C4 C4 Wallet Security & Key Management 1 — Questions and Answers
Question 1: What is a hierarchical deterministic (HD) wallet in the context of cryptocurrency?
- A wallet that stores keys on a hardware device
- A wallet that generates a tree of key pairs from a single seed phrase (Correct answer)
- A wallet managed by a centralized exchange
- A wallet that requires multiple signatures for transactions
Correct answer: A wallet that generates a tree of key pairs from a single seed phrase
An HD wallet uses a single seed phrase to deterministically generate a hierarchical tree of private/public key pairs, per BIP32.
Question 2: Which BIP standard introduced the 12- or 24-word mnemonic seed phrase for wallet backup?
- BIP16
- BIP32
- BIP39 (Correct answer)
- BIP44
Correct answer: BIP39
BIP39 defines the standard for generating mnemonic phrases (12 or 24 words) that encode a wallet's seed entropy.
Question 3: What is the primary security advantage of a hardware wallet over a software wallet?
- It is free to use
- Private keys never leave the secure element and are not exposed to internet-connected devices (Correct answer)
- It supports more cryptocurrencies
- It syncs faster with the blockchain
Correct answer: Private keys never leave the secure element and are not exposed to internet-connected devices
Hardware wallets store private keys in a tamper-resistant secure element, ensuring keys are never exposed to a potentially compromised host computer.
Question 4: What does a cold wallet refer to in cryptocurrency key management?
- A wallet that has run out of funds
- A wallet stored on a device that is never connected to the internet (Correct answer)
- A wallet used only for receiving transactions
- A wallet protected by two-factor authentication
Correct answer: A wallet stored on a device that is never connected to the internet
A cold wallet (cold storage) keeps private keys completely offline, dramatically reducing exposure to remote attacks.
Question 5: In a multisignature (multisig) wallet setup described as '2-of-3,' what is required to authorize a transaction?
- Only 1 of 3 keys
- Any 2 of the 3 private keys (Correct answer)
- All 3 private keys
- A hardware device plus one key
Correct answer: Any 2 of the 3 private keys
A 2-of-3 multisig wallet requires any 2 out of 3 designated private keys to sign and authorize a transaction.
Question 6: What is the purpose of a passphrase (sometimes called the '25th word') in BIP39 HD wallets?
- To encrypt the transaction before broadcasting
- To add an additional layer of security by creating a completely different wallet from the same seed (Correct answer)
- To speed up key derivation
- To convert a hot wallet into a cold wallet
Correct answer: To add an additional layer of security by creating a completely different wallet from the same seed
An optional BIP39 passphrase acts as a salt during seed derivation, producing an entirely different set of keys even with the same mnemonic.
C4 C4 Wallet Security & Key Management 1
What is a hierarchical deterministic (HD) wallet in the context of cryptocurrency?