Blockchain and Crypto Essentials Flashcards
Year that blockchain was established?
2009 (first BTC was mined)
How to confirm transaction in double entry ledger accounting?
Confirm on the ledgers of the two businesses, a credit to one and a debit to the other.
What is consensus?
The mechanism and rules by which nodes agree on the validitity of the past and current blockchain as well as the process of how new txs/info can be added
What is blockchain (block definition)?
A series of chronological snapshots of an updated ledger containing information that is secured with cryptography.
How crypto address is created?
Produced by using a hash function on the public key along with information about the network (depending on the blockchain)
Point of public key encryption vs digital signing
Public key encryption: to secure a message itself
Digital signing: to securely determine the point of origin
Each block has a unique number called what?
Height
Process for a proof-of-work transaction
- Transaction is signed with Sally’s private key and sent.
- A node on the network receives the transaction and verifies the sender’s funds, then places it in the mempool.
- The miner gathers transactions from the mempool, verifies each sender’s funds and signature, and places them together into a potential block.
- Miner then searches for a special hash with leading zeroes by changing the nonce (random number, “number only once”), running computation, repeating until result is a valid hash and block (hash must be below difficulty number).
- The miner then sends valid block to a node, which also checks the block and its transactions, then distributes it to other nodes. Processed tx’s are removed from the mempool.
Blockchain interoperability meaning
Separate blockchains being able to interact with each other
What is the Ethereum Foundation?
Basically supports further research and development for Ethereum
How public key is created?
Mathematically derived from the private key using a complex algorithm
Ethereum established when?
Crowdsourcing campaign - 2014
Ethereum Blockchain launched - 2015
How often is the bitcoin mining difficulty adjusted?
Every 2,016 blocks (~2 weeks)
Wallets hold what?
Private keys associated with a public key address, not actual coins/tokens
Year of first paper outlining blockchain
1991
What is triple ledger accounting?
With an established blockchain, companies can each maintain their own business ledgers, but transactions can also be recorded on the distributed blockchain.
Cryptography definition
Practice and study of techniques (like encryption and decryption) for secure communication
How data is encrypted
Using an algorithm, also called a cipher.
How cryptographic hash functions work?
Takes input string of digital data (numbers, letters, images, videos, ebooks) of any size and uses an algorithm to transform it into a fixed-length result, called a hash or digest.
What does it mean that cryptographic hash functions are irreversible?
Attackers cannot reverse engineer a hash to figure out the original inputs.
How proof-of-stake works
Users of a network stake their shares of the network’s currency to become validators, which then are chosen at random to create blocks based on the agreed-upon rules.
When not creating new blocks, validators are responsible for checking and confirming new blocks (called “attesting”).
What does Ethereum offer beyond Bitcoin?
Bitcoin: currency and ledger (record of transactions)
Ethereum: can be programmed and run computation
How cryptography scrambles a message
Put it through an algorithm before sending. Only ones who can read it are those who know the algorithm.
What does it mean that cryptographic hash functions are deterministic?
The same inputs will always yield the same output
How much computational power needed for cryptographic hash functions?
The functions are fast with low computational overhead.
Are digitally signed messages secure/confidential?
No, anyone on the network can see the message using the public key. However, this process does prove that the message is authentic and unaltered.
Primary purpose of a block
To record transactions
Example of Consortium blockchain
3 companies and government regulator operate nodes, where all 4 entities must sign transactions, and where all can access and audit the ledger without needing access to internal ledgers of the other entities. Also, public not able to see these tx’s.
Difference between coin and token?
Ethereum and Bitcoin native currencies are coins (ETH and BTC)
Apps built on top of them would be tokens.
Function of private keys in a wallet?
Allows one to prove ownership of coins in a network
Advantage of triple ledger accounting
Can make the process of auditing complicated transactions much easier, as it doesn’t require coordinating the separate books from many different business entities.
Cryptographic hash function type of output?
Hexadecimal number
What is a hexadecimal number?
Also called base 16, a number that contains 16 symbols per numeral column, 0–9 and A-F.
Types of blockchains
Public, Consortium (shared permissioned), and Private (permissioned)
Bitcoin’s key innovation
Enabling participants to digitally transact directly with each other without relying on a single, centralized intermediary, such as a bank, to validate the payments.
Three forms of decentralization coined by Vitalik Buterin
Architectural (de)centralization
Political (de)centralization
Logical (de)centralization
Greek meaning of cryptography
Hidden writing. It’s as old as the earliest messages we ever wrote using codes or cipher.
What does “SHA-256” stand for and what is it?
Secure Hashing Algorithm, with a hash length of 256 bits, used by the Bitcoin blockchain
What is the miner reward/subsidy?
The reward for finding the correct hash for the new block and establishing it, in the form of some of the blockchain’s tokens and transaction fees
Way for any network node to confirm a newly mined block
Hash the information and nonce in the new block themself and ensure that it’s below the difficulty setting
Term for programs that can be deployed on Ethereum blockchain
Decentralized applications (dApps) or smart contracts
What is a distributed ledger?
Multiple copies of the ledger distributed on a network, so there is no one authoritative copy. There are specific rules around updating them.
What is tokenization?
Creating on-chain representation of one or multiple assets in the form of a token.
This can be everything from physical objects to ideas to a bundle of existing blockchain tokens.
Why is the BTC mining difficulty adjusted periodically?
To keep the block time at 10 minutes (600 seconds)
How is validity related to the difficulty setting?
The difficulty setting determines how low the hash must be of a newly mined block to be valid.
Any block mined with a higher hash would be considered invalid and not accepted by other nodes
Ether (ETH) token allows users what?
The ability to pay for transactions or computing power on the Ethereum blockchain.
How is information in Blockchains immutable (permanent)?
After blocks are created and accepted by the network, any change to a previous block would change the current block’s hash, which would not be tolerated by the participants.
How much ETH will users need to stake to become a validator?
32 ETH
What is a ledger?
A book of transactions, recording debits and credits
What does it mean that collision is very unlikely with cryptographic hash functions?
Different inputs into the hash function are extremely unlikely to ever produce the same result.
What is a network’s hashrate or hashpower?
A key security metric showing the hashing (computing) power in the network by its miners.
Higher computing power means that it is more resistant to attacks because of the expense that would have to be incurred.
Current bitcoin block reward/subsidy
6.25 BTC
What does it mean that traditional Internet structure is server-based?
anyone who wants to interact with an online service must connect to the same server
Where are the coins/tokens stored of each networks’ users?
On the blockchain network itself, not a wallet. Technically, no account balances are actually stored, just transaction information, which is a list of credits and debits going all way back to the genesis block.
Goal of decentralization
Shift power and authority in a community away from one central entity and make it available to the members themselves, making community members self-sovereign
What are tokens?
Representations of value or the permission to do some actions within an application.
For example, a token could represent an opportunity to play a video game or download a song.
In public key cryptography, private and public keys can encrypt and decrypt what?
Each key can encrypt a message but not decrypt one it encrypted. Each can decrypt a message that was encrypted by its corresponding key.
Difference between encryption and hashing
Encrypted items are meant to also be decrypted, so they are two-way.
Hashing is only one-way, so once the output data has been generated, the hash cannot be reversed to find the input.
How blocks in the Blockchain are linked together?
On each new block, the previous block’s hash is included, then hashed into the new block’s hash.
In proof-of-work chains, how do nodes agree on what makes a block valid?
If the correct hash is produced, as this shows commitment to the system because significant work was done to mine the new hash and create the block.
Simplified Payment Verification (SPV)
Enables someone running a light client to verify that a transaction has been included in a blockchain and therefore a payment has been made.
Year that the concept of Proof-of-Work established
1993 initial paper
What is the Mining Difficulty?
A setting that determines how hard it is to create blocks. The higher the difficulty, the lower the mined block’s hash must be, and the more work it takes to mine (thus proof of the work).
Without a difficulty setting, the first mined/hashed block would be accepted, defeating the purpose of the proof-of-work concept.
Types of nodes
Full nodes store of the entire blockchain and verify every block and transaction.
Light nodes store a recent portion of the blockchain and also verify blocks and transactions.
Difference between Web 1.0, 2.0, 3.0
- 0 information being available
- 0 interaction with info and other users
- 0 user interaction with ownership of their information and networks?
What is Ciphertext?
Scrambled text that results from encryption performed on plain text.
Hashing algorithm used by Ethereum blockchain
Keccak-256
Nonce purpose
A block data field used by miners that can be changed with each computation to find the correct and valid block hash.
Year that all 21 million bitcoin will be distributed
2140
Encryption definition
In cryptography, it is the process of encoding information
Why decentralized networks can be more secure
Not a central system to attack.
A decentralized network consists of many nodes and can function if individual nodes go down because others are still active
Process of digitally signing?
Sender
- Take a hash of message/data
- Encrypt that hash with sender’s private key
- Send msg/data and encrypted hash to recipient
Recipient
- Decrypt encrypted hash with sender’s public key.
- Take a hash of the msg/data received
- Compare this hash to decrypted hash from sender to verify authentic and unaltered from sender
Bitcoin blocks contain how many transactions?
Generally around 1,500-2,000, depending on block size limits
Node definition
A computer connected to a blockchain network that is responsible for its maintenance and security.
Usually stores a copy of the blockchain and ensures its validity.
What is a smart contract?
- Lines of code stored at a specific blockchain address. executed by machines on a blockchain.
- They instruct data when and how it should move.
What is the Enterprise Ethereum Alliance (EEA)?
A non-profit created to connect entities with Ethereum subject experts, in order to lead to Ethereum’s further adoption.
Bitcoin current block size limit
One megabyte
Drawbacks of proof-of-work
- Uses large amounts of energy
- Transaction rates and volumes are lower
- Transaction fees are higher to pay for power use
How proof-of-stake validators can lose stake?
By attesting to, or validating, malicious blocks
What is an unspent transaction output (UTXO)?
The amount of cryptocurrency that remains after a transaction is executed
How is the total gas cost calculated on Ethereum?
Amount of gas needed for the computation times the current gas price
What parts of blockchains are forkable?
All code, dApps, and smart contracts
If a flash loan is not repaid with required interest by the end of the transaction, what happens?
It reverts to the state before any money left the lender’s account and everything resets as if the user had not borrowed money.
Price of gas on Ethereum dependent on what?
Network use/congestion
What is a keeper?
A type of EOA (externally owned accont) that receives a fee to perform an action in a DeFi protocol or other dApp
Ethereum EOA accounts have ability to do what?
(Human account) Initiate transactions, receive, hold and send tokens, and interact with deployed smart contracts
What is a slashing (negative) incentive?
The removal of a portion of a user’s staked balance as the result of an undesirable event.
What is a “slashing condition”?
A mechanism that triggers a slashing
On an AMM, original trading pair and market price: 1 Eth = 100 DAI. Formula (xy=k) with 10 of ea in liquidity pool is 101,000=10,000
If new market price outside of this exchange is 1 Eth = 400 DAI, how does trading pair/liquidity pool change?
The pricing of the pair on this exchange would move to reflect market prices.
Dai would be sold to get Eth, resulting in the new pool looking like: 5*2,000=10,000, so 1 Eth = 400 DAI
How Bitcoin transactions and UTXOs work?
Accounts consist of balances of UTXOs. If Bob is sending 2 BTC to John and Bob has a UTXO of 10, 5, and 3 in their account, they might use the 3 for the transaction, spending an output of 2 to John, with the remaining 1 being another new output that comes back to Bob.
Ethereum gas measurement unit?
Gwei, which is one billionth of one ether
Why quantum computing irrelevant to crypto?
Public and private keys can be changed to use quantum resistant signatures.
Irrelevant to consensus mechanisms, even PoW because it’s still whoever can find the correct hash fastest.
Two forms of burning tokens?
- Manually send a token to an unowned Ethereum address.
2. More efficient is to create a contract that is incapable of spending them
What are some other applications where consensus is needed when there is not one leader?
Jury (unanimous consensus)
Senate (majority consensus)
What does it mean that the EVM is a Turing Complete machine?
It can run computation and programs that any other normal computer can
Fungible meaning?
Mutually interchangeable; able to replace or be replaced by another identical item
Swapping on a decentralized exchange is considered what and what?
Atomic and non-custodial
Why mint tokens?
Incentivize a wide range of behavior (supply liquidity, encourage use of a platform)
Entering a liquidity pool and acquiring corresponding ownership share.
How is a bonding curve deployed?
It can be a single smart contract with options for purchasing and selling the underlying token.
If a person deposits 15 ETH with a market value of $200/unit in a MakerDAO vault and the collateralization requirement is 150%, how much DAI can they borrow against the deposit?
The equivalent of 10 ETH or $2,000 in DAI.
If ea ETH market value is $200, then $3000/1.5 = $2,000 or 2,000 DAI can be minted/borrowed.
What mechanisms of MakerDAO drives its stablecoin toward the $1 peg?
The debt ceiling, stability fee (variable interest rate for debt), and DAI Savings Rate (DSR, variable rate paid for DAI holders’ deposits).
What is a virtual computer?
It is a computer file that behaves like an actual computer when “borrowing” processing power, memory, and storage from a physical host computer and/or remote server.
Ethereum Improvement Proposal (EIP) 1559 summary
Part of London Hard Fork (8/5/21) that made gas fees more transparent with an “base fee” plus “tip” structure, where the base fee portion of all transactions is “burned”, decreasing Eth supply.
Also creates adjustable block sizes depending on demand.
Mechanics of DAI?
User deposits ETH or supported ERC-20 assets into a Vault, which is a smart contract that escrows collateral and keeps track of the USD-denominated value of the collateral.
User can then mint DAI up to a certain collateralization ratio on their assets, which creates a “debt” in DAI that must be paid back by the Vault.
The DAI is the corresponding asset that can be used any way the vault holder wishes.
Due to volatility of ETH and most collateral types, collateralization requirement is far in excess of 100% and usually in 150-200% range.
What does it mean in DeFi that smart contracts are atomic?
If any link in a chain a smart contracts doesn’t execute, the contract terms reset as if the money never left the starting point.
What is an equity token (fungible)?
Represents ownership of an underlying asset or pool of assets
What is a governance token (fungible)?
Represents a percent ownership of voting rights.
Many smart contracts have parameters as to how the system is allowed change, which would be initiated by a vote.
MakerDAO’s two tokens and their types?
Maker - governance token
DAI - stablecoin pegged to USD
How does a bonding curve (smart contract) carry out a token swap?
The bonding curve (smart contract) escrows the incoming funding for the point in the future when a trader may want to sell back against the curve.
What is a DAO?
Decentralized Autonomous Organization.
Rules of operation built into code and smart contracts. Think of a company where the trust is in its code instead of it’s leadership/people.
Types of fungible tokens?
Equity, Utility, Governance
What does a DAOs governance token enable its owner?
Some percentage of a vote on future outcomes.
What is a bonding curve?
Basically, an algorithmic representation of the relationship between a token’s supply and the price of an asset used to purchase it.
What does it mean to mint tokens?
Add more to circulation.
If the MakerDAO protocol’s collateral falls far enough in value that the DAI debt can’t be repaid, what happens?
The undercollateralized positions are closed and the protocol accrues “protocol debt.”
Buffer pool of DAI exists to cover this, but there is a risk that it won’t always be enough.
Easiest way to think of an NFT
A numbered token that represents something. It is like a certificate of authenticity.
What is a utility token (fungible)?
Token required to utilize some functionality of a smart contract system
What does it mean to burn a token?
To remove it from circulation
Why burn tokens?
Exiting a liquidity pool and redemption of underlying
Increase scarcity
Penalize bad acting
What happens next if the MakerDAI buffer pool isn’t enough to cover protocol debt in the event of a large fall in the protocol’s collateral?
A scenario called “Global Settlement,” where newly minted MKR tokens are auctioned off in exchange for DAI, and the DAI are used to pay back the Protocol Debt
What is the ERC-20 token standard?
Most popular fungible token standard on the Ethereum blockchain that outlines certain specifications for tokens to follow in order to function optimally.
Each token is worth the same value.
Tokens on this standard are all interoperable with each other.
Ethereum simple definition
Ethereum is a decentralized, open-source software platform powered by blockchain technology with smart contract functionality
What is a flash loan?
An instantaneous loan paid back within the same transaction, without the need for collateral.
What is a NFT token URI?
Uniform resource identifier (think of like a URL).
Ethereum contract accounts have ability to?
Receive, hold and send ETH and tokens; Interact with deployed smart contracts; and can only send transactions in response to receiving a transaction
What makes ERC-20 tokens fungible?
They are all identical in value
What is an automated market maker (AMM)
A smart contract that holds assets on both sides of a trading pair and continuously quotes a price for buying and for selling.
NFT model flow?
this token points to this URI (like a URL) and at the URI is this JPG
Ethereum externally owned accounts (EOA) are controlled by who?
Anyone with the private keys
Can an ERC-721 token be split or fractionalized within the ERC-721 standard for shared ownership of a unique asset?
No, the ERC-721 cannot be split. But you can vault an ERC-721 and then issue ERC-20 equity tokens based on the ERC-721 asset.
What is Escrow risk in DeFi?
Tokens could be locked up in a smart contract indefinitely if it has no way of releasing funds
Miner extractible value meaning?
A measure of the profit that a miner could make by front-running or re-ordering transactions that they process from the mempool (mempool can be viewed by anyone w/mining node).
What does the ERC-1155 token standard enable?
Contracts to hold a mix of fungible and non-fungible tokens, instead of just one or the other like ERC-20 and ERC-721
Simple definition of Ethereum’s state?
The current values of all the variables in the system as agreed upon by all the nodes through a consensus
Ethereum ERC definition?
Ethereum Request for Comment, the way for a new standardized token structure to be created and proposed within the Ethereum architecture
Stablecoin definition?
A coin intended to maintain the same price as a particular asset. (Most common track USD)
What is an Ethereum contract account?
A smart contract deployed to the network, controlled by code.
What does escrow mean in DeFi?
To custody funds in a smart contract. Opens up many capabilities in the space.
How does a swap work on a DEX?
Algorithms are enforced by smart contracts when the exchange conditions are agreed to and met by all parties.
What are Ethereum Testnets?
Fully functioning Ethereum blockchains where the ether has no value, used for developers to test out their dApps and smart contracts in a low risk environment
What is the IPFS?
Interplanetary File System, a distributed system for storing and accessing data, files, websites, and applications.
Problems with centralized finance?
- Centralized control
- Limited access (1.7B unbanked, more underbanked)
- Inefficiency (fees, settlement time, transfer times)
- Lack of interoperability
- Lack of transparency
In a collateralized loan on MakerDAO where 5 ETH is deposited in the vault and an amount of DAI are minted to lend to the borrower, what is considered as the collateral?
The 5 ETH deposited in the vault (in escrow).
In a collateralized loan, what are the options for a borrower who goes below their collateralization requirement?
Can increase the amount of collateral in the contract.
Can pay off the loan immediately to receive their collateral.
The loan is liquidated by a keeper (any external actor).
What are the two main categories of token incentives?
Staked and direct incentives
Staked incentives: apply to a balance of tokens custodied in a smart contract
Direct incentives: users within the system who do not have a custodied balance. Payments or fees associated with user actions.
Programming language of Ethereum?
Solidity, which is a derivative of JavaScript
CBDC pros/cons
Pros for gov’t: eliminate tax evasion, instant monetary policy
Cons for gov’t: people don’t want gov’t to see all tx’s or having ability to easily seize wealth
Why double spend was previously an issue?
Digital copies of many things are easy to create and duplicate, so this was an issue for digital money.
What is the ERC-721 token standard?
Most popular non-fungible token standard on Ethereum blockchain.
Each token associated with a particular asset and therefore has a unique value.
With MakerDAO, what happens for a borrower who goes below their collateralization requirement and must be liquidated, where:
5 ETH collateral in vault, market value/unit has gone from $400 to $300 (ETH value now $1,500)
1,000 DAI loan
Keeper fee of .1 ETH
Keeper auctions 3.33 ETH to pay off loan
Keeper receives .1 ETH for incentive and returns remaining 1.66 ETH to borrower
Borrower ends up with $1,000 worth of DAI and $498 worth of ETH for total of $1,498
How are synthetic tokens created (Synthetix example)?
By users staking collateral (SNX) and minting a synthetic asset against it. In other words, each Synth is essentially debt against the posted collateral.
How to think about what a non-fungible token (NFT) is?
Like a deed providing unique ownership over an asset
How gas on Ethereum solves infinite loop problem?
If there is malicious attack or bug in code of smart contract, can only run until gas is used up
What happens if gas limit sent is higher/lower than needed?
If higher, excess gas refunded.
If lower, transaction will not be completed because of lack of funds. Still charged though because some computation was run.
How to identify a fake exchange?
- Extremely inflated volumes
- Offsetting trades at the same price (multiple buys/sells at exact same price)
- Wide spreads between bid/ask
What is impermanent loss?
When an investor makes less of a profit being a liquidity provider of two assets than to just hold the assets, because of significant price fluctuations in the market.
Flash loans do not have which kind of risks?
Duration and counterparty
Ethereum gas fee dependent on what?
Complexity of the calculation that needs to be run
Advantage of dApps over traditional apps?
Interacting directly with peers through smart contracts/code rather than through a central entity
Why are keepers needed to perform actions on blockchains?
Every interaction (at least on Ethereum) must begin with a transaction, which must begin with an EOA, which is off-chain. So a smart contract, for example, must be triggered by a human or off-chain bot.
What is a collateralization requirement?
How much collateral a borrower must place in escrow compared to the amount borrowed.
If collateralization requirement is 200% and 15 ETH are borrowed, the minimum collateral in escrow must be 30 ETH.
Are public keys always a network user’s public address?
Not always. In BTC, public address is derived from public key. In ETH, public address is same as public key.
In liquidity pools on AMMs, impermanent loss is minimized when?
The trading pair has correlated prices (stablecoins, sETH:wETH)
Two primary types of decentralized exchanges?
Order-matching and Automated Market Maker.
Formula that determines asset’s price on an AMM?
x * y = k
Where k is the invariant (or constant), x is the number of token 1, and y is the number of token 2 (note the number, not the value).
Drawback of Proof-of-Stake
Theoretically could lead to more centralization as the higher one’s stake, the more influence they could have over the network
On Ethereum, when a participant creates a smart contract, what runs its code?
EVM
How are dApps and smart contracts related?
Dapps are higher-level applications built using a combination of technologies, including smart contracts to provide their functionality
What is a swap?
The exchange of one type of token to another.
Oracle definition in blockchain?
A service that connects blockchains to external systems, thereby enabling smart contracts to execute based upon inputs and outputs from the real world.
Chainlink is the main platform working on oracle solutions.
How gov’t recovered Colonial Pipeline funds?
Gov’t hacked into hacker’s computer and found their private keys. Not a blockchain issue, hacker’s security issue.
Same with exchange hacks, where they don’t take care of private keys.
What is the main interaction between layer-2 scaling solutions and their base blockchains?
Layer 2s work to minimize interaction with the base blockchain by handling the bulk of computation and processing of transactions, then only report to the base blockchain for finality and settlement.
What is Gravity DEX?
An IBC-Native exchange that resides directly on the Cosmos Hub
What is Gravity Bridge?
A Cosmos < > Ethereum bridge that runs on the Cosmos Hub.
What has the biggest impact on slippage on an AMM?
How much liquidity is in a given pool.
Example: USDC/DAI pool of 44=16 (xy=k)
If a user wants to purchase DAI and puts in 4 USDC, can only take out 2 DAI to keep the invariant constant (8*2=16). So effective exchange rate is 2 USDC to 1 DAI. But much better exchange rate if there is 100 or 1M of each asset in pool.
What is a nested blockchain (layer 2 scalability solution)?
Operates on top of a base blockchain that sets parameters then delegates work to the nested blockchain. Nested blockchain executes the processes/work then reports them back to the base blockchain.
Similar to typical company structure: the manager designates tasks to subordinates, who report back to the manager once they’re done with their respective tasks.
What is the Uniswap governance token?
UNI, distributed to users to incentivize liquidity. Is also traded on open market.
What is rehypothecation?
When banks and other financial service providers use client assets for their own purposes to benefit both sides, such as collateral to be lent to institutional investors or their own collateral for taking out a loan.
Sometimes called “re-pledging” or “re-use”.
In traditional finance, the amount of rehypothecation is regulated.
What is total locked value (TVL)?
The amount of liquidity placed in a protocol by its users
Term for the number of transactions that take place every second on a blockchain?
Throughput
What is Uniswap?
An Automated Market Maker on Ethereum
Percent of developers and DeFi applications working on Ethereum?
90% in 2021
What is Bitcoin’s Lightning Network?
A layer two scaling solution that sets up many payment channels between users that settle smaller transactions off-chain, then reports those smaller transactions as just one or a few transactions to the BTC blockchain.
Also means cheaper fees and more privacy, as not every tx is broadcast to the BTC blockchain.
Two main kinds of rollups currently?
zk-Rollup (zero knowledge): can prove that some information is known/valid without revealing the known information directly (ex: give two different colored balls to colorblind friend and can prove to them that they are different colors by telling if he switched balls behind his back or not each time).
Optimistic Rollup: assumes that bundled tx’s are valid unless a user flags them, in which case a fraud proof must be supplied.
What are perpetual futures offered by dYdX?
A popular derivative product similar to traditional futures but without the settlement date that trad futures have.
In a perpetual futures contract, investor is simply betting on future price of an asset.
The contract can be long or short, with or without leverage.
Liquidity mining description?
Receive fees for being a liquidity provider as well as a form of the platform’s token
What is hypothecation?
Simply pledging collateral for a debt
What is the Cosmos Hub?
The blockchain protocol underlying a large number of independent blockchains built on the Cosmos Network, allowing them to communicate with each other (pending integration with IBC).
Designed to generate thousands of interconnecting blockchain systems built on the Cosmos Network.
How are fees paid to liquidity providers on Uniswap?
Similar to Compound’s cToken, a uni token is issued that represents ownership portion of a given pool, then fees are paid to liquidity providers based on their share of the pool.
Example: if user provides liquidity to ETH/DAI pool, they receive uni ETH/DAI token.
What is the blockchain trilemma coined by Vitalik B?
Key tradeoffs that developers need to consider when developing a blockchain.
Decentralization (no central point of control)
Scalability (handle increasing number of transactions per second)
Security (operate as expected and resilient to attacks)
What are blockchain roll-ups?
A Layer-2 scaling solution used to combine and process (roll up) smart contract transactions off-chain before settling the final state on-chain.
Latency meaning in computing?
Delay
Composability vs modularity?
Composability: the ability for applications to seamlessly interact with one another with minimal friction.
Modularity: the ability for a system to be broken down into individual parts (modules) that can be stripped and re-assembled at will.
What is shared staking on Cosmos?
Enables ATOM validators from the Cosmos Hub to offer security to other App-Chains that opt-in, for a fee.
An attractive proposition for validators because they can earn more fees supporting multiple “child chains”, instead of only staking the Cosmos Hub (i.e. the “parent chain”).
How did Compound go from a centralized to decentralized network?
Developer admin access was removed and COMP tokens were distributed to users of the platform based on the borrow volume per market.
COMP token continues to be distributed to suppliers and borrowers of the platform as a subsidization of rates.
When is a digital asset a “security”, thus needing to be registered under Securities Act, unless exemption granted?
Tokens representing shares of securities like stocks or bonds.
When it has an “investment contract” as determined by Howey Test of 1946 (all conditions must be true):
“…an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby aperson invests his money (1)in acommon enterprise (2)and is led toexpect profits (3)solely from theefforts of the promoter or a third party (4), it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.”
What is Balancer?
A decentralized exchange (AMM) similar to Uniswap, but can support up to 8 ERC-20 tokens in a liquidity pool with varying weights.
Why can TVL be misleading?
Assets/tokens can easily be rehypothecated in DeFi
How will shard chains work on Ethereum 2.0?
Ethereum blockchain will be partitioned into 64 shard chains that process transactions and computation in parallel.
Each shard chain will be managed by randomly assigned teams of validators that have deposited collateral (stake) and all of the shard chains will be coordinated by the Ethereum 2.0 Beacon Chain.
What is the Cosmos Software Development Kit (SDK)?
An open-source, scalable, modular framework designed for building multi-asset proof-of-authority (PoA) and PoS blockchain platforms within the Cosmos Network.
The modular framework allows developers to use pre-built modules, including: Tendermint (consensus mechanism), Governance, IBC, Peggy, Staking, Rewards and Fees, and EVM; or can use their own custom-built modules.
What is “oracle risk” to a protocol?
Oracles currently represent the highest risk to DeFi protocols that rely on them bc all on-chain oracles are vulnerable to front-running and arbitrage. Oracle outages can have catastrophic downstream effects.
Until oracles are blockchain native, hardened, and proven resilient, they represent the largest systemic threat to DeFi today.
What is blockchain horizontal scaling?
Increasing the transactional capacity of a network by adding more nodes or optimizing systems, rather than altering the protocol via code.
KYC and AML meanings?
Know your customer
Anti-money laundering
Definition of fully diluted market cap?
The total value of a crypto at today’s price if the entire future supply of coins were in circulation.
What is governance risk for a protocol?
In protocols that have a human-controlled governance processes to determine protocol parameters, a financially equipped adversary could acquire a majority of liquid governance tokens to gain control of the protocol and steal funds
What is smart contract risk in DeFi?
A smart contract vulnerability in the form of:
- internally, a logic error in the code (rounding example, The DAO)
- externally, manipulation of an outside input (like an oracle) to the smart contract, used for economic exploit, etc.
How can DeFi companies reduce smart contract risk on their protocols?
Many protocols will employ one or more third-party auditors to check the code in their smart contracts for any vulnerabilities.
What is a “Hub” in the Cosmos ecosystem?
Basically a Hub is a Zone that has a lot of channels (other zones) connected to it, allowing it to facilitate IBC between all connected zones.
While any Zone could theoretically act as a Hub, some Zones only connect to a Hub, enabling them to communicate with with other zones connected to that Hub.
Which pairs are possible to trade on Uniswap?
Any ERC-20 token pair (ETH is not actually ERC-20 token, but can use WETH in pairs)
Scalability definition?
The ability to process more transactions without increasing the cost to validate them
What is a state channel (layer 2 scalability solution)?
A two-way communication channel between participants, enabling them to conduct interactions off the blockchain, then submitting the final state of the channel to the base blockchain.
How it works:
Portion of the blockchain is sealed off via multi-signature or smart contract. Participants directly interact with each other without submitting anything to the base blockchain.
When entire transaction set is over, the final state of the channel is submitted to base blockchain.
Examples of state channels: BTC’s Lightning Network, ETH’s Raiden Network.
ATOM token (Cosmos) used for what?
Used for transaction payments, governance voting, and staking to secure the network.
Flash swap example
DAI/USDC market with a supply of 100,000 each, 1:1 exchange rate, invariant of 10 billion.
Trader who has no starting capital spots arbitrage opportunity to buy DAI on a DEX for 0.95 USDC.
Trader capitalizes via a flash swap by withdrawing 950 USDC of flash liquidity (liquidity derived from a flash loan) from the DAI/USDC market, purchase 1,000 DAI via the described arbitrage trade, and repay 963 DAI for a profit of 37 DAI.
The figure of 963 is calculated as 960 (rounded) to maintain the 10 billion invariant, and to account for some slippage, plus a 0.30%*960 = 3 DAI transaction fee.
What does a traditional long futures contract allow an investor to do?
Pay a price for the opportunity (contract) to buy an asset in the future at a set price.
What’s a flash attack?
An economic exploit which utilizes a flash loan
“Nascent” definition
Just coming into existence and beginning to display signs of future potential.
What is Compound?
a lending market that offers several different ERC-20 assets for borrowing and lending
What is the WBTC application?
An app that represents off-chain assets on chain using tokenization, specifically for BTC (wBTC). Some steps of the protocol use off-chain participants (users, merchants, custodians).
Allows BTC to be used as collateral or liquidity on all of the Ethereum-native DeFi platforms.
Phases of Ethereum 2.0 rollout?
Phase 0: launch of Eth 2’sBeacon Chainon 12/1/20, the coordination mechanism of Eth 2 network, uses type of Proof of Stake called Casper. Allows ETH holders to stake their ETH and become validators in Ethereum 2.0.
Phase 1: creates shard chains that connect legacy Ethereum network to Eth 2 blockchain.
Phases 1.5 and 2: merging of Ethereum’s network shards. Phase 1.5 will create bridge between Eth 1.0 and Eth 2.0, allowing users to send ERC-20 tokens from one blockchain to the other. Phase 2 will enable native dApp deployment on Eth 2 and ability for smart contracts deployed on any of the shards to communicate with smart contracts on any other Eth shard.
Phase 3: least-defined phase of Serenity upgrade, and generally refers to any other future features or upgrades developers will need to deploy in order to ensure a smooth and secure transition to Eth 2.
What is the Inter-Blockchain Communication (IBC) Protocol and what does it have to do with “Zones”?
An interoperable communication layer between different blockchain networks in the Cosmos Network.
If an App-Chain in the Cosmos ecosystem has an integration for IBC established it is called a “Zone”.
What is Aave?
A lending and borrowing protocol with “stable” (not fixed) borrow rates that has pioneered flash loans.
What kind of consensus mechanism is used on the Cosmos Hub?
Delegated Proof of Stake (DPoS)
What is the governance token for Compound and what kind of agreement is required to make changes to the protocol?
COMP.
A quorum agreement, which is a majority of users must come to agreement, each of whom holds a minimum of 400,000 COMP
How many transactions per second can Ethereum process vs Visa?
Visa - 65k TPS
Ethereum - 15-30 TPS
Solana - 65k TPS
Ethereum 2.0 - estimated 100k TPS
What is blockchain vertical scaling?
Centralizes all transaction processing to a single large machine, which increases TPS but compromises decentralization.
Solana follows this approach and can achieve upward of 50,000 TPS.
What is the data availability issue for blockchains?
How can nodes (full and light clients) on a blockchain be sure that when a new block is produced, all of the data in that block was actually published to the network?
What is a side chain (layer 2 scalability solution)?
A chain designed to process large number of transactions, having a consensus mechanism that’s independent of the base chain.
The mechanism can be optimized to enhance scalability and processing speed. In this situation, the base chain has to confirm transaction records, maintain security, and handle disputes.
What are “App-Chains” on Comsos?
Application Specific Blockchains, each optimized for their given use case.
What is dYdX?
A company that specializes in margin trading and derivatives using margined collateral, has spot trading, free flash loans, and uses a hybrid off and on-chain approach.
What are a hard fork and soft fork?
Soft forks: relatively minor software changes that are backward compatible with previous versions of the blockchain so that nodes do not need to upgrade to new version to form consensus.
Hard fork: major software changes that are not backward compatible with previous versions so nodes need to follow new rules for consensus.
What is a DNS attack?
Hacker takes over domain name service and tricks user into giving private key
What does CFMM stand for?
Constant Function Market Maker, aka Automated Market Maker
What is the challenge in scaling Ethereum?
Blockchains have a fixed block size and every Ethereum miner must
execute all of the included transactions on their machine for it to become part of the blockchain.
Unrealistic to expect each miner to process all of the financial transactions for a global financial market.
Who is building the Cosmos Hub?
The Tendermint Core team, the primary organization responsible for developing the Cosmos Network
What is Osmosis?
The first IBC-Native DEX to go live in the Cosmos ecosystem. It offers a customizable AMM.
What is ERC-223?
A token structure that seeks to replace the ERC-20. It seeks to allow for more complex and safer operations.
What is the current market cap and top daily volumes of all stablecoins combined?
Market cap as of January 2022: $150 billion
Max daily volumes: around $300 billion
Based on a tether report in June 2021, what is USDT backed by?
85% of assets are held in cash and cash equivalents (money market instruments) and 15% in a variety of secured loans, corporate bonds, and other investments.
Main two types of decentralized stablecoin designs?
- Overcollateralized: users deposits crypto assets into a protocol, then borrow against these assets by minting a stablecoin asset pegged to a fiat currency in an overcollateralized manner.
- Algorithmic: gist of this design is to use financial incentives to encourage the market to keep the stablecoin at its peg. UST is an algorithmic stablecoin pegged to the dollar
One of the biggest potential risks of overcollaterallized stablecoins?
Re-centralization via collateral.
DAI, the largest overcollateralized stablecoin, has 44% of its collateral in centralized stablecoins. If these coins were blacklisted and thus unmovable, MakerDAO would not be able to meet all of its redemptions.
UST and LUNA relationship?
When 1 UST is created, $1 worth of LUNA is burned, and vice versa.
Ensures that when value is created, an equal amount of value is also destroyed.
How the LUNA/UST relationship affects staking
- As UST in circulation grows, more tx fees are generated which then accrue back to LUNA stakers.
- Usually staking rewards are paid out in the native token, but Terra staking rewards are paid out in UST, resulting in staking yields increasing when the price of LUNA falls and decreasing when the price of LUNA rises.
How UST maintains its peg
- If demand causes the market price of UST to be greater than one dollar, arbitrageurs can burn one dollar of LUNA to mint one UST, which can then be sold at spot for a higher price than the peg, netting a riskless profit. This spot selling drives UST price back to its $1 peg, expanding UST supply and reducing LUNA supply.
- If demand causes the market price of UST to be less than one dollar, arbitrageurs can buy UST at spot and redeem it at par value for newly minted LUNA. Spot buying drives UST price back to its $1 peg, while redemptions contract the UST supply and increase the LUNA supply.
LUNA/UST analogy with Ethereum?
Every time USDT, USDC, or BUSD is created on Ethereum, an equivalent amount of ETH would be burned.
Terra TVL in January 2022
$17 billion, making it the second largest L1 ecosystem behind Ethereum. Currently Mirror, Astroport, and Anchor hold the bulk of Terra’s TVL.
What is Mirror Finance?
A synthetic Asset product, offering on chain exposure to any asset with a reliable oracle (price feed). The “mirrored” assets are called mAssets.
To mint the synthetics, a user has to “borrow” them in an over-collateralized manner against UST, LUNA, or other mAssets. Gives global access to equities at virtually any position size.
What is Anchor protocol?
A protocol on Terra that lets people borrow UST against staked L1 assets or let’s lenders deposit UST and earn Anchor’s unique stable interest rate of 18-20% – called the “Anchor rate.”
How is Anchor’s “Anchor rate” so high?
It’s generated by lending to borrowers who put down liquid-staked Proof-of-Stake assets (like bLuna) from major blockchains as collateral, then transferring staking rewards from borrowers to depositors.
What is Random Earth?
Terra’s first NFT marketplace.
What is Mars?
Delphi says one of the most interesting projects launching in 2022, providing lending and borrowing services like most DeFi money markets, but w newly added features like:
- smart contract lending: Mars will extend credit lines to smart contracts, allowing for uncollateralized lending and leveraged yield farming.
Biggest takeaway of the significance of NFTs from interview with Raoul Pal and Punk 6529?
Currently most everything that we “own” digitally resides on databases that are owned by central entities, therefore the rights to those things can be taken away easily.
NFTs also represent ownership of digital items, but reside on distributed blockchains that are owned by the users themselves, giving them true ownership and control.
