Cryptocurrency Cryptocurrency 5 — Questions and Answers
Question 1: What is a '51% attack' in blockchain?
- When 51% of token holders vote to change a protocol rule
- When a single entity controls more than half the network's mining power and can manipulate transactions (Correct answer)
- A phishing attack targeting the top 51 cryptocurrency exchanges
- A smart contract exploit that drains 51% of a liquidity pool
Correct answer: When a single entity controls more than half the network's mining power and can manipulate transactions
A 51% attack occurs when a single miner or group controls the majority of a blockchain's hash rate, allowing them to double-spend coins or reverse transactions.
Question 2: What is 'wrapping' a cryptocurrency (e.g., Wrapped Bitcoin / WBTC)?
- Encrypting a private key with an additional password layer
- Creating a tokenized version of one asset that can be used on a different blockchain (Correct answer)
- Bundling multiple small transactions into one for lower fees
- Converting spot crypto holdings into a futures contract
Correct answer: Creating a tokenized version of one asset that can be used on a different blockchain
Wrapping creates an ERC-20 or similar token that represents another asset (like BTC) 1:1, allowing it to be used within DeFi ecosystems on different blockchains.
Question 3: What does 'HODL' mean in cryptocurrency culture?
- A trading signal to sell all holdings immediately
- Holding onto cryptocurrency long-term rather than selling during volatility (Correct answer)
- A type of hardware wallet protocol
- A decentralized lending platform acronym
Correct answer: Holding onto cryptocurrency long-term rather than selling during volatility
HODL originated from a 2013 Bitcoin forum typo of 'hold' and became a mantra meaning to hold cryptocurrency despite market fluctuations rather than panic-selling.
Question 4: What is the role of a 'validator' in a Proof of Stake blockchain?
- To write and audit smart contracts for security vulnerabilities
- To propose and attest to new blocks by locking up staked cryptocurrency as collateral (Correct answer)
- To store historical blockchain data for light clients
- To convert crypto into fiat currency for network participants
Correct answer: To propose and attest to new blocks by locking up staked cryptocurrency as collateral
Validators in PoS systems stake cryptocurrency as collateral and are chosen to create new blocks and verify transactions, earning rewards for honest participation.
Question 5: What is 'dollar-cost averaging' (DCA) in the context of crypto investing?
- Converting crypto profits to USD at regular intervals
- Investing a fixed dollar amount at regular intervals regardless of price (Correct answer)
- Buying crypto only when its price drops below a moving average
- A method of calculating cost basis for tax purposes
Correct answer: Investing a fixed dollar amount at regular intervals regardless of price
DCA involves investing a fixed amount of money into an asset at regular intervals, reducing the impact of volatility by averaging the purchase price over time.
Question 6: What is the 'Merkle tree' used for in a blockchain?
- Storing user wallet addresses in an encrypted database
- Efficiently summarizing and verifying the integrity of all transactions in a block (Correct answer)
- Generating new private keys for wallet creation
- Routing messages between nodes in a peer-to-peer network
Correct answer: Efficiently summarizing and verifying the integrity of all transactions in a block
A Merkle tree is a hash-based data structure that allows efficient and secure verification of large sets of transaction data, with the Merkle root stored in each block header.
Question 7: Which of the following is a key risk unique to decentralized exchanges (DEXs) compared to centralized exchanges (CEXs)?
- Counterparty risk from the exchange holding user funds
- Smart contract vulnerabilities that could lead to loss of funds (Correct answer)
- Regulatory shutdown by financial authorities
- Insider trading by exchange employees
Correct answer: Smart contract vulnerabilities that could lead to loss of funds
DEXs operate via smart contracts, and bugs or exploits in that code can result in users losing funds directly, a risk that doesn't exist when using a custodial CEX.
Cryptocurrency Cryptocurrency 5
What is a '51% attack' in blockchain?