FINA 4920 Quiz Solutions Study Set
Approximately how many coins (Cryptocurrencies) have been created?
About 1,000
T/F: On the Bitcoin blockchain there can be multiple blocks in a transaction or multiple transactions in a block.
False; There can be multiple transactions in a block. Clearly one cannot have blocks in a transaction.
T/F: The computational work required to create a new block ensures that a malicious (dishonest) node will be less likely to solve the puzzle and broadcast the next block than the likelihood of one of the honest nodes doing it earlier.
True; Because we assume that the honest nodes have more combined computational power than the malicious node, the probability of the malicious node coming up with the next block is small as long as the work required to do it is substantial.
T/F: The transactions in a node's Mempool are all the transactions the node has heard about but have still not been incorporated in a block accepted by the node.
True; First of all the transactions have to be the ones the node has heard of or received. Second, if they are already on the block chain then these UTXOs are spent and cannot be in a new block. So, the node has to delete them.
Tether; a fiat backed stablecoin; has the following characteristics
- it is not decentralized - is backed by resources that are hard for investors to verify
If the Federal reserve board issues a CBDC; it is likely to
- provide peer to peer transactions (this is the prime motivation) - it will NOT be anonymous - has no protection against inflation - have no reversibility
A validator on Ethereum's proof of stake mechanism has to put up a minimum of ______ ETH.
32
Bitcoin was introduced at an opportune time because: A) there was a general lack of trust in financial institutions and government monetary policy after the great recession in 2008. B) President Obama came to office in 2009 and he had a reputation of being technologically savvy. C) Regulators were distracted and bitcoin got a head start before they realized the importance of regulating. D) Financial institutions were weak and could not compete with the bitcoin developers
A
Which of the following are not in the block header: A) the entire transaction list of the block B) has of the previous block C) merkle root of the transactions included in the current block D) timestamp of the current block
A
Which of the following are true: A) a person can have multiple public keys B) a secret key is needed to validate a signature C) a new identity is generated every time you sign a transaction D) a public key is needed to sign a message
A
Which of these is not a fundamental role of money? A) Keep economy at full employment B) Facilitate exchange of services or goods C) Allow people to store value over time D) Be a unit of accounting
A
Your secret key is needed to... A) None of these B) Generate a new public key & secret key pair C) to verify your signature on a transaction D) to send Bitcoins in exchange for a service
A
A smart contract ... (Choose all correct answers) A) does not have to pay gas fees. B) can be easily amended. C) a precise translation of a business arrangement in computer code. D) sits (resides) on the blockchain waiting for instructions or conditions that will trigger action.
A & B C is incorrect because Every transaction irrespective of where it originated need to pay gas fees D is incorrect because they are on the blockchain which is immutable as are these contracts.
Arrange the following in increasing order: A. (1111) base 2 B. (1111) base 16 C. (1111) base 10
A < C < B
The number of transactions on the Bitcoin blockchain is limited to about 7 per second because: (choose all correct answers) A) Software adjusts so that a new block is mined every 10 minutes on average B) Number of transactions in the mempool are limited C) Block reward is too small for miners to include more transactions in the block. D) There is a limit on the size of the block
A and D
The Ethereum Virtual Machine is: A) is software that makes Ethereum network hardware independent. B) software that runs on all Ethereum nodes and executes transactions initiated by user accounts. C) the name given to hardware that needs to be run by all Ethereum nodes D) a program which executes commands used to implement operations on Ethereum.
A, B, C D is wrong because EVM is not a hardware
Ethereum's transition from PoW to PoS is referred to as the merge. Post-merge the change in outstanding ETH was significantly impacted because: A) block reward was significantly reduced B) burning was significantly increased C) block reward was significantly reduced and burning was significantly increased. D) the number of validators were significantly higher than expected.
A; block rewards were significantly reduced. Burning was largely coming from transaction fees and is about the same. The number of total validators has no impact on burning.
It is difficult to use exchange rate valuation models built for foreign currencies like the British Pound to value cryptocurrencies because (choose all that apply) A) there does not exist a large basket of goods priced in cryptocurrencies or deep markets of financial instruments to use arbitrage models. B) cryptocurrencies do not have a long historical record or data C) cryptocurrencies are extremely volatile and cannot be modeled using traditional economics. D) unlike traditional currencies there is no government backing cryptocurrencies.
A; there does not exist a large basket of goods priced in cryptocurrencies or deep markets of financial instruments to use arbitrage models. In traditional currencies we can use purchasing power parity or the interest rate parity conditions to get estimates of the exchange rate. For cryptos it is not meaningful.
A crypto pricing model that is based on network effect (e.g. Metcalfe's law) is problematic because (choose all that apply) A) Hard to estimate penetration with anonymous addresses B) Assumes the impact of each address is similar C) Hard to estimate future adoption based on past adoption rates D) Ignores the increase in the money supply
All of the above; A demand side model ignores supply. We know from Econ 101 that both supply and demand determine prices. The value is coming from network effect of adoption. In the class we had talked about modeling it with internet or cell phones. We have no idea what the correct model is, which makes it hard to estimate. Also, all addresses cannot have the same impact- Walmart v/s Joe Schome. We also do not know how many people there are in this ecosystem, as we do not know how many public keys belong to the same person or entity.
The first transaction in a Bitcoin block ... (Choose all the correct answers) A) is the highest value transaction in the block. B) is different for every miner. C) does not have an input UTXO. D) does not exist in the Mempool but the miner writes it.
All of these except A. are coinbase transaction. That means it has newly minted coins that the miner gets as a reward. Every miner is different and has their own address. Hence, every miner will have a different first transaction. Because it is a miner reward it does not have an input UTXO. The output UTXO consist of the reward and the transaction fees. Also, this transaction does not exist in the Mempool and is written by the miner to benefit themselves.
In case of an upgrade that leads to a soft fork the following are true: (Choose all correct choices) A) Nodes that upgrade will have some chance to get a block reward B) Nodes that do not upgrade will accept block accepted under the new standard C) Longest blockchain will consist of blocks mined under the upgraded standards D) Upgraded nodes with reject blocks accepted under the old standard
All of these; Because the soft is when the upgraded software is more restrictive. The blocks accepted under the more restricted standard are still acceptable under the old standard. For the same reasons, the old standard blocks will not meet the restrictive criterion and will be rejected by the upgraded nodes. As the only blocks universally accepted will be those that were mined under the upgraded software, the blockchain will have only these blocks after the fork. The upgraded nodes have a chance to mint a block hence they have a chance to get the reward.
Which of the following statements are incorrect? (Choose all that are incorrect) A) Ether is the native token or currency on the Ethereum Blockchain B) An account holder with a UTXO of 2 ETH and a UTXO of 3 ETH has a choice of which UTXO to use if they want to make a payment of 1 ETH. C) Contracts on Ethereum that use artificial intelligence are referred to as smart contracts. D) Fees paid for Externally Owned Accounts on Ethereum are determined by supply and demand.
B: An account holder with a UTXO of 2 ETH and a UTXO of 3 ETH has a choice of which UTXO to use if they want to make a payment of 1 ETH. Ethereum is an account based (running balance) ledger and does not maintain UTXOs. C: Contracts on Ethereum that use artificial intelligence are referred to as smart contracts. There is no claim of intelligence in these smart contracts D:Fees paid for Externally Owned Accounts on Ethereum are determined by supply and demand. EOAs pay no fees on Ethereum
In May 2020 BTC reward went from 12.5 BTC to 6.25 BTC. What do you expect the reward to be in 2030? (Answer in BTC with at least 4 decimal positions).
Block reward is halved about every 4 years. We should expect a halving event in 2024 to 3.125, then in 2028 1.5625, and then in 2032 to 0.78125. In 2030 the reward is expected to be 1.5625
The fact that no one can find two inputs that give the same exact output to a SHA 256 hash function means it satisfies which property
Collision free
An increase in the supply of a fiat currency by the central banks ... A) always leads to deflation due to higher demand of goods. B) has no effect on wages or prices. C) always leads to inflation due to debasing the currency. D) can result in inflation or deflation or depending on various macroeconomic factors.
D; we had examples of how increases in money supply was unable to overcome the deflationary regime in Japan etc.
T/F: Ethereum's protocol burns some Ether for every block minted to penalize validators that do not respond in a timely fashion.
False
T/F: The volatility of Bitcoin is similar to that of major stock price indexes like the S&P 500 index
False
T/F: Stablecoins are a good hedge against inflation
False; As they are pegged to the US dollar their buying power is the same as the US dollar. Given that US dollar is not protected against inflation neither are these Stablecoins.
T/F: If the cost of mining goes up due to an increase in the cost of electricity, the price of the cryptocurrencies that has a proof-of-work consensus mechanism must increase.
False; As we discussed in class, one needs to be careful of cause and effect. An increase in cost of mining will have a direct effect on the investments made in mining. The price of the cryptocurrency will generally depend on supply & demand. For the case of BTC, for example, the supply is kept largely constant by changing the difficulty.
T/F: To ensure that a block is added every ten minutes (on average), the block reward is adjusted accordingly.
False; Block reward is halved every 4 years. It has nothing to do with the timing of the block. The system adjusts the difficult of the puzzle (# of leading zeros) to get a block being added approximately every 10 minutes
T/F: Vitalik Buterin's (Ethereum's co-founder) big innovative idea was to reduce the amount of electricity consumed by improving Bitcoin's proof-of-work consensus mechanism.
False; Buterin saw the potential of blockchain to be much bigger than currencies if one could provide computational engine for smart contracts. The proof of stake was a slow transition for Ethereum and, in fact, other blockchains had implemented it first
T/F: In exchange for US Dollars, Ethereum's Initial Coin Offerings (ICOs) gave the initial investors Bitcoins.
False; Ethereum's ICO gave 2000 Ether for one Bitcoin
T/F: Bitcoin cash was a hard fork in the Bitcoin blockchain. All holders were required to choose whether to convert the Bitcoin to Bitcoin cash or stay with the original Bitcoin.
False; Folks that had an unspent Bitcoin now also got a Bitcoin cash. There was no choice needed to be made.
T/F: If two blocks with no errors are broadcast at the same time then the block with the highest number of transactions will be incorporated in the blockchain.
False; In this case some nodes will hear about one of the blocks and the others will hear about the alternate one. These nodes will try to extend the block they get first and whichever node gets extended will survive. The other unlucky one will fall off. This has nothing to do with the number of transactions.
T/F: In the US money supply is increased when the US Government issues more Treasury bonds to the market.
False; in the US the Federal reserve controls the money supply and not the US government; also money supply is not increased by issuing government bonds but increased when the Federal reserve buys government bonds in open market operations
T/F: Kublai Khan introduced the first known Fiat Money by holding deposits of Gold equivalent to the paper currency issued
False; we discussed in class how this was the first instance of paper money without any deposits; another hint was the use of the term 'Fiat' money in the question, Fiat money is not backed by any deposits of precious metals
Suppose an adversary changes the transaction amount in Block 240,000; how will we detect the change?
If anything in a transaction is changed it will change the Merkle Root, which is in the header of the block, Hence, the has of that block will change; the has of the current block is included in the header of the next block; hence, its hash will change; this will be carried through the entire blockchain and all blocks after the current block will also change
John has transacted many times in Bitcoin. His wallet has 3 UTXOs with values of 0.1, 0.01, and 0.001 BTC respectively. John would like to pay Mary 0.011 BTC. Assuming no fees what is the minimum and the maximum number of input UTXOs that John can use to construct a transaction that pays Mary 0.011 BTC and the rest goes back to him as change?
Minimum 1 and Maximum 3. John can input the UTXO with value 0.1 and get the rest as change. He can also input all 3 give 0.011 to Mary and get the rest back as change.
A transaction with a gas limit of 22,000 units, uses 21,000 units of gas, and the gas price is 24 GWei. Calculate the fees paid
Total gas fee = Gas used * Gas price = 21,000 * 24 GWei = 504,000 GWei = 504,000/109 ETH = 0.000504 ETH
T/F: The market cap of some of the larger cryptocurrencies is comparable to the money supply of some large countries
True
T/F: An honest miner accepts a block by including its hash pointer in the next block the hones node is trying to solve.
True; This is the only way for miners to accept a block. They just include the Hash of that block in the header of the block they are mining.
A CBDC might be a threat to commercial banks because...
it will reduce deposits held by banks and given peer to peer transactions it will also reduce the credit card transactions
SHA 256 is considered puzzle friendly because...
the only known way to solve a computational puzzle (satisfy specific property of the hash output) is to try a lot of different inputs
John is a proud owner of 1 Bitcoin. What is the theoretical maximum number of UTXOs he can have?
the smallest unit possible is one Satoshi and there are 100 million Satoshis in a Bitcoin. Hence, theoretically John can have at most 100 million Satoshi each with a value of 1 Satoshi; should not have your secret key
