Blockchain and Cryptocurrency: Basics for Exams

The correct answer is B, Satoshi Nakamoto. The paper titled Bitcoin: A Peer-to-Peer Electronic Cash System was circulated in 2008 under the name Satoshi Nakamoto, a pseudonym whose owner has never been established, and it set out how a chain of hashed blocks and proof of work could prevent double spending without any trusted third party. The first block of the chain was mined in January 2009. Option A is wrong because Vitalik Buterin proposed Ethereum in 2013, five years later, and Ethereum is a different network built for smart contracts. Option C is wrong because Nick Szabo coined the term smart contract in the 1990s and designed an earlier scheme called bit gold, but did not write this paper. Option D is wrong because Ralph Merkle devised the Merkle tree, the hashing structure that bitcoin uses inside a block, decades before bitcoin existed.

The correct answer is B, SHA-256. Bitcoin uses the SHA-256 hash function, part of the Secure Hash Algorithm family, which turns an input of any length into a fixed output of two hundred and fifty-six bits. The function is one-way, so the input cannot be derived from the output, and it is collision resistant, so two different inputs practically never give the same hash; mining consists of searching for a nonce that makes the block hash fall below a target value. Option A is wrong because MD5 is an older and now broken hash function, no longer considered secure. Option C is wrong because AES is a symmetric encryption cipher, not a hash function, and encryption is reversible with the key while a hash is not. Option D is wrong because RSA is a public key encryption and signature algorithm; bitcoin signs transactions with elliptic curve cryptography, not RSA.

The correct answer is B, twenty-one million. The bitcoin protocol fixes the total supply at twenty-one million coins. New coins enter circulation only as the reward paid to whoever adds a block, and that reward is halved every two hundred and ten thousand blocks, which works out to roughly every four years, so issuance falls geometrically towards zero. This built-in scarcity is why bitcoin is often described as deflationary by design. Option A is wrong because one crore, that is ten million, is below the protocol limit. Option C is wrong because one hundred million is the number of the smallest units, called satoshis, in a single bitcoin, not the number of bitcoins. Option D is wrong because an unlimited supply is the feature of ordinary fiat currency, which a central bank can issue at will, and the fixed cap is precisely the contrast bitcoin was designed to draw.

The correct answer is C, Proof of Work. In proof of work, the computers called miners compete to find a nonce that makes the hash of the proposed block meet a difficulty target. The search requires enormous numbers of trials and therefore real electricity, which is the cost that makes rewriting the chain uneconomic; the winner adds the block and receives the block reward and the fees. Option A is wrong because proof of stake, in which validators are chosen in proportion to the coins they lock up, is used by Ethereum after its change of mechanism in 2022 and by many newer chains, but not by bitcoin. Option B is wrong because proof of authority relies on a small set of identified validators and suits private or consortium chains. Option D is wrong because practical Byzantine fault tolerance is a voting-based mechanism used in permissioned systems such as Hyperledger Fabric.

The correct answer is A, Vitalik Buterin. Ethereum was described by Vitalik Buterin in a white paper of 2013 and the network went live in 2015. Its contribution was to add a general purpose computing layer, the Ethereum Virtual Machine, on top of a blockchain, so that programs called smart contracts could be stored on the chain and run by themselves; contracts are written in languages such as Solidity and the computation is paid for in a fee called gas. Its token is ether. Option B is wrong because Satoshi Nakamoto is the name on the bitcoin paper of 2008, and bitcoin has no general contract layer. Option C is wrong because Charlie Lee created Litecoin, an early alternative coin based on the bitcoin code. Option D is wrong because Hal Finney was an early bitcoin developer who received one of the first bitcoin transactions, not the founder of Ethereum.

The correct answer is B, the Merkle root. The transactions in a block are hashed in pairs, the resulting hashes are hashed in pairs again, and the process repeats until a single hash remains; that hash is the Merkle root, named after Ralph Merkle, and it is stored in the block header. Its value is that a change in any one transaction changes the root, so tampering is detected at once, and a light client can prove that one transaction belongs to a block without downloading the whole block. Option A is wrong because the nonce is the number miners vary to make the block hash meet the difficulty target. Option C is wrong because the genesis block is simply the first block of a chain, which has no predecessor. Option D is wrong because a private key is the secret a user keeps to sign transactions from an address.

The correct answer is B, distributed ledger technology. A blockchain is a ledger whose identical copies are held by many nodes, with new entries grouped into blocks, each linked to the previous one by its hash, and added only when the network agrees by a consensus rule. Distributed ledger technology is the wider family; a blockchain is the form in which entries are batched into hash-linked blocks, while other designs in the family do not use blocks at all. Option A is wrong because a relational database is held and controlled by one administrator who can edit or delete rows, which is the opposite of an append-only shared record. Option C is wrong because cloud storage merely keeps files on someone else's servers, with no consensus or tamper-evidence. Option D is wrong because an operating system manages the hardware and software of a single machine.

The correct answer is C, thirty per cent. The Finance Act of 2022 inserted a definition of the virtual digital asset into the Income Tax Act and taxed income from the transfer of such an asset at a flat thirty per cent, plus the applicable surcharge and cess. No deduction is allowed except the cost of acquisition, no expenditure or allowance may be set off, and a loss from one such asset cannot be set off against gains from another or carried forward. Option A is wrong because ten per cent is the long term capital gains rate applicable to certain listed securities, not to these assets. Option B is wrong because twenty per cent applies to long term capital gains with indexation in other contexts. Option D is wrong because forty per cent is a corporate rate for certain foreign companies and has nothing to do with these assets.

The correct answer is A, one per cent. From July 2022 a person paying any consideration for the transfer of a virtual digital asset must deduct tax at source at one per cent of that consideration, a provision introduced by the Finance Act of 2022 so that the tax department can see the volume and the parties in this market. Small transfers below the prescribed limits for specified persons are exempt, and the deduction applies whether the consideration is in money or in kind. Option B is wrong because two per cent is the rate for certain cash withdrawals and contract payments, not for these assets. Option C is wrong because five per cent appears in other withholding provisions such as some interest payments to non-residents. Option D is wrong because ten per cent is a common rate for professional fees and dividends; using it here is the usual error in this question.

The correct answer is B, a central bank digital currency. The digital rupee, written as e-rupee, is the digital form of sovereign currency issued by the Reserve Bank of India. It is a liability of the central bank, is legal tender, exchanges one for one with the paper rupee and does not earn interest; the wholesale pilot began in November 2022 and the retail pilot in December 2022. Option A is wrong because a cryptocurrency is issued by no authority and its supply and price are set by code and the market, while the digital rupee is issued by the central bank. Option C is wrong because a stablecoin is a private token pegged to an asset, and commercial banks do not issue the digital rupee; they only distribute it. Option D is wrong because a non-fungible token represents a unique item and is not money at all.

The correct answer is B, El Salvador. The Central American country passed a Bitcoin Law in June 2021 and became, in September 2021, the first state anywhere to give bitcoin the status of legal tender alongside the United States dollar, which it already used as its currency. The step drew wide comment because it made a privately created token acceptable in payment of debts in a sovereign country, and international financial institutions warned about the risk to stability. Option A is wrong because Venezuela issued a state-backed token called the petro but never made bitcoin legal tender. Option C is wrong because Nigeria launched a central bank digital currency, the eNaira, which is the opposite approach, a sovereign digital currency rather than a private token. Option D is wrong because Switzerland, although friendly to the industry, treats these tokens as assets and not as legal tender.

The correct answer is B. A fifty-one per cent attack is one in which a single party commands a majority of the resource that decides consensus, which is the mining power in a proof of work chain and the staked coins in a proof of stake chain. With that majority the attacker can build the longest chain, so it can exclude or reorder transactions and reverse its own recent payments to spend the same coins twice. It cannot forge coins out of nothing or move coins from other people's addresses, because those still require the owner's private key. Option A is wrong because guessing private keys is a cryptographic attack on individual users, not a consensus attack. Option C is wrong because merely holding coins gives no power over block production in a proof of work chain. Option D is wrong because shutting down nodes is a denial of service attack and does not let the attacker rewrite the ledger.