CBCP Cryptocurrency and Digital Tokens 5 — Questions and Answers
Question 1: What is a 'Layer 2' solution in the context of cryptocurrency scalability?
- A second blockchain that replaces the main chain
- A protocol built on top of a base blockchain to increase throughput and reduce fees (Correct answer)
- A second cryptographic layer added to wallet security
- A regulatory framework for second-generation cryptocurrencies
Correct answer: A protocol built on top of a base blockchain to increase throughput and reduce fees
Layer 2 solutions (e.g., Lightning Network, Optimism, Arbitrum) process transactions off the main chain while inheriting its security, dramatically improving scalability.
Question 2: What is the 'halving' event in Bitcoin, and how often does it occur?
- The block size doubles every 2 years
- The block reward for miners is cut in half approximately every 4 years (210,000 blocks) (Correct answer)
- Bitcoin's total supply is halved during network upgrades
- Transaction fees are halved when network congestion drops below 50%
Correct answer: The block reward for miners is cut in half approximately every 4 years (210,000 blocks)
Bitcoin halving reduces the block subsidy by 50% every 210,000 blocks (~4 years), controlling inflation and ensuring Bitcoin's 21 million cap is approached asymptotically.
Question 3: What is 'front-running' in blockchain transactions?
- Prioritizing transactions from exchange operators
- Exploiting visibility of pending transactions in the mempool to insert a profitable transaction ahead of them (Correct answer)
- Submitting a transaction before the blockchain is fully synced
- Running a validator node before the network reaches consensus
Correct answer: Exploiting visibility of pending transactions in the mempool to insert a profitable transaction ahead of them
Front-running involves monitoring the mempool for profitable pending transactions and submitting a competing transaction with a higher gas fee to be processed first.
Question 4: Which of the following best describes a 'CBDC' (Central Bank Digital Currency)?
- A decentralized stablecoin pegged to a national currency
- A digital form of sovereign fiat currency issued and controlled directly by a central bank (Correct answer)
- A cryptocurrency backed by central bank gold reserves
- A private bank token that operates on a public blockchain
Correct answer: A digital form of sovereign fiat currency issued and controlled directly by a central bank
CBDCs are legal tender in digital form issued by central banks, combining properties of fiat currency with blockchain-like digital infrastructure under centralized control.
Question 5: What is 'token dilution' and why is it a concern for investors?
- Mixing tokens from different blockchains in one wallet
- The reduction in existing holders' ownership percentage when new tokens are minted or released (Correct answer)
- Converting tokens to stablecoins during market downturns
- The loss of token value due to exchange hacking
Correct answer: The reduction in existing holders' ownership percentage when new tokens are minted or released
Token dilution occurs when additional tokens enter circulation (via unlocks, mining, or minting), reducing the proportional ownership and potentially the value of existing holdings.
Question 6: What is the key difference between 'proof-of-burn' and 'proof-of-stake' consensus mechanisms?
- Both are identical but use different terminology
- Proof-of-burn requires destroying cryptocurrency to earn mining rights; proof-of-stake requires locking (not destroying) cryptocurrency as collateral (Correct answer)
- Proof-of-stake burns tokens as rewards; proof-of-burn locks them
- Only proof-of-burn is considered energy-efficient
Correct answer: Proof-of-burn requires destroying cryptocurrency to earn mining rights; proof-of-stake requires locking (not destroying) cryptocurrency as collateral
In proof-of-burn, miners permanently destroy coins to gain virtual mining power, while in proof-of-stake, validators lock coins as reversible collateral without destroying them.
Question 7: In a multi-signature (multisig) cryptocurrency wallet requiring 2-of-3 signatures, what happens if one private key is permanently lost?
- All funds are permanently locked and unrecoverable
- The wallet becomes fully inaccessible since all three keys are required
- Funds can still be accessed using the remaining two valid keys (Correct answer)
- The wallet automatically resets to a single-signature configuration
Correct answer: Funds can still be accessed using the remaining two valid keys
A 2-of-3 multisig wallet requires any two of the three private keys to authorize a transaction, so losing one key still allows access using the remaining two.
CBCP Cryptocurrency and Digital Tokens 5
What is a 'Layer 2' solution in the context of cryptocurrency scalability?