Cryptocurrency Wallets and Key Management 3 — Questions and Answers
Question 1: What does the 'gap limit' setting in an HD wallet determine?
- The maximum transaction fee the wallet will pay
- How many consecutive unused addresses the wallet scans before stopping discovery (Correct answer)
- The delay between consecutive transactions
- The number of confirmations required before funds are spendable
Correct answer: How many consecutive unused addresses the wallet scans before stopping discovery
The gap limit defines how many empty (unused) consecutive addresses the wallet checks during blockchain scanning before assuming no further addresses are active.
Question 2: What is the main security advantage of using a hardware wallet over a software wallet on an internet-connected device?
- Hardware wallets support more cryptocurrencies
- Private keys are generated and stored in an isolated secure element, never exposed to the host computer (Correct answer)
- Hardware wallets use stronger encryption algorithms
- Hardware wallets automatically back up to the cloud
Correct answer: Private keys are generated and stored in an isolated secure element, never exposed to the host computer
Hardware wallets keep private keys inside a secure chip that never exposes them to the connected computer, protecting against malware and remote attacks.
Question 3: In the context of cryptocurrency wallets, what is 'coin control'?
- A feature that limits how much crypto can be spent per day
- The ability to manually select which UTXOs are used as inputs in a transaction (Correct answer)
- A government control mechanism on digital assets
- Automatic conversion between different cryptocurrencies
Correct answer: The ability to manually select which UTXOs are used as inputs in a transaction
Coin control lets users choose specific unspent transaction outputs (UTXOs) to use in a transaction, improving privacy and fee management.
Question 4: What is a 'custodial' wallet?
- A wallet where only the user holds the private keys
- A wallet where a third party holds and controls the private keys on behalf of the user (Correct answer)
- A wallet designed specifically for institutional custody
- A wallet that requires two users to authorize every transaction
Correct answer: A wallet where a third party holds and controls the private keys on behalf of the user
In a custodial wallet, a service provider like an exchange holds the private keys, meaning the user must trust that provider to access or transfer funds.
Question 5: Which cryptographic curve is used by Bitcoin and Ethereum for key generation?
- Curve25519
- secp256k1 (Correct answer)
- P-256 (secp256r1)
- Ed448
Correct answer: secp256k1
Both Bitcoin and Ethereum use the secp256k1 elliptic curve for their ECDSA-based key pairs.
Question 6: What happens if a user loses both their hardware wallet device and their seed phrase?
- The wallet provider can restore access using KYC documents
- The funds are permanently inaccessible with no recovery option (Correct answer)
- The blockchain automatically refunds the wallet after 90 days
- A government escrow holds the funds for five years
Correct answer: The funds are permanently inaccessible with no recovery option
Without the seed phrase or private keys, there is no mechanism to recover a cryptocurrency wallet; funds are permanently lost.
Question 7: What is the purpose of the passphrase option (sometimes called the '25th word') in BIP39 wallets?
- It replaces one of the 24 seed words if that word is forgotten
- It adds an additional secret that creates a completely different wallet from the same seed (Correct answer)
- It encrypts the seed phrase file stored on disk
- It enables two-factor authentication for the wallet
Correct answer: It adds an additional secret that creates a completely different wallet from the same seed
Adding a BIP39 passphrase derives an entirely different set of keys from the same mnemonic, providing plausible deniability and an extra layer of protection.
Cryptocurrency Wallets and Key Management 3
What does the 'gap limit' setting in an HD wallet determine?