05 Blockchain 01

Question 1

What is a BLockchain?

Answer 1

A blockchain is a ledger or list where the entitties are grouped in blocks that are cryptographically linked
* blocks are timestamped and cannot be altered once included in the chain

Question 2

High level distinguish between four differetent types of tokens?

Answer 2

1. Cryptocurrencies/ payment tokens
2. Utility tokens
3. Security tokens and tokenized assets
4. Non-fungible tokens

Question 3

What do cryptocurrencies promise?

Answer 3

• secure and immutable transaction
• increases in efficiency
• reduction in cost (no intermediation)
• no trust in particular authority
• financial inclusion due to lower costs and decentralization

Question 4

What are the main functions of money? and fullfilled by cryptocurrencies?

Answer 4

1. Unit of account
2. Medium of exchange
3. Store of value

–>No decentralized money:
* volatility is high
* acceptance is low

Question 5

The two generations of blockchains/cryptocurrenices

Answer 5

1. Generation cryptocurrencies: Payments and store of value
2. Generation: Platform/ distributed computation tokens

Question 6

What is a Stablecoin?

Answer 6

is a cryptocurrency where the price is linked to some other asset such as fieat currencies or a commodity

Question 7

Characteristics of stable coins

Answer 7

• low volatility compared to other cryptocurrencies
• provide quick and relativeley safe way of entering into cryptocurrencies
• less regulation than the asset they are pegged to
• some allow for smart contracts

Question 8

What is Central bank digital currencies? (CBDCs)

Answer 8

–>a virtuel currency representing a direct liability of a central bank, similar to banknotes and coins

Question 9

The two types of Central Bank digital currencies?

Answer 9

1. Wholesale CBDC –>used among financial intermediaries
2. Retail CBDC –>used in the wider economy

Question 10

What are utility tokens?

Answer 10

Utility tokens offer the right to a service or product
* have value and can typically be used similarly to cryptocurrencies
* some act as internal currencies for payments on a blockchain (E.g. ether)

Question 11

Wider functionality of utility tokens?

Answer 11

• some utility tokens are “consumed” in exchange for products or services, comparable for voucher or gift gards
• othery only have to be held, for example offering voting rights

Ex:
* Golem (GNT) for renting computing power
* Filecoin (FIL) for renting storage space
* Exchange tokens like Binance coin (BNB)

Question 12

What are security tokens/ tokenized assets?

Answer 12

Security tokesn represent blockchain-based recorded ownerships of other assets (Stocks, bonds and real estate)
–>derive value from an external asset

Question 13

Tokenized assets and the pegged underlying asser

Answer 13

the price is pegged by (at least in principle) allowing token holders to exchange their tokens for the underlying asset
- token price too low, exchaning the tlkens for the asset is profitable
- token price too high, selling pressure on/low demand for the tokens will decrease their price
–>Mechanism similar to how collateralized stablecoins maintain their peg

Question 14

What are the benefits of tokenization for tradeing?

Answer 14

Beneifts: Allow for fractional ownership
- Equitites:
- Real Estate
* Trading costs and other fictions may be lowerr for tokenized assets
* tokenization is typically not decentralized
–>a company ususally owns the underlying asset
- The price is pegged by allowing token holders to exchange their tokens for the underlying asset

Question 15

What are tokenized assets?

Answer 15

Tokenization of (existing) assets provides a way of recording the ownership of other types of assets on a blockchain

Question 16

How can security tokens be issued?

Answer 16

Can be issued via decentralized ICO, but may also be issued in a more centralized way by a company
- A security token offering (STO) may be less expensive for smaller ventures as compared to an IPO

Question 17

Market for security tokens and their regulation?

Answer 17

–>Security tokens are usually subject to the same regulation as the underlying asset
–>Market is still relatively small, but potentially impacts the way trading is organized

Question 18

Benefits using security tokens for trading?

Answer 18

• transaction allows for fractional ownership
• Blockchain transactions are transparent
• settlement of trade substantially faster
• secondary market liquidity may (or may not) benefit
• transactions cost may be lower than on conventional exchanges

Question 19

What are non-fungible tokens?

Answer 19

Non-fungible tokens are not interchangeable
–>usually represent digital artwork and collectibles, where the ownership is recorded on a blockchain

Question 20

What is a cryptographic hash function?

Answer 20

= a cryptographic hash function maps an input x of any length to an output Hash(x) of fixed length

Question 21

What do the two properties Deterministic, Efficient mean for Hash Functions?

Answer 21

Deterministic: The same input x will always give the same output
Efficient: GIven x, calculating Hash(x) is computationally easy

Question 22

What do the two properties One-way, collusion resistant mean for Hash Functions?

Answer 22

One-way: GIven Hash(x), calculating x is computationally infeasible
Collision resistant: Finding two inputs x and y that give the same output Hash(x)=Hash(y) is infeasible

Question 23

What do the two properties Avalanche-effect and Puzzle friendly mean for Hash Functions?

Answer 23

Avalanche-Effect: Changing x slightly changes the Output Hash(X) substantially
Puzzle Friendly: GIven Hash(x) and part of x, it is still difficult to find the rest of x

Question 24

Key properties of Hash functions

Answer 24

1. deterministic
2. efficienct
3. oneway
4. collision resistant
5. avalance effect
6. puzzle friendly

Question 25

What are Merkle trees and Merkle roots?

Answer 25

**Merkle trees**: are trees containing hashes of hases -->The top has of a merkle tree is called the **Merkle root**

Question 26

What is cryptohraphy and security?

Answer 26

Cryptographcy used for secure communication: * prevent third parties from reading and manipulation private messages **asymmetric (or public key) cryptography uses pairs of key**:

Question 27

Difference between public and private key?

Answer 27

**Private key**: is basically just a random number that is only known by the owner **Public key**: is mathematically linked to private key and is known by others -->easy to get public from private key, but not vice versa

Question 28

use cases of asymmetric cryptography?

Answer 28

* **encryption** of messages with the public key, that only can be decrypted by the private key * generation of **message-specific** **digital signatures** -->protect against tampering and impersonation

Question 29

Types of blockchains?

Answer 29

**Public or private:** public: everyone can read, view participate by writing, and validating private: only read after approval or some verification **Permissionless or permissioned:** permissionless: no access contral, trust-free, usually slower permissioned: validating and wirting to the chain requires approval, usually faster, trusted authority required

Question 30

Two problems that needed to be addressed by decentralized currencies?

Answer 30

1. Only alice should be allowed to spend her coins 2. the "Double spending problem"

Question 31

What is the solution to Problem 1: (Only alice spend her coins?

Answer 31

**Asymmetric Cryptography:** * all transaction are cryptographically signed by **private key** of that individual * everyone **can verify** the signature by the **public key** *

Question 32

What is the solution to Problem 1: (Only alice spend her coins? -->what are keys and addresses?

Answer 32

* Private keys are basically long random numbers * Public key is easy to compute from the private key -->**Addresses** are easy to compute from the public key (for bitcoin, the public key is hashed twice, and a chechsum is added)

Question 33

What is the solution to Problem 2: Double spending problem

Answer 33

**Consensus Mechanism:** -->there are different consensus mechanisms to get **an agreeement** on what the **correct version of the ledger** is -->if temporarilty conflicting versions, in the long-run the **longest version** is chosen

Question 34

Question neccesary for blockchains (general)

Answer 34

1. Do you need to store data ? **YES** 2. Are there multiple writers? **YES** 3. Can you use an always online TPP? **NO** -->blockchain

Question 35

Questions figuring out which type of blockchain

Answer 35

1. Are all writer known? **NO** -->**permissionless** Blockchain 2. Are all writers trusted? **Yes** don´t use 3. Is public verifiability required? **Yes** -->**public** permissioned blockchain **No**-->**private** permissoned blockchain