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Questions and Answers List

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QuestionAnswer
In Bitcoin, your private key allows you to verify whether a transaction has been signed with the correct public key.False. In Bitcoin, you can sign transactions with your private key. Others then can use your public key together with your signature and the transaction’s hash, to verify that whoever signed the transaction is the holder of the corresponding private key.
The largest share of the Bitcoin miner’s income is generated via transaction fees.False. Currently miners receive two rewards for mining: Bitcoins and transaction fees. Currently value of bitcoins received > income transaction fees. This could change in the future as more blocks will be mined. Newly created coin-based transaction rewards will be lowered until no new bitcoin will be created.
Blocks on the Ethereum blockchain contain fewer transactions than blocks on the Bitcoin blockchain. Therefore, Bitcoin can process more transactions per second.False. Indeed blocks on the Ethereum blockchain contains fewer transactions than blocks on the BTC blockchain. However, on the Ethereum blockchain smaller blocks are mined but this mining process takes 12 seconds. BTC blocks are mined in 10 minutes. So in general Ethereum processes more transactions per second.
The monetary policy of Ethereum is more flexible than the monetary policy of Bitcoin.True. Monetary policy of Ethereum is more flexible than that of BTC since general structure is more centralized compared to BTC. Vitalik Buterin, the inventor of Ethereum, for example has made alterations in code after the hard fork at the DAO hack. It can be stated that he has large bargain power. Additionally, BTC has a maximum number of coins, whereas Ethereum has unlimited supply.
Sokolov (2021) demonstrates that Bitcoin enables ransomware attacksFalse. Sokolov examines how users respond to congestion in BTC blockchain caused by spikes in transaction demand for settlement during ransomware attacks. He does not claim whether BTC enables these ransomware attacks.
The price for Ethereum Gas depends on the demand for transactions on the Ethereum blockchainTrue, Gas price = base fee + tip. Base fee depends on demand
Gas denotes the amount of Ether which needs to be paid for a transaction.False. Gas reflects the amount of computational effort needed to execute specific operations on the Ethereum network. Transaction fee = Gas*Gas price=Gas*(Base fee+tip)
Fees for transactions to be recorded on the Ethereum blockchain solely depend on the computational effort to record a transaction on the Ethereum blockchainThe fee depends on the amount of gas required and the Gas price ( Base fee+tip ). The fee increases if the block size increases. The tip can be used for quicker transaction process.
Deploying a smart contract onto the Ethereum Blockchain does not require Gas.False. The deployment of a smart contract is a transaction, which requires Gas. A smart contract is a set of promises, specified in digital form, including protocols, within the parties perform on these promises.
Easley, O’Hara, and Basu (2019) show that transaction fees increase whenever the (coinbase) reward for mining a block goes down.False. Easley, O’Hara and Basu find that transaction fees increase in case of queuing problems, not by reduction in coinbase rewards. This is because transaction fees get you priority to be on a block, so this price goes up when there’s a larger que.
Bitcoin provides real anonymity to its users.False. BTC does not provide complete anonymity, but it provides pseudonymity. You do not use your real name, but a specific wallet address. If this wallet address cannot be linked to your personal ID, you could act anonymous. However, wallets can be hacked, home/mail addresses can be found, or real ID could be revealed in the world.
A problem of proof-of-stake as a consensus mechanism is that nothing is really at stake.False. A staker, which activates and runs a validator by sending 32 Ether to staking deposit contract located on Mainnet, has 32 Ether at stake. When being dishonest this Ether could be slashed. Additionally, rewards and penalties can be given in different situations
Proof-of-work is more easily scalable than proof-of-stakeFalse. Proof-of-stake is more easy scalable because for each new block to be validated, a validator is chosen randomly and eventually by after sharding the items need to be validated. This requires less computational power as is needed by proof-of-work.
The stablecoin DAI can be used to lever crypto investments.True. Stablecoin DAI could be reinvested intro crypto-asset and make use of a leverage of +- 66%. This cycle could be repeated in the MakerDao and therefore created more leverage. The DAI is minted through the MakerVault, where anyone could stake ERC20 tokens and receive DAI for 150% collateral.
The stablecoin DAI can be used to hedge crypto investments.True. One could exchange DAI into fiat-currency which essentially means that you cash out dollar by taking DAI. This hedges against volatility in ERC 20 token. Second hedging method: one could lock into DAI savings rate (DSR) contract. This earns an interest rate. However, this interest rate is lower than the stability fee, it hedges (partly) against each other
The stablecoin DAI is as risky as the US Dollar, which it is pegged to.False. DAI is an asset backed stablecoin, with ERC20 tokens as collateral. Since it has these ERC20 tokens as collateral, DAI is riskier than the USD, since these tokens are more volatile. In addition, the USD is regulated by a central bank, which has proven to have more experience in regulating assets, making USD less risky than DAI.
Providers of liquidity in liquidity pools face impermanent loss when one asset in the liquidity pool appreciates in value.True. There’s a risk of impermanent loss if prices move substantially. Impermanent loss comes from the fact that constant price function is used, leading to impermanent loss if one of the two currencies changes substantially.
Decentralized, permissionless proof-of-work blockchains guarantee the immutability of their (governance) protocols.False. Immutability is not 100% guaranteed. Even though this is rare, in case when one party holds onto more than 51% of the nodes, an incorrect block can be validated.
Decentralized, permissionless proof-of-stake blockchains guarantee the immutability of their (governance) protocols.True. As the blockchains are permissionless, end-users can store a copy of the blockchain and digital signatures give more or less a guarantee (based on consensus algorithm) as blockchain data cannot be edited or deleted by a governance party, as there is none.
Permissioned blockchains provide better protection against a “51% attack”.True. Permissioned blockchains provide a layer where only identifiable individuals can perform certain actions. A 51% attack where the attacker takes over the governance is therefore almost not possible. Private/centralized blockchains are closed ecosystems where all participants are well defined, Only pre-approved entities can run nodes.
If you want to provide liquidity to a liquidity pool that swaps Ether into Tether, you need to add either Ether or Tether to the liquidity pool.False. To contribute to a liquidity pool you need to add both currencies in a pre-specified ration to a pool and earn a transaction fee relative to the share in the liquidity pool. However, a risk of impermanent loss exists.
An automated market maker determines the exchange rate in liquidity pools by applying a constant sum function.False. An Automated Market Maker (AMM) determines the exchange ratio by applying a constant product function: N (Asset 1)* N(Asset 2)= constant product.
Decentralized exchanges operating liquidity pools do not allow for arbitrage.False. Arbitrageurs usually keep the exchange ratio a close reflection of current market prices of the underlying assets in liquidity pools. Therefore, arbitrage could be formed when trading between decentralized exchanges and liquidity pools. The DEX of a liquidity pool is simply a platform of liquidity in that scenario and is not aware of the market movements around that exchange.
The token BAT is a non-fungible tokenFalse. Each BAT token is equal meaning fungible. BAT is used to reward customers who accept watching ads in the Brave browser. This helps advertisers to better target the customers and for the customer to have the choice to view or not to view ads.
The main purpose of the segregate witness upgrade was to increase the number of Bitcoin transactions that can be included in one block.False. The main purpose of SegWit was to disable transaction malleability. This means that after a transaction is signed, the receiver can change the witness data, hence, the transaction-ID
The ASIC producer Bitmain will profit from Ethereum’s switch to proof-of-stake.False. With proof-of-work mining is performed by computational power. However, with proof of stake, mining is not on base of computational power but based on financial resources. Therefore Bitmain will lose due to the switch.
TerraUSD was a crypto-collateralized stablecoinFalse. TerraUSD was an algorithmic stablecoin with Luna as its currency. It allowed to swap 1 UST for 1$ worth of Luna. TerraUSD crashed when UST got way below 1$ and nobody wanted to trade Luna anymore.
Assume you own one coin of the cryptocurrency “Fork-a-lot”. At one point, there is a protocol update and some miners refuse to go along with the protocol update. As a consequence of the hard fork, these miners keep mining the old protocol which they call “Fork-a-lot Classic”. The majority of miners, however, upgrades and continues mining “Fork-a-lot”. Which coin will you own after the hard fork?After the hard fork you will own both coins since a split in chains has been realized. Comparable to the DAO-hack, where Vitalik Buterin proposed a hard for, a new chain was created called Ethereum. In this new chain the code is modified. However, the old chain, Fork-a-lot classic, will continue.
What are the four key innovations that Nakamoto integrated into Bitcoin?Digital signatures, 2) Distributed ledger, 3) The blockchain, 4) Proof-of-work
What are the three key questions that a distributed consensus mechanism needs to answer? What are Bitcoin’s answers to these questions?1) Who maintains the ledger of transactions? -> The blockchain does. It is a decentralized system so the system itself maintains the ledger of transactions. 2) Who has authority over which transactions are valid? -> The signature (private & public key) is checked by peers and by proof-of-work the blocks are validated. A transaction is valid when the signature is set by the corresponding private key, this can be checked by using the public key. Once the transactions are sent to the network, 51% of the nodes need to validate, by proof-of-work mining, in order for the block to be send to the blockchain. 3) Who creates new currency? -> Miners generate BTC through a competitive and decentralized process called the mining process. This process involves individuals that are rewarded by the network for their services. BTC miners are processing transactions and securing the network using specialized hardware and are collecting new BTC in exchange.
What is a mining pool?A mining pool is a joint group of cryptocurrency miners who combine their computational resources over a network to strengthen the probability of finding a block and receive a pay per share in return. The mining pool gets an insurance fee in return
What is the economic rationale behind mining in a mining pool rather than mining on your own?The strict economic rationale for joining a mining pool is the providence of insurance. There is reward being paid out even if the miner itself does not solve the puzzle.
Explain the impossibility triangleThe impossibility triangle exists of three components. Decentralization, Consensus and Scalability. To receive wide adoption and application, consensus provision needs to be accurate and scalable. BTC blockchain achieves decentralization and consensus record at the same time but doing so reduces its scalability. Records made in large scales with decentralization are hard to synchronize and achieve consensus
Name and explain one recent layer-2 innovation that addresses the scalability problem associated with proof-of-work-based blockchains.The invention of Proof-of-stake addresses the scalability problem. By randomly addressing transactions to stakers which become validators, way less computational power is needed, hence, the need for large polluting mining pool decreases. In addition, for instance the Beacon chain, creates extra layers on the blockchain, facilitating more scalability.
If I provide you with a SHA256-hash of my name, would it be in principle possible for you to verify whether the hash is indeed the output of my name?In theory, yes it would be possible to verify this. However, in case I don’t know your name, I would need to enter a name in a SHA256-hash generator, and by trial and error check whether the hash output of my input is the same as the given hash. In practice, this would be almost impossible, but in case I’d know your name it would be done quickly.
What is the purpose of Ethereum’s Beacon chain?The purpose of the Beacon chain is to coordinate stakers and committees randomly. It cross-links shard chains and the mainnet and it is central registry of all levels of stored data in Ethereum 2.0.
A liquidity pool operated by an automated market maker contains 3000 Ether (ETH) and 9,000,000 Tether (USDT). You want to exchange 50,000 USDT into ETH. How many ETH can you take out of the pool?Exchange rate determined by AMM. First we compute exchange ratio 9000000/3000 -> 1 ETH= 3000 USDT and this gives 27.000.000.000. When you put in 50.000 USDT that brings the total of 9050000. By scaling that back to that exchange rate you need N(ETH)*9050000= 27.000.000.000. This gives N(ETH) of 2983,43 so you can take out 3000-2983,43=16,57 ETH= 16 ETH
A liquidity pool operated by an automated market maker contains 3000 Ether (ETH) and 9,000,000 Tether (USDT). You want to exchange 50,000 USDT into ETH. How many ETH can you take out of the pool? Answer: Exchange rate determined by AMM. First we compute exchange ratio 9000000/3000 -> 1 ETH= 3000 USDT and this gives 27.000.000.000. When you put in 50.000 USDT that brings the total of 9050000. By scaling that back to that exchange rate you need N(ETH)*9050000= 27.000.000.000. This gives N(ETH) of 2983,43 so you can take out 3000-2983,43=16,57 ETH= 16 ETH Follow-up to previous question: What is the exchange rate after the transaction (with USDT being the numeraire)?3000-16,57= 2983,43 Ether versus 9.000.000+ 50.000= 9050000 USDT. New ratio 1: 3033,43
What are the main differences between Bitcoin and Ethereum?See picture
Every 210,000 blocks the mining reward for mining Bitcoin gets reduced. By what percentage do mining rewards get reduced?The percentage by which the mining rewards get reduced is 50%.
What is the difference between a staker and a validator in Ethereum 2.0?Staker: Activates and runs a validator for 32 Ether per validator (so puts 32 Ether at ‘stake’ to activate a validator) Validator: Is a block proposer, so validators are selected to propose new blocks and also placed in a committee that attests these newly proposed
What is an ERC-20 token?ERC stands for Ethereum Request for Comments and 20 refers to it being the 20th proposal ever made. This proposal was to standardize tokens, by creating one fungible token with a common interface so that both exchanging tokens and smart contracts that use different tokens become possible.
Name and explain the two major concerns voiced about Tether.The fiat-collaterized token Tether is said to be backed 100% by USD. However, eventually it became clear that this surely was not the case making Tether not transparent. Bitfinex is not an open protocol and if too many people want their USD back at once, a bank run can happen (unregulation). Tether could just be printed extra without people knowing which make it a risky token.
Filecoin is an open-source, public cryptocurrency and digital payment system intended to be a blockchain-based cooperative digital storage and data retrieval method. Filecoin is built by Protocol Labs and will be launched in the near future. Filecoin allows users to rent unused hard drive space. A blockchain mechanism is used to register the deals. Due to Filecoin's decentralized nature, it protects the integrity of data's location making it easily retrievable and hard to censor. It also allows people on their network to be their own custodians of the data that they store. Additionally, Filecoin also rewards the network nodes that mine and store data on their blockchain network. Filecoins have been sold to accredited investors. Is Filecoin a coin, a security token, or a utility token. Why?Filecoin is a utility token since it has tradable ownership rights of products/services (cloud storage). It resembles crowdfunding presales. By having the token, you could trade it, but you can also make use of the utility offered by the coin.
Filecoin is an open-source, public cryptocurrency and digital payment system intended to be a blockchain-based cooperative digital storage and data retrieval method. Filecoin is built by Protocol Labs and will be launched in the near future. Filecoin allows users to rent unused hard drive space. A blockchain mechanism is used to register the deals. Due to Filecoin's decentralized nature, it protects the integrity of data's location making it easily retrievable and hard to censor. It also allows people on their network to be their own custodians of the data that they store. Additionally, Filecoin also rewards the network nodes that mine and store data on their blockchain network. Filecoins have been sold to accredited investors. Is Filecoin a security according to U.S. securities law? Why?-An investment of money is made by the purchaser -> yes -The investment is part of a common enterprise among numerous purchasers -> yes -The success of the enterprise depends on the efforts of a third-party promotor (management) -> yes, Protocol Labs -A purchaser has an expectation of financial return, such as capital gains -> Yes tokens have been sold to accredited investors. By investing, this suggests there is a chance they will sell it for a premium, fulfilling this restriction So yes, Filecoin is a security to U.S. law.
Name and explain three benefits of utility tokens1) They secure commitment from future customers 2) They hasten network effects since users are incentivized to create demand for the service 3) They reward network creators without giving them operational control after the network has launched.
How does Szabo (1986) define smart contracts?A set of promises, specified in digital form, including protocols, within which the parties perform on these promises.
What is the difference between a hard fork and a soft fork?A fork is an update to the protocol. Soft fork: changes you can do within the current limits of the protocol, so these changes will need a consensus of the total network, so keeps the old blockchain. Hard fork: changes that will create a new blockchain with people either pro or against, so now two blockchains
What are the two key innovations coming to the Ethereum blockchain with Ethereum 2.0?Proof-of-stake and sharding. Proof-of-stake is a new mechanism to validate blocks where stakers & validators are randomly chosen and validate a block, after staking 32 Ether as leverage. Sharding is a technique which horizontally partitions data in a database. It can be used in layer-2 protocols such as rollups and helps in scalability. The Beacon chain coordinates these shard chains
What is the role of oracles in smart contracts? Can you provide one example of an oracle used in a smart contract?Oracles deliver reliable data feeds from the outside world to the smart contracts. For example: Assume that Alice and Bob want to bet on an outcome of a sports match. Alice bets 20$ on team A and Bob on team B, with the total 40$ held in escrow by a smart contract. When the game ends, how does the smart contract know whether to release the funds to either Alice or Bob? The answer is it requires an oracle mechanism to fetch accurate match outcomes off-chain and deliver it to the blockchain in a secure and reliable manner.
You provide 10 Ether and 35,000 DAI to a liquidity pool. With this contribution to the liquidity pool, you provide 10% of the liquidity offered by the pool. One month later, the liquidity pool has earned 0.5 Ether in transaction fees and the price of Ether has increased by 150%. Assuming that your share of the liquidity pool stayed constant over the past month, what is your net profit (in Ether) from providing liquidity?-Old price for 1 Ether= 3500 DAI, new price 1 Ether= 8750 DAI -In liquidity pool, ratio adjusts to 6325 ETH and 55340 DAI, because of the constant product function. The value of 55340 DAI in ETH is 6325 ETH thus the total value of your assets in pool is equal to 12.65 -If you had not provided your assets to the pool, you would still have 10 ETH and 35000 DAI. The value of 35000 DAI would now be 4 ETH, thus the total value of your assets would be 14 -Impermanent loss=((12.65-14)/14)-1= -9,65% or -1.35 ETH (=14 ETH* -9,65%) -Fees earned 0,5 ETH* 10% = 0,05 ETH -Net profit in ETH= -1,35+ 0,05 ETH= -1,3 ETH
Describe how the mechanism implemented in MakerDAO’s smart contract MakerVault allows crypto investors to leverage their crypto-investment.When the investor invests their Ether into the Makervault, they will receive back DAI in a proportion of their initial investment. This proportion depends on the collateral ratio (now 150%). With the DAI they receive back, the investor can purchase additional securities, thus creating leverage.
Describe how the mechanism implemented in MakerDAO’s smart contract MakerVault allows crypto investors to hedge their crypto-investment.Firstly, an investor could hedge against the volatile market. If a ERC20 token increased in price, the investor could transform a part of his ‘profit’ into DAI (pegged to USD) and therefore can hedge against the volatile market. Secondly, the DAI could be locked into a savings contract (DSR). In this savings contract you earn an interest rate, which partially hedges against the stability fee which applies in the Makervault.
According to Cong, Li, Wang (2021), what is the determinant of the value of utility tokens? What does this mean in laymen’s terms (i.e., in your own words)?According to Cong, Li, Wang, the key driver of utility tokens are network effects. The price of tokens is determined by aggregating heterogeneous users’ transactional demand, rather than discounting cash flows. This means that the important value driver behind utility tokens is the fact that more people make use of the token because that benefits yourself.
Name three advantages of a security token offering relative to a traditional IPO?1) Opportunity to attract capital from around the world. 2) You don’t have to make your company public. 3) Faster and cheaper share transactions
In a recent article, the Economist argues that regulators should treat Tether like a bank. Would you agree?Yes, Tether and the connected exchange Bitfinex were buying BTC with USDT when there was a bear run to push back the price up. This injection of liquidity in the Market is typical for central banks. That’s why people think that Tether should be regulated as a bank. Also Tether creates and redeems Tether itself, also similar to a (central) bank.
Name and explain three reasons why regulators are worried about cryptocurrencies.1) Concerns of financial stability because the world of cryptocurrencies are extremely volatile, it could be that a lot of deposits will be lost when a platform or company goes bankrupt. 2) Investor/consumer protection from fraud and other bad intentions 3) Lose grip on monetary policy because the world of cryptocurrencies are largely decentralized there is no real governance related to this.
What is an ERC-721 token?ERC stands for Ethereum Request for Comments and 721 refers to it being the 721th proposal ever made. This non-fungible token (NFT) gives you ownership rights of something very specific.
What is the purpose of the Howey-test?Identify whether a digital asset (token/coin) is a security token and if securities legislation applies to it.
What does constitute a security according to the Howey test?- An investment of money is made by the purchaser - The investment is part of a common enterprise among numerous purchasers - Success of the enterprise depends on the effort of a third-party promoter - A purchaser has an expectation of financial return, such as capital gains.
Describe the evolutionary steps from Uniswap v1 to Uniswap v3.Uniswap V1 only had liquidity pools allowing swapping only against ETH. Uniswap V2 allowed any two cryptos directly in. In Uniswap V3, liquidity is allocated within a custom price range.
ICOs continue to raise proceeds comparable to the size of the US IPO marketFalse! Have never raised as much, and have raised very little recently. (1 point) IEOs/IDOs have started to become more relevant recently and have replaced ICOs for the moment.
A liquidity-pool based DEX uses a constant product function to determine the exchange rate at which currencies be exchanged.True! The constant product function requires a liquidity trader wishing to exchange one currency into another currency to balance off added liquidity and withdrawn liquidity such that the product of both liquidities stay constant. The constant product function ensures that larger trades have a stronger impact on the exchange rates, ensuring that arbitrage traders bring prices back to market prices (1 point in case of 3 point question)