CBP Bitcoin Transactions and Wallets 3 — Questions and Answers
Question 1: What is the primary advantage of a hardware wallet over a software wallet?
- It generates more Bitcoin addresses per second
- Private keys never leave the device, protecting them from internet-connected malware (Correct answer)
- It automatically selects the lowest fee transactions
- It allows anonymous transactions without any address reuse
Correct answer: Private keys never leave the device, protecting them from internet-connected malware
Hardware wallets store private keys in a secure element and sign transactions internally, so keys are never exposed to potentially compromised computers.
Question 2: In the Bitcoin UTXO model, what is 'coin selection'?
- The process by which miners select which transactions to include in a block
- The algorithm a wallet uses to choose which UTXOs to combine as inputs for a new transaction (Correct answer)
- Choosing the best exchange rate for purchasing bitcoin
- The method by which nodes validate transaction signatures
Correct answer: The algorithm a wallet uses to choose which UTXOs to combine as inputs for a new transaction
Coin selection algorithms determine which UTXOs to use as inputs to minimize fees, avoid change, or improve privacy.
Question 3: What is a 'watch-only' wallet?
- A wallet that only accepts incoming transactions
- A wallet that has the public keys/addresses to monitor balances but cannot sign transactions (Correct answer)
- A wallet that watches the mempool for fee opportunities
- A read-only copy of the blockchain
Correct answer: A wallet that has the public keys/addresses to monitor balances but cannot sign transactions
Watch-only wallets contain public keys or addresses to track balances and history without holding the private keys needed to spend.
Question 4: What does it mean for a Bitcoin transaction to be 'in the mempool'?
- The transaction has been confirmed in the latest block
- The transaction has been broadcast to the network but not yet included in a block (Correct answer)
- The transaction failed validation and was rejected
- The transaction is waiting for additional signatures
Correct answer: The transaction has been broadcast to the network but not yet included in a block
The mempool (memory pool) is each node's local holding area for valid but unconfirmed transactions awaiting block inclusion.
Question 5: Which of the following best describes a P2WPKH (Pay-to-Witness-Public-Key-Hash) address?
- A legacy address starting with '1'
- A native SegWit address starting with 'bc1q' that stores the hash of a public key in the witness field (Correct answer)
- A multisig address starting with '3'
- A Taproot address starting with 'bc1p'
Correct answer: A native SegWit address starting with 'bc1q' that stores the hash of a public key in the witness field
P2WPKH is a native SegWit (bech32) address type beginning with 'bc1q' that places signature data in the segregated witness field.
Question 6: Why is address reuse considered a privacy risk in Bitcoin?
- Reused addresses charge higher fees
- It links multiple transactions to the same entity, enabling blockchain analysis to trace spending patterns (Correct answer)
- Reused addresses expire after 100 blocks
- Miners prioritize transactions from unique addresses
Correct answer: It links multiple transactions to the same entity, enabling blockchain analysis to trace spending patterns
When the same address appears in multiple transactions, it allows observers to cluster those transactions and associate them with a single user.
Question 7: What is the function of OP_RETURN in a Bitcoin transaction output?
- Returns unspent funds to the sender automatically
- Creates an unspendable output that embeds arbitrary data on the blockchain (Correct answer)
- Signals that the transaction should be processed with higher priority
- Rolls back a failed transaction to the previous state
Correct answer: Creates an unspendable output that embeds arbitrary data on the blockchain
OP_RETURN marks an output as provably unspendable and allows up to 80 bytes of arbitrary data to be recorded on-chain.
CBP Bitcoin Transactions and Wallets 3
What is the primary advantage of a hardware wallet over a software wallet?