Download PrepIQ DEMYSTIFYING CRYPTOCURRENCIES Ultimate Exam and more Exams Technology in PDF only on Docsity!
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Question 1. Which of the following best describes a cryptocurrency? A) A physical token issued by a central bank B) A digital asset secured by cryptographic algorithms and operating on a decentralized network C) A fiat currency that can be exchanged only on government-approved platforms D) A commodity like gold that is stored in vaults Answer: B Explanation: Cryptocurrencies are digital assets that use cryptography for security and run on decentralized (often blockchain) networks, unlike physical tokens or fiat currencies. Question 2. The first cryptocurrency ever created was: A) Ethereum B) Litecoin C) Bitcoin D) Ripple Answer: C Explanation: Bitcoin, introduced by Satoshi Nakamoto in 2008, is the inaugural cryptocurrency and the foundation for subsequent digital assets. Question 3. Which characteristic distinguishes a stablecoin from most other cryptocurrencies? A) It uses proof-of-work mining B) Its price is pegged to an external asset such as a fiat currency C) It is always built on the Bitcoin blockchain
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D) It cannot be transferred between wallets Answer: B Explanation: Stablecoins maintain a relatively constant value by being pegged to assets like the US dollar, unlike most volatile cryptocurrencies. Question 4. A utility token primarily provides: A) Ownership of a physical asset B) Voting rights in a corporation C) Access to a product or service within a blockchain ecosystem D) Guaranteed dividends Answer: C Explanation: Utility tokens grant holders the right to use a specific platform’s services, not ownership or profit rights. Question 5. Which of the following is a non-fungible token (NFT) use case? A) Paying for coffee at a café B) Representing a unique piece of digital artwork C) Storing a private key for a wallet D) Acting as a stable store of value Answer: B Explanation: NFTs represent unique digital items, such as artwork, where each token is distinct and cannot be interchanged on a one-to-one basis.
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D) Store private keys Answer: B Explanation: A Merkle Tree creates a single root hash that summarizes all transactions, enabling quick verification without exposing each transaction. Question 9. Which consensus mechanism relies on computational puzzles to add new blocks? A) Proof-of-Stake (PoS) B) Delegated Proof-of-Stake (DPoS) C) Proof-of-Work (PoW) D) Proof-of-Authority (PoA) Answer: C Explanation: PoW requires miners to solve cryptographic puzzles; the first to solve adds the block and receives a reward. Question 10. In Proof-of-Stake, validators are selected primarily based on: A) Their geographic location B) The amount of cryptocurrency they lock up as stake C) Their GPU hash rate D) Random chance unrelated to holdings Answer: B Explanation: PoS selects validators proportionally to the amount of tokens they stake, incentivizing honest behavior.
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Question 11. Which of the following blockchain types is permissioned and typically used by enterprises? A) Public blockchain B) Private blockchain C) Consortium blockchain D) Hybrid blockchain Answer: C Explanation: Consortium blockchains are permissioned networks where a group of vetted entities manage consensus, common in enterprise settings. Question 12. A hot wallet is characterized by: A) Storing private keys offline on a hardware device B) Being connected to the internet, allowing quick access for transactions C. Being printed on paper and stored in a safe deposit box D. Requiring multi-year lock-up periods Answer: B Explanation: Hot wallets are software-based and internet-connected, making them convenient but less secure than cold storage. Question 13. The phrase “Not your keys, not your coins” emphasizes: A) The importance of using exchange-provided wallets B) That ownership of a cryptocurrency depends on controlling the private keys C. That all coins are stored on the blockchain regardless of keys
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Explanation: DEXs execute trades via on-chain smart contracts, allowing direct user- to-user swaps without a central authority. Question 16. In Automated Market Makers (AMMs), liquidity is provided by: A. Order books matching buyers and sellers B. Centralized market makers setting prices C. Smart contracts that hold token pools and price assets algorithmically D. Government regulators Answer: C Explanation: AMMs rely on token pools within smart contracts, using formulas (e.g., constant product) to price trades automatically. Question 17. Gas fees on Ethereum are paid in: A) Bitcoin (BTC) B) Ether (ETH) C) USDC stablecoin D) The native token of the DEX Answer: B Explanation: Gas on Ethereum is denominated in ETH and compensates miners/validators for processing transactions. Question 18. The “Blockchain Trilemma” refers to the challenge of simultaneously achieving: A) High speed, low cost, and anonymity
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B. Security, decentralization, and scalability C. Transparency, regulation, and privacy D. Mining, staking, and governance Answer: B Explanation: The trilemma posits that improving two of security, decentralization, and scalability often compromises the third. Question 19. An Optimistic Rollup is a Layer-2 scaling solution that: A) Stores all data off-chain and never posts it to the main chain B. Assumes transactions are valid by default and only posts fraud proofs when challenged C. Uses zero-knowledge proofs to validate every transaction instantly D. Requires miners to solve additional PoW puzzles Answer: B Explanation: Optimistic Rollups post compressed transaction data to the base layer and rely on fraud proofs to resolve disputes. Question 20. Zero-Knowledge Rollups (ZK-Rollups) differ from Optimistic Rollups because they: A) Require a longer withdrawal period B) Use cryptographic proofs to verify transaction validity instantly C. Do not interact with the main chain at all D. Are only compatible with Bitcoin
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A) The Dodd-Frank Act B) MiCA (Markets in Crypto-Assets) C) The Patriot Act D) The Basel III Accord Answer: B Explanation: MiCA is the EU’s comprehensive regulation governing crypto assets, issuers, and service providers. Question 24. The primary tax treatment for most jurisdictions when an individual sells cryptocurrency for a profit is: A) Income tax on the full sale amount B. Capital gains tax on the profit realized C. No tax because digital assets are exempt D. Sales tax based on the transaction value Answer: B Explanation: Many tax authorities treat crypto disposals as capital events, taxing the net gain. Question 25. Which of the following is a common security vulnerability specific to smart contracts? A) Replay attacks on Bitcoin transactions B) Integer overflow/underflow bugs C. DNS hijacking of wallet websites D. Physical theft of hardware wallets
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Answer: B Explanation: Smart contracts can suffer from integer overflow/underflow errors, leading to unintended behavior or exploits. Question 26. A “rug pull” in the DeFi space refers to: A) A protocol upgrading its smart contracts B. Developers abruptly withdrawing all liquidity from a project, leaving investors with worthless tokens C. A mining pool switching algorithms D. An exchange delisting a coin Answer: B Explanation: Rug pulls are scams where creators abandon a project after extracting invested funds, causing token value to collapse. Question 27. Which consensus model selects a limited set of trusted validators to create blocks, reducing energy consumption? A) Proof-of-Work (PoW) B) Proof-of-Authority (PoA) C) Proof-of-Space (PoSpace) D) Proof-of-Capacity (PoC) Answer: B Explanation: PoA relies on a small group of authorized validators, offering high throughput with minimal energy use.
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D. Mandatory staking for all holders Answer: B Explanation: Deflationary tokens often burn a portion of each transaction, decreasing circulating supply. Question 31. Which blockchain platform introduced the concept of “gas” to limit computational resources? A) Bitcoin B) Ethereum C) Ripple D) Cardano Answer: B Explanation: Ethereum’s gas system quantifies the computational effort required for transactions and smart-contract execution. Question 32. A “fork” in blockchain terminology can be: A) A hardware malfunction in a mining rig B. A divergence in the protocol rules, leading to a new chain (hard fork) or temporary split (soft fork) C. The process of converting fiat to crypto D. A type of wallet Answer: B Explanation: Forks alter consensus rules; hard forks create permanent splits, while soft forks remain compatible.
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Question 33. Which of the following is an example of a privacy-focused cryptocurrency? A) Litecoin B) Monero C) Dogecoin D) USDT Answer: B Explanation: Monero uses stealth addresses, ring signatures, and confidential transactions to obscure transaction details. Question 34. The primary function of a “validator” in a Proof-of-Stake network is to: A) Mine new blocks using ASIC hardware B. Propose and attest to new blocks based on their staked tokens C. Issue fiat currency to users D. Provide liquidity on DEXs Answer: B Explanation: Validators stake tokens and are responsible for block production and consensus in PoS systems. Question 35. Which of the following best defines “slippage” when trading on a DEX? A. The fee charged by the exchange for processing a trade
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Answer: A Explanation: ICOs were early crypto fundraising events where projects sold newly minted tokens to raise capital. Question 38. Which of the following is a key advantage of using a hardware wallet? A) It allows instant transaction broadcasting without internet B) Private keys are stored offline, reducing exposure to malware and hacks C. It automatically swaps tokens on DEXs D. It provides built-in fiat banking services Answer: B Explanation: Hardware wallets keep private keys isolated from internet-connected devices, enhancing security. Question 39. The term “staking rewards” refers to: A. Fees earned by miners for solving PoW puzzles B) Interest-like payouts given to validators who lock up tokens in a PoS network C. Dividends paid by a corporation to shareholders D. Penalties imposed for network inactivity Answer: B Explanation: Staking rewards incentivize participants to secure PoS networks by locking up their tokens. Question 40. Which of the following is NOT a typical feature of a permissioned blockchain?
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A) Open participation for anyone who wants to run a node B) Controlled access to who can read or write data C) Faster transaction finality due to fewer validators D) Identity verification for participants Answer: A Explanation: Permissioned blockchains restrict node participation, unlike permissionless networks that are open to all. Question 41. The hash function SHA-256 is primarily used in: A) Generating deterministic wallet addresses for Bitcoin B) Encrypting private keys for storage C. Managing consensus in proof-of-stake D. Providing privacy through zero-knowledge proofs Answer: A Explanation: Bitcoin uses SHA-256 to hash block headers and generate addresses via double-hashing. Question 42. Which of the following describes “liquidity mining”? A) Extracting minerals using blockchain-controlled robots B) Providing assets to a DeFi protocol and earning additional tokens as incentives C. Mining new blocks on a PoW chain D. Converting fiat to crypto via a bank
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A) It runs a completely independent consensus mechanism and can have its own token B. It does not interact with the main chain at all C. It requires proof-of-work mining on the main chain D. It is only used for storing NFTs Answer: A Explanation: Sidechains operate parallel to the main chain with separate consensus, whereas many Layer-2 solutions rely on the main chain’s security. Question 46. Which of the following is a primary environmental concern associated with proof-of-work mining? A) High electricity consumption leading to carbon emissions B. Excessive water usage in data centers C. Generation of hazardous waste from hardware D. Increased radio frequency interference Answer: A Explanation: PoW mining’s computational intensity leads to significant energy use, raising environmental impact concerns. Question 47. In the context of crypto taxation, “airdrop” income is typically treated as: A) Tax-free because it is a gift B. Ordinary income based on the fair market value at receipt C. Capital gains only when sold D. A loss for tax purposes
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Answer: B Explanation: Many jurisdictions consider airdropped tokens as taxable income when received, valued at market price. Question 48. Which of the following best describes a “governance token”? A) A token that represents a share of a physical commodity B) A token that grants holders voting rights on protocol changes and parameter adjustments C. A token used exclusively for paying transaction fees D. A token that automatically accrues interest Answer: B Explanation: Governance tokens empower holders to influence the future direction of a blockchain project through voting. Question 49. The term “oracle” in blockchain refers to: A) A decentralized exchange platform B. An off-chain service that provides external data to smart contracts C. A consensus algorithm based on reputation D. A type of wallet Answer: B Explanation: Oracles feed real-world information (e.g., price feeds) into smart contracts that cannot access external data directly.
