CPT Cryptocurrency & Digital Assets 2 — Questions and Answers
Question 1: What is the primary purpose of a crypto 'hard fork'?
- To permanently split a blockchain into two separate chains with incompatible protocol rules (Correct answer)
- To temporarily suspend transaction validation on a network
- To merge two separate blockchains into one unified chain
- To increase the block size limit without changing consensus rules
Correct answer: To permanently split a blockchain into two separate chains with incompatible protocol rules
A hard fork creates a permanent divergence in the blockchain where nodes running old software can no longer validate blocks produced by upgraded nodes.
Question 2: Which consensus mechanism does Ethereum currently use after 'The Merge'?
- Proof of Work
- Proof of Stake (Correct answer)
- Delegated Proof of Stake
- Proof of Authority
Correct answer: Proof of Stake
Ethereum transitioned from Proof of Work to Proof of Stake in September 2022 during 'The Merge', reducing energy consumption by approximately 99.95%.
Question 3: In cryptocurrency trading, what does 'slippage' refer to?
- The fee charged by an exchange for executing a trade
- The difference between the expected price of a trade and the actual executed price (Correct answer)
- The spread between the bid and ask price on an order book
- The delay between order placement and confirmation on the blockchain
Correct answer: The difference between the expected price of a trade and the actual executed price
Slippage occurs when market conditions change between order placement and execution, resulting in a different fill price than expected, especially in low-liquidity markets.
Question 4: What is a 'crypto whale' in the context of digital asset markets?
- A blockchain validator with more than 1,000 staked coins
- An entity holding a large enough position to significantly influence market prices (Correct answer)
- A decentralized exchange with over $1 billion in daily trading volume
- A mining pool controlling more than 10% of a network's hash rate
Correct answer: An entity holding a large enough position to significantly influence market prices
Crypto whales are individuals or institutions holding such large quantities of a digital asset that their buying or selling activity can move the market price.
Question 5: What distinguishes a 'utility token' from a 'security token'?
- Utility tokens are always built on Ethereum while security tokens use other blockchains
- Utility tokens provide access to a product or service, while security tokens represent an investment contract (Correct answer)
- Utility tokens have no monetary value, while security tokens can be traded on exchanges
- Utility tokens are regulated by the CFTC while security tokens fall under SEC jurisdiction
Correct answer: Utility tokens provide access to a product or service, while security tokens represent an investment contract
Utility tokens grant holders access to a platform's services, while security tokens represent ownership or profit-sharing rights and are subject to securities regulations.
Question 6: What is the function of a 'mempool' in Bitcoin and similar cryptocurrencies?
- A cold storage vault for long-term holding of digital assets
- A temporary holding area for unconfirmed transactions waiting to be included in a block (Correct answer)
- A consensus layer where validators vote on transaction validity
- A secondary chain used for fast off-chain transaction settlement
Correct answer: A temporary holding area for unconfirmed transactions waiting to be included in a block
The mempool (memory pool) is where broadcast transactions wait until miners select them for inclusion in the next block, typically prioritizing higher-fee transactions.
Question 7: Which risk is MOST unique to cryptocurrency markets compared to traditional equity markets?
- Counterparty risk from broker insolvency
- Smart contract vulnerabilities leading to direct asset loss (Correct answer)
- Regulatory changes affecting asset valuations
- Liquidity risk during market downturns
Correct answer: Smart contract vulnerabilities leading to direct asset loss
Smart contract bugs or exploits can lead to irreversible loss of funds directly from user wallets or protocols, a risk with no close parallel in traditional equity markets.
CPT Cryptocurrency & Digital Assets 2
What is the primary purpose of a crypto 'hard fork'?