Tutorial #3 Bitcoin Basics Flashcards
Explain the function of the memory pool in the bitcoin network.
The mempool stores a list of unconfirmed transactions that are not part of the block yet (but should be in the future).
Every full node has a mempool that gets updated whenever a new block arrives or new transactions arrive.
We have two investors, Alice and Bob. Alice is day trading Bitcoin as a hobby, and Bob has bought some Bitcoin as part of his children’s college funds.
For each, argue whether they should use a hot or cold wallet and suggest a specific wallet as an example.
Alice: hot wallet. She needs easy use and access to her bitcoins at any time. An online hot wallet such as Binance or Coinbase would be ideal for her as her bitcoins will be delivered directly to her wallet through online transactions.
Bob: cold wallet. He doesn’t care for easy use/access to the bitcoins as much as he does for security of those coins. Thus hardware wallets such as Trezor/Ledger or a paper wallet are ideal for him.
Payment channels such as Lightning Network on Bitcoin are known as Layer-2 (L2) solutions. Briefly explain why these solutions are called L2, and list two potential drawbacks.
Two potential drawbacks:
1. Processing transactions off-chain -> limit transparency/traceability features of underlying L1
2. security measures of L1 do not protect user transactions anymore -> potential regulatory problems for L2 maintainers.
Why it’s called L2: It operates on a separate network built on top of the main underlying L1 network. L2 solutions scale L1 by:
1. processing transactions in their own network –> higher throughput
2. publishing minimal info on the L1
