Open Questions Flashcards
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?
Both, consider you had 100 fork-a-lot at the moment of the hard fork. after the hard fork, this balance is recorded on both chains. you now own 100 fork-a-lot and 100 fork-a-lot classic.
What are the four key innovations that Nakamoto integrated into Bitcoin?
- Digital signatures -> Ensures bitcoin can only be transacted by the person who owns the bitcoin (gives controlled access to your wallet)
- Distributed ledger -> Replaces a trusted third party to guarantee that the data are correct
- The blockchain -> makes changing the ledger impossible because changing one entry of the ledger would require to change the entire blockchain, one would have to rewrite the entire blockchain
- Proof of work -> validates transactions, prevents double spending
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?
answer bitcoin: miners (nodes) maintain the ledgers by expressing their acceptance and including it in the next block.
2)Who has authority over which transactions are valid?
answer bitcoin: the nodes. The decision to add a transaction to the chain is made by consensus. this means that the majority of the nodes must agree that the transaction is valid
3)Who creates new bitcoin?
answer bitcoin: new bitcoins are released through mining, which is a process of confirming Bitcoin transactions. At the moment, when a miner finds a new block, they are rewarded with 6.25 BTC.
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 or otherwise successfully mining for cryptocurrency. It can be joined by any miner willing to contribute “hashes” to the pool. The pool charges a fee for pooling miners.
What is the economic rationale behind mining in a mining pool rather than mining on your own?
Risk sharing benefit of mining pools: certainty equivalent more than doubles and risk sharing benefits increase in pool size. You search together for the answer on the mining puzzle. Because you work together, the chances on finding the solution increase, but if the solution is found, the reward has to be divided between all the participants of the pool.
Explain the impossibility triangle.
The triangle exists out of 3 points: Decentralization, Consensus and Scalability. It is considered impossible to achieve these 3 characteristics at the same time. records made in large scales with decentralization are hard to synchronize and achieve consensus. If you achieve decentralization and consensus record at the same time (like bitcoin), scalability is reduced.
Name and explain one recent layer-2 innovation that addresses the scalability problem associated with proof-of-work-based blockchains.
Rollups is one recent layer-2 innovation. Rollups are the solution for scalability problems. Rollups perform transaction execution outside the main Ethereum chain (layer 1) but post transaction data in layer 1. as transaction data is on layer 1, rollups are secured by layer 1. inheriting the security properties of layer 1 while performing execution outside layer 1 is defining characteristics of rollups.
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?
For a hash the input is converted to a hexi-decimal “hash” by scrambling it in a way that is impractical to invert. You cannot use patterns of characters in the output (the hash) as a roadmap for recovering the input, even of you know the hash function that generates the output. But, if I put the same info (in this example your name) in a hash generator, it should come up with the same hash all the time. i can compare this outcome with the hash you gave me and via this way verify if the hash you gave me is indeed the hash of your name.
What is the purpose of Ethereum’s Beacon chain?
Coordinates stakers and committees, cross-links shard chains and mainnet, central registry of all levels of data stored 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?
N(ETH) x N(USDT) = 3,000 x 9,000,000 = 27,000,000,0000 = constant
current market price for 1 ETH: 3,000 USDT
you want to exchange 50,000 USDT into ETH:
USDT pool increases to 9,050,000
27,000,000,000/9,050,000 = 2,983.425
3,000 - 2,983.425 = 16.575
Follow-up to previous question: What is the exchange rate after the transaction (with USDT being the numeraire)?
if currency X held twice the market value of a unit of the numeraire (USDT), the relative price of currency X is 2. formula is numeraire/ Currency X
in this case numeraire = USDT, currency X = ETH
after the transaction, there are 9,050,000 USDTs and 2983,425 ETH in the liquidity pool.
9,050,000/ 2983,425 = 3033.426 ETH/USDT
price for 1 ETH = 3033.426 USDT
What are the main differences between Bitcoin and Ethereum?
1) Bitcoin is only a coin, while Ethereum is a blockchain/ platform with (extended) smart contract functionality
2) Transaction-based ledger vs. Balance-based ledger
3) Decentralized vs. decentralized with de facto leadership around Vitalik Buterin
4) Blocks created every 10 minutes vs. blocks created every 12 seconds.
5) Blocks size of maximum 1 MB (can be more using SegWit) vs. target size of 15 million gas, max 30 million gas. Gas fees moderate target size
6) Mining fee halves every 210,000 blocks vs. mining fee constant, but protocol brought down the fee from 5 ETH to 3 ETH in 2019
7) Mining supports arms race in mining hardware vs. mining discourages the use of ASICs (at least has for some time)
8) Turing incomplete script vs. Turing complete programming language
Every 210,000 blocks the mining reward for mining Bitcoin gets reduced. By what percentage do mining rewards get reduced?
It halves every 210,000 blocks (approx. every 4 years). So it gets reduced by 50%. In may ‘20 the reward changed from 12.5 BTC per block to 6.25 BTC per block. In 2024 it will go to 3.125 BTC per block.
What is the difference between a staker and a validator in Ethereum 2.0?
A staker activates and runs a validator (software) by sending 32 Ether to staking deposit contract located on Mainnet. The validator proposes new blocks and attests new blocks by being part of committees. A staker can run more than one validator.
What is an ERC-20 token?
It is one of the 2 standarized tokens on the Ethereum platform. It is the standard for fungible tokens. It is a common interface with a list of required functions. Finally, it is interoperable. This means that it allows other smart contracts to recognize/utilize any ERC20-token