CBSE Key Management and Wallet Security 2 — Questions and Answers
Question 1: What fundamentally distinguishes a non-custodial wallet from a custodial wallet?
- Non-custodial wallets support a wider range of cryptocurrencies
- In a non-custodial wallet, the user alone controls and holds their private keys (Correct answer)
- Custodial wallets are always implemented as hardware devices
- Non-custodial wallets always require identity verification
Correct answer: In a non-custodial wallet, the user alone controls and holds their private keys
Non-custodial wallets give users full ownership of their private keys, whereas custodial wallets have a third party (such as an exchange) holding keys on the user's behalf.
Question 2: Why is storing a seed phrase in a digital file on an internet-connected device considered a critical security failure?
- Digital storage degrades the cryptographic integrity of the seed phrase
- It violates BIP-39 protocol storage requirements
- It exposes the seed phrase to malware, keyloggers, cloud breaches, and unauthorized access (Correct answer)
- Seed phrases are incompatible with standard digital file formats
Correct answer: It exposes the seed phrase to malware, keyloggers, cloud breaches, and unauthorized access
Digitally stored seed phrases on connected devices can be captured by malware, keyloggers, or cloud account breaches, leading to complete and unrecoverable wallet compromise.
Question 3: Which attack type specifically manipulates users into voluntarily revealing wallet credentials or seed phrases?
- 51% attack on the blockchain network
- Phishing and social engineering attacks (Correct answer)
- Eclipse attack on network nodes
- Replay attack on signed transactions
Correct answer: Phishing and social engineering attacks
Social engineering and phishing attacks exploit human psychology to trick users into voluntarily disclosing wallet credentials, seed phrases, or private keys to attackers.
Question 4: What is the core security purpose of the BIP-32 standard?
- To define fungible token standards compatible with ERC-20
- To specify the hierarchical deterministic (HD) wallet key derivation standard (Correct answer)
- To encrypt communications between blockchain nodes
- To define on-chain transaction fee calculation structures
Correct answer: To specify the hierarchical deterministic (HD) wallet key derivation standard
BIP-32 establishes the HD wallet standard defining how an entire tree of key pairs can be deterministically derived from a single root seed using HMAC-SHA512.
Question 5: What is the primary security vulnerability associated with paper wallets?
- Paper wallets cannot hold large cryptocurrency balances
- Physical loss, theft, or destruction permanently destroys access to funds (Correct answer)
- Paper wallets are incompatible with hardware signing devices
- Paper wallets cannot generate multi-signature addresses
Correct answer: Physical loss, theft, or destruction permanently destroys access to funds
Paper wallets exist only as physical objects; if lost, stolen, burned, or deteriorated, the private key is permanently irrecoverable with no backup mechanism.
Question 6: What does Shamir's Secret Sharing (SSS) accomplish in blockchain key management?
- It duplicates keys across multiple servers for redundant storage
- It splits a secret into shares where a minimum threshold can reconstruct the original (Correct answer)
- It encrypts private keys using the recipient's public key
- It generates child keys from a parent key using one-way derivation
Correct answer: It splits a secret into shares where a minimum threshold can reconstruct the original
Shamir's Secret Sharing splits a key into N shares where any M shares reconstruct the secret, distributing risk so no single share compromises the key and no single loss destroys it.
Question 7: In blockchain security, what specifically does 'cold storage' refer to?
- Archiving keys in refrigerated, humidity-controlled data centers
- Keeping private keys on systems that have never been connected to the internet (Correct answer)
- Archiving historical blockchain transactions to save storage space
- Using low-power validation nodes to reduce energy consumption
Correct answer: Keeping private keys on systems that have never been connected to the internet
Cold storage means private keys are kept on air-gapped systems, hardware wallets, or paper wallets with no internet connectivity, protecting against all remote attack vectors.
CBSE Key Management and Wallet Security 2
What fundamentally distinguishes a non-custodial wallet from a custodial wallet?