05 Blockchain 04

Question 1

What are wallets?

Answer 1

Wallets are tools to create and store the keys and addresses
* create a seed phrase of typically 12 or more words used to set up and access the wallet
* From this one seed, infinite number of addresses can be generated
–>all can be accessed and backup by the single seed phrase

Question 2

What kin of Wallets exist?

Answer 2

Hot Wallets: are connected to the internet and readily available for trading
Cold Wallets: are offllince and suited for long-term storage of funds

Question 3

Name the two types of exchanges?

Answer 3

Centralized exhanges: operate similar to exchanges of other finanical assets
Decentralized exchanges: are new to cryptocurrencies
–>Transaction on the blokcchian can be used to transfer funds of the same currency between parties.

Question 4

Explain LImit Order Book Trading (Centralized Exchanges)

Answer 4

–>centralized exchanges typically operates a central limit order book:
* Traders can submit limit and market orders
* The matching enging then matches buy and sell orders

Question 5

What do users need for centralized exchange?

Answer 5

–>to trade the users need an account at the exchange
* all funds are kept in the exchange´s own wallet, from the blockchain´s perspective the coins are still owned by the exchange
* Only deposits and withdrawals of cryptocurrencies are recorded on the blockchain, and actually moves coins to other addresses

Question 6

Short Description of decenteralized exchanges

Answer 6

decentralized exchanges (DEX) is a type of on-blockchain exchange that does not require an intermediary but instead relies on smart contracts

Question 7

Description of Constant Product Market Making (CPMM)?

Deecentralized Exchanges

Answer 7

= trading takes place in liquidity pools where two tokens can be exchanged with each other
* Liquidity provider (LP) add both tokens to the pool in the same ration as tokens are already in the pool
* in return, LP´s receive liquidity tokens that reflect the LP´s share in the pool and can be exchanged for both coins in their share

Question 8

How does a trade exchanges Tokens in CPMM?

Answer 8

Traders wanting to exchange tokens, deposit one token in the pool and receive the other token in return
–>The price is implied by the current raio of the two tokens in the pool
- LP´s are rewarded by receiving transaction fees

Question 9

What types of Loans exists in Lending markets for cryptocurrencies?

Answer 9

1. Collateralized Loans
2. Flash Loans

Question 10

Describe Collaterialized Loans

Answer 10

–>Similar to bank loans
* Typical application would be to borrow a given amount in a stablecoin and put up another cryptocurrency as collateral
–>Since cryptos are so volatile, the loans have to be overcollateralized

Question 11

describe Flash loans?

Answer 11

Flash Loans are uncollateralized DeFi Loans
* Funds are borrowed, used, and returned within the same transaction via smart contracts
* If the loan is not repaid within the same transaction, the whole transation is reversed
–>Liquidity is provided via pools similar to DEX (with one token)
—>Flas loans are used for exploiting arbitragre opportunitites or attacking dApps

Question 12

Describe CBDC?

Answer 12

= DB digital currencies represent a claim on a central bank

Question 13

What are Retail CBDC?

Answer 13

Retail CBDC is accessible to everyone
* Single-tier retail CBDC: CB directly handles retail payments
* Two-tier CBDC (hybrid or intermediated): Intermediaries handle retail payments

Question 14

What are whole-sale CBDC?

Answer 14

In Wholesale CBDB, only a few isntitutions have access and use it for settlement

Question 15

What types of Retail CBDC are there?

Answer 15

Token-based CBDC: are anonymous, may use blockchains (not open or public), and are closer to cryptocurrencies (and pyhsical cash)
Account-based CBDC: users are identifiable and have an account with the CB

Question 16

Pros of Central Bankd Digital Currencies (CBDC)?

Answer 16

Pros:
* provide new and better ways to implement monetary policy
* can be used for efficient fiscal transfers
* faciliate improved anti money laundering processes
* might be attractive and competitive with other payment systems
* Default risk of CBs is practically zero
* might make cross-border payments more efficient
* Retail implementations decrease the need for commercial bank intermediation

Question 17

Cons of Central Bankd Digital Currencies (CBDC)?

Answer 17

Cons:
*effects on financial stability still not fully understood
* Privacy concerns compared to physical cash and
* more centralization compared to established banking system
* Security might be an issue if the CB is hacked
* Retail implementations decrease the need for commercial bank intermediation

Question 18

Further Blockchains Applications?

Answer 18

1. Clearing and Settlement (trade)
2. Insurance
3. Energy markets
4. Compliance
5. Commerce and Trade
6. Logistics and Supply Chain Management
7. Healtcare

Question 19

What do Mixers do?

Answer 19

Mixers pool together funds from multiple sources over some time and then split them acoss multiple addresses at random times

–>They are used to obscure fund flows and to increase anonymity
* can be intermediate mixing steps of pooling and distributing
* operators keep a small fee
* are frequently used for criminal activity

Question 20

Things to conisder with centralized exchanges?

Answer 20

• are convenient and fast, but introduce a single point of failure and require trust in the exchange
• severall centralized exchanges allow user to buy cryptocurrnecies with fiat currency (contracy to decentralized exchanges)
• several have been shown to report fake volumne to appear more trustworthy

Question 21

What are the pros of using centralized exchanges?

Answer 21

–>simplifies the process, increases speed, and reduces blockchain congestion and fees

Question 22

What is the computing layer within Ethereum?

Answer 22

The computing layer is a virtual machine (EVM), which is a Turing complete machine that can execute loops and run all sorts of programs