Introduction to Cryptocurrency Quiz

Answer: Blockchain

Blockchain technology, as its name implies, consists in a chain of blocks in which transactions are recorded. Each of the blocks contains the data of the transaction(s), a timestamp, and two cryptographic hashes: the one from the previous block, and the closing hash of the current block, which will be used as a link to the following block.

This mechanism contributes to the integrity of the transactions, given that any record contained within any block cannot be altered retroactively, without altering all the subsequent blocks.

Blockchain is also a public distributed ledger, meaning that any user that has access to the network, through a valid node, can also have access to the blocks and the transactions that they contain, to explore them and validate them.

While nowadays, blockchain is mainly associated with the cryptocurrency ecosystem, it is also used in other kinds of applications.

Answer: Bitcoin

The origins of cryptocurrency can actually be traced as far back as 1983, when David Chaum conceived "ecash" as a type of electronic money, with that being one of the first studies in this field.

After several other projects, the idea of a decentralized, electronic currency came back into the spotlight following the big financial crisis of 2008, with a paper titled "A Peer-to Peer Electronic Cash System" being released on 31 October of that year. The paper, signed under the pseudonym of Satoshi Nakamoto, proposed the creation of "a system for electronic transactions without relying on trust", giving birth to the Bitcoin protocol.

The first block was mined by the very same Nakamoto, in early 2009. Still, in 2023, the Bitcoin protocol is the basis on which most of the over 9,000 other current cryptos are created and maintained, and Bitcoin itself remains the most exchanged of the cryptocurrencies, and the one with the highest market capitalization.

Answer: Mining

Mining is a term that comes up frequently when talking about crypto. The process focuses on solving the hash number that validates and closes each of the blocks of the network (which, as mentioned in question one, are also used as an opener for the next block). The miner that solves the hash, receives new Bitcoin (or the corresponding coin's) tokens as a reward.

While it sounds simple, it involves very complex mathematical calculations that require a lot of computing power. Hence, many miners usually work collectively in what is known as "mining farms" to try and maximize the profit.

However, there are two downsides to this process. The first is that the calculations become increasingly complex as each new block is created, which tends to lower the mining yield through time. The second, which causes more concern, is the heavy environmental impact due to the high energy consumption of the process. This is one of the main reasons why cryptocurrency is looked down upon by many sectors of society.

Answer: Stake

Proof-of-Stake, as described, bases the validation of the blocks on the "stakes" of the different users that participate on the network. The system randomly chooses users, who offer their tokens as collateral, for using them in the validation of the transactions of a given block. The selected users receive transaction fees as a reward.

One thing to note is that every crypto based on PoS has different rules regarding how many tokens a user must hold, for how long, and under which conditions, to be eligible for the rewards. Of course, the reward percentage also varies from coin to coin.

As opposed to PoW, this mechanism doesn't require intensive computing, and is therefore more efficient in terms of energy (although it generally yields lower rewards). On September 2022, Ethereum network, which supports the "Ether" coin (being the second more important behind Bitcoin), completed a long anticipated transition from a PoW protocol to a PoS, reducing energy consumption an estimated 99,95%. This event was called "The Merge".

Answer: Internet connection

Hot wallets are connected to the Internet through a computer or a mobile device, while cold wallets are not.

Cold wallets come primarily in two types: paper wallets and hardware wallets. As their names imply, the difference between both of them is the format in which they are stored. Paper wallets are, obviously, paper sheets that contain the keys to the wallet inside a printed QR code. Hardware wallets are USB or mobile storage devices that keep all information of the wallet stored inside them.

Hot wallets, on the other side, can be specific mobile or desktop apps that need an Internet connection to be accessed. Many cryptocurrency exchanges (market place for buying cryptos) offer free hot wallets on their web sites, giving the opportunity to buy crypto and store it instantly into the wallet. However, this has its disadvantages, which are covered in later in the quiz.

Cold wallets are less vulnerable to hacks and breaches, since they work offline, but they are more expensive, and it's more difficult to restore the information if one should lose the device. Hot wallets are usually free and easier to access, but are more exposed to pirate attacks due to being constantly online. The decision of which one is better depends on every person, their risk tolerance and their objectives when buying cryptocurrency.

Answer: Public

Pretty self explanatory, the public key, or address of the wallet, is visible to everyone, while the private is only viewable to the wallet's owner. The public key is what you need to know when transferring crypto to any wallet. For that matter, consider it as a bank account number: you need to enter the key to the wallet you wish to transfer to. Together with the private key, they serve as a means to validate the transactions in the crypto world.

The public key also consists of a hash code, and it's generated automatically when the wallet is created. You have to be extremely careful when entering the address, because one single typo can send your funds to an unknown wallet, and it's pretty much impossible to trace them and get them back. Many of the apps offer an option to copy the address, or to retrieve it through a QR code, to minimize the risk of errors when transferring.

The private key, on the other hand, is vital to the wallet's owner. It consists of a set of random words (12 to 24 on some wallets) that must be entered in the same order to grant full access to that wallet in any device. Needless to say, private keys are the main objective of hackers, since they can gain control of any wallet (and thus, any crypto contained within) by knowing their private keys.

When using a hot wallet, the risk of theft of the private keys is increased, due to the wallet being constantly online. Having a wallet within a web-based exchange makes them even more vulnerable, as an attack on the whole site can target numerous wallets at once. Most web exchanges issue an explicit disclaimer about their responsibility for the safety of the funds of every user.

Answer: All of these

The "non-fungible" quality of NFTs refers to their uniqueness and irreplaceability. A non fungible item, both in the crypto and in the real world, is one that possesses certain characteristics that make it impossible for it to be directly exchangeable by other similar item.

NFTs are, therefore, tokens that represent unique items, unlike any other coin token. By generating a hash code related to that item, and storing it in the blockchain, NFTs are used as a way to grant and trace ownership of such items.

NFTs are mostly used in the digital art world, as artists make NFTs out of their works and either sell them or expose them in virtual galleries. Another field where NFTs are heavily used is video games, in which certain characters or upgrades (even virtual real estate) are purchased through this mechanism. Finally, many sport teams around the world offer special collectibles or memorabilia in an NFT format, some of them granting the owner special benefits regarding attendance to sporting events or exclusive merchandise.

As is the case with regular crypto tokens, NFT can also be traded, sold, and even staked to earn rewards.

Answer: Minting

To mint an NFT, you need to select the network on which it will be hosted, and use a wallet that supports that network. You will then be prompted to upload the media file to the wallet, and you will also need to have an amount of coins enough to cover the fees of the transaction.

It sounds a bit confusing, but certain crypto sites are specialized in this type of transaction, and will guide you step by step in a very simple way.

Answer: Airdrop

There are different types of airdrop, depending on the actions that are required to be eligible for the tokens: bounty airdrops (where a task must be completed in order to receive the tokens, such as sharing a post on social media, or filling in a form), exclusive airdrops (usually reserved for users that have an active history with the project on its early stages of development) and holder airdrops (as its name implies, a user must hold a certain amount of currency in their wallets at a given time).

In all cases, the idea of an airdrop is to promote the new project by reaching several new users at once with no need for a purchase on their side.

The problem with airdrops (and with new crypto projects, broadly speaking) is that, sometimes, there isn't a serious project behind them, and in some cases it might even be a scam. As a rule of thumb, whenever you notice unusual movements in your wallet, it's advisable to run a little research before attempting to trade the new tokens.

Answer: Burning

Crypto burning is achieved by sending tokens to a special wallet, that doesn't have a private key and is located outside of the blockchain. This type of wallet can only receive tokens but not send them, so any coin that is transferred to this wallet (known as an "eater" or "burner" address) is not retrievable.

The goal behind reducing crypto circulation by burning, is to control the coin supply and to increase the value of the existing tokens, though this last objective is not always achieved when the process takes place, since there are other market forces that can push the prices in any direction.