Cryptocurrency and Digital Tokens Flashcards

What is a 'Layer 2' solution in the context of cryptocurrency scalability?

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.

What is the 'halving' event in Bitcoin, and how often does it occur?

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.

What is 'front-running' in blockchain transactions?

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.

Which of the following best describes a 'CBDC' (Central Bank Digital Currency)?

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.

What is 'token dilution' and why is it a concern for investors?

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.

What is the key difference between 'proof-of-burn' and 'proof-of-stake' consensus mechanisms?

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.

In a multi-signature (multisig) cryptocurrency wallet requiring 2-of-3 signatures, what happens if one private key is permanently lost?

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.