Cryptocurrency Wallets and Key Management 2 — Questions and Answers
Question 1: What is the purpose of a BIP39 mnemonic phrase?
- To encrypt transactions on the blockchain
- To represent a hierarchical deterministic wallet seed in human-readable words (Correct answer)
- To generate a unique wallet address for each exchange
- To store private keys on a hardware device
Correct answer: To represent a hierarchical deterministic wallet seed in human-readable words
BIP39 defines a standard for encoding a random seed as a 12- or 24-word mnemonic phrase, making it easier for humans to back up an HD wallet.
Question 2: In a hierarchical deterministic (HD) wallet, what does the derivation path m/44'/0'/0'/0/0 specify?
- The wallet's IP address on the network
- The index of a specific key within the HD tree following the BIP44 standard (Correct answer)
- The block number when the wallet was created
- The encryption algorithm used by the wallet
Correct answer: The index of a specific key within the HD tree following the BIP44 standard
BIP44 defines a standard derivation path structure where each level (purpose, coin type, account, change, index) narrows down to a specific key in the tree.
Question 3: Which attack involves monitoring power consumption or electromagnetic emissions to extract a private key from a hardware wallet?
- Replay attack
- Side-channel attack (Correct answer)
- Sybil attack
- Eclipse attack
Correct answer: Side-channel attack
Side-channel attacks exploit physical information leaked during cryptographic operations, such as power usage, timing, or electromagnetic emissions.
Question 4: What is a 'watch-only' wallet?
- A wallet that only stores stablecoins
- A wallet containing only public keys, used to monitor balances without spending ability (Correct answer)
- A wallet that alerts the user when transactions occur
- A wallet restricted to read-only exchanges
Correct answer: A wallet containing only public keys, used to monitor balances without spending ability
A watch-only wallet holds public addresses or public keys, allowing balance and transaction monitoring without exposing private keys.
Question 5: What does 'key stretching' accomplish when used in wallet encryption?
- It extends the length of the blockchain
- It makes brute-force attacks more computationally expensive by deriving a stronger key from a password (Correct answer)
- It duplicates private keys for backup redundancy
- It converts public keys to longer formats
Correct answer: It makes brute-force attacks more computationally expensive by deriving a stronger key from a password
Key stretching algorithms like PBKDF2 or bcrypt apply many hash iterations to a password, dramatically increasing the cost of brute-force attempts.
Question 6: What is the risk of reusing Bitcoin addresses?
- Transaction fees increase with each reuse
- It can reduce privacy and potentially weaken cryptographic security over time (Correct answer)
- The address expires after a fixed number of uses
- It triggers automatic tax reporting
Correct answer: It can reduce privacy and potentially weaken cryptographic security over time
Address reuse links transactions together, reducing privacy, and repeated signing with the same key can expose information that weakens ECDSA security.
Question 7: Which statement best describes a 'paper wallet'?
- A digital wallet stored as a PDF document
- A physical printout of a private key and corresponding public address (Correct answer)
- A wallet secured by biometric paper ID
- A regulated wallet issued by a bank on paper
Correct answer: A physical printout of a private key and corresponding public address
A paper wallet is a physical document containing a printed private key and public address, kept offline as a form of cold storage.
Cryptocurrency Wallets and Key Management 2
What is the purpose of a BIP39 mnemonic phrase?