Blockchain for Finance Flashcards

Question 1

What is a distributed ledger in the context of blockchain?

Accepted Answer

A distributed ledger is a shared record of transactions maintained by many independent participants instead of one central administrator. Participants can verify entries, and no single party can quietly alter past records. In a blockchain, entries are grouped into blocks linked in chronological order.

Question 2

What is a block in a blockchain, and how is it used?

Accepted Answer

A block is a grouped set of transactions that is confirmed together and added to the chain. Once accepted, it becomes part of the shared record that all participants can verify. Each new block is checked against the rules before nodes accept it as the next entry in the ledger.

Question 3

Why is each block in a blockchain linked to the block before it?

Accepted Answer

Each block stores a cryptographic hash, a fingerprint computed from the previous block's contents. If anyone changes an earlier block, its hash no longer matches what later blocks record, which makes tampering easy to detect. This linkage gives the ledger a tamper-evident structure.

Question 4

What is a transaction on a blockchain, and who initiates it?

Accepted Answer

A transaction is a signed instruction that transfers value or records an action, such as moving a token between addresses. A participant creates it and signs it with a private key to prove authorization. Once broadcast, nodes check it against the network rules before it can be included in a block.

Question 5

What is a node in a blockchain network, and what does it do?

Accepted Answer

A node is a computer or software process that connects to a blockchain network and holds a copy of its ledger. Nodes relay transactions and blocks to one another, and many also check that new entries follow the network's rules. Some nodes take part in consensus, while others only read and verify data.

Question 6

What is the difference between a public and a private blockchain?

Accepted Answer

A public blockchain allows anyone to read the ledger and, under its rules, to take part in validating transactions. A private blockchain restricts access and participation to approved organizations, which can make governance and performance easier to control. Financial institutions often explore permissioned designs because they can manage identity and confidentiality more directly.

Question 7

What is the difference between a traditional database and a blockchain?

Accepted Answer

A traditional database is usually controlled by one organization that can edit or delete records. A blockchain distributes copies across participants, makes past entries append-only, and uses consensus rules so changes require agreement. Databases remain a better fit for many tasks.

Question 8

What is the difference between a blockchain and a cryptocurrency?

Accepted Answer

A blockchain is a type of ledger technology that records data in linked, validated blocks. A cryptocurrency is a digital asset that is often issued and transferred using a blockchain, though it is only one possible use of the technology. Many blockchains operate without a native cryptocurrency.

Question 9

What is a hash function, and why does blockchain depend on it?

Accepted Answer

A hash function takes input data of any size and produces a fixed-length output effectively unique to that input. Blockchains use this to link blocks and detect alteration, since even a tiny change yields a different output. Hashing is one-way, so the original data cannot be recovered from the output.

Question 10

What role does consensus play in a blockchain network?

Accepted Answer

Consensus is the set of rules by which participants agree on which transactions are valid and which block is added next. Without a central authority to decide, the network relies on this agreement to keep every copy of the ledger identical. Different protocols, such as proof of work, reach agreement in different ways.

Question 11

How do public and private keys work together in blockchain systems?

Accepted Answer

A key pair has a private key, kept secret, and a public key derived from it. The private key signs transactions to prove authorization, while others verify those signatures with the public key. Losing the private key usually means losing control of the assets.

Question 12

What is a digital signature and what does it prove?

Accepted Answer

A digital signature is a cryptographic value created with a private key that is attached to a message or transaction. It proves that the holder of the matching private key authorized the content and that the content has not been changed since signing. Anyone can check the signature using the corresponding public key.

Question 13

What is proof of work, and how does it secure a blockchain?

Accepted Answer

Proof of work is a consensus method in which participants compete to solve a computationally difficult puzzle, and the first to find a valid solution may propose the next block. Solving the puzzle requires real computing effort and energy, which makes rewriting history costly. Others can verify a solution cheaply.

Question 14

How does proof of stake differ from proof of work?

Accepted Answer

Proof of stake selects validators in proportion to the tokens they lock up as collateral, rather than through computational competition. Validators risk losing part of their stake if they act dishonestly, which creates an economic incentive to follow the rules. This approach generally uses far less energy than proof of work.

Question 15

What is the double spending problem and how do blockchains address it?

Accepted Answer

The double spending problem occurs when the same digital token is spent more than once, which is easy to do with copyable digital data. Blockchains address it by recording every transaction in a shared, ordered ledger that participants agree on through consensus. Once confirmed and followed by later blocks, reversing a transaction becomes costly.

Question 16

What does transaction finality mean on a blockchain, and why does it matter?

Accepted Answer

Finality is the point at which a transaction becomes effectively irreversible, so that the recipient can rely on it without fear of reversal. Some protocols offer deterministic finality, while others offer probabilistic finality that grows with more blocks. This matters in finance because settlement risk depends on whether a payment can be undone.

Question 17

What is a digital asset in the context of financial markets?

Accepted Answer

A digital asset is a piece of value or a right that exists in electronic form and can be owned, transferred or recorded. In finance, digital assets include cryptocurrencies, tokenized securities and stablecoins, among others. Their legal treatment varies by jurisdiction.

Question 18

What is a stablecoin and what usually keeps its value stable?

Accepted Answer

A stablecoin is a digital token designed to hold a steady value, usually one unit of a currency such as the US dollar. Stability is typically maintained by reserves of cash or short-term assets held by the issuer, or by algorithmic mechanisms in some designs. Its value can still drift, so reserve quality matters.

Question 19

What is the difference between fungible and non-fungible tokens?

Accepted Answer

Fungible tokens are interchangeable units, so any one token has the same value and function as another of the same type, much like a dollar bill. Non-fungible tokens are unique records that represent distinct items or rights, and each carries its own identifier. Financial tokens such as stablecoins are usually fungible.

Question 20

What does it mean to tokenize a real-world asset?

Accepted Answer

Tokenization means representing ownership or a claim on a real-world asset, such as a bond, property or fund share, as a digital token on a ledger. The token can make transfers faster and allow fractional ownership, but it does not by itself create legal rights. Legal enforceability depends on contracts or registries.

Question 21

What is the difference between custodial and non-custodial wallets?

Accepted Answer

A custodial wallet is managed by a third party that holds the private keys on the user's behalf, which can simplify access but adds counterparty risk. A non-custodial wallet lets the user control the private keys directly, which gives full control and full responsibility. Lost keys in such a wallet are usually unrecoverable.

Question 22

What is a central bank digital currency, and who issues it?

Accepted Answer

A central bank digital currency is a digital form of a country's currency issued and backed directly by its central bank, rather than by a private firm. It is a liability of the central bank, which distinguishes it from privately issued stablecoins. Designs differ on who may hold them.

Question 23

How does a security token differ from a utility token?

Accepted Answer

A security token represents a financial interest such as equity, debt or a share of a fund, and is generally subject to securities rules. A utility token grants access to a product or service on a platform rather than a financial claim. Classification depends on the rights attached to the token.

Question 24

What is an initial coin offering, and why are regulators interested in it?

Accepted Answer

An initial coin offering is a fundraising method in which a project sells newly issued tokens to investors, often before a product exists. Because buyers may expect profits from the efforts of others, regulators have examined whether such sales are securities offerings. The answer depends on the facts and applicable law.

Question 25

What is settlement in finance, and why does it carry risk?

Accepted Answer

Settlement is the final transfer of funds or securities that completes a trade or payment obligation. It carries risk because one party may deliver its side while the other fails to pay, leaving the first party exposed. Reducing that gap between agreement and final transfer is a goal of payment and securities infrastructure.

Question 26

What does delivery versus payment mean in securities settlement?

Accepted Answer

Delivery versus payment is a settlement arrangement in which the transfer of securities occurs only if the matching payment occurs at the same time. This removes the risk that one side pays without receiving the asset or delivers without being paid. Blockchain systems are studied as a way to automate this.

Question 27

Why are many cross-border payments slow and expensive today?

Accepted Answer

Many cross-border payments pass through several intermediary banks, each with its own systems, cutoff times and fees. Differences in time zones, currencies and business hours add delays, and each step may require manual checks and reconciliation. Blockchain proponents argue that a shared ledger could reduce these layers, though adoption depends on regulation and liquidity.

Question 28

What is correspondent banking and why does it matter for payments?

Accepted Answer

Correspondent banking is an arrangement in which one bank holds accounts with another bank to process payments. It allows funds to move across borders without each bank needing a direct presence in every country. Because each relationship carries credit and compliance checks, long chains of correspondents can be slow and costly.

Question 29

What is real-time gross settlement and how does it differ from netting?

Accepted Answer

Real-time gross settlement processes each payment individually and immediately across accounts at a central bank, without combining it with others. Netting instead offsets many obligations between parties and settles only the net balance, which needs less liquidity but leaves exposure until settlement. Both approaches are used in practice.

Question 30

What is reconciliation in payments, and why is it time-consuming?

Accepted Answer

Reconciliation is the process of matching records held by different parties to confirm that they agree on balances and transactions. It is time-consuming because each institution keeps its own ledger, and discrepancies must be investigated and corrected by hand. A shared ledger that all parties update together can reduce the need for this matching.

Question 31

What does atomic settlement mean and why does it reduce risk?

Accepted Answer

Atomic settlement means that two or more linked transfers either all complete together or none of them complete. Because no partial transfer can occur, one party cannot be left holding the asset without the payment, or the reverse. Programmable ledgers are one way to achieve this.

Question 32

Why does intraday liquidity matter for payment systems and participants?

Accepted Answer

Intraday liquidity is the cash or credit a participant can use during the day to settle payments as they fall due. If it runs short, payments queue or fail, which can delay other participants and spread stress through the system. Efficient systems use queuing, netting and collateral arrangements to economize on the liquidity needed.

Question 33

What is a smart contract, and how does it run on a blockchain?

Accepted Answer

A smart contract is a program stored on a blockchain that executes automatically when predefined conditions are met. Its code and outcomes are recorded on the shared ledger, so the parties do not need a trusted intermediary to enforce the terms. They are often used to automate payments and settlement steps.

Question 34

What is decentralized finance, often called DeFi, and what are its main features?

Accepted Answer

Decentralized finance refers to financial services, such as lending, trading and borrowing, built on public blockchains using smart contracts instead of traditional intermediaries. Users typically interact through wallets and keep custody of their own assets. Its software and collateral rules carry risks such as code errors and sudden price moves.

Question 35

What is the oracle problem, and why does it matter for smart contracts?

Accepted Answer

The oracle problem arises because blockchains cannot natively see data outside their own network, such as market prices, interest rates or delivery confirmations. An oracle is a service that brings external data onto the chain, but a faulty oracle can mislead a smart contract. Reliable data sourcing is a central design question.

Question 36

Why do banks often prefer permissioned networks for trade finance?

Accepted Answer

Banks often prefer permissioned networks because participants are known, identity and data access can be governed, and privacy requirements are easier to meet. Trade finance involves sensitive commercial information that should be visible only to parties with a legitimate role. Consortium models let competing institutions share infrastructure.

Question 37

How do anti-money laundering and know-your-customer rules apply to blockchain?

Accepted Answer

Anti-money laundering and know-your-customer rules require regulated institutions to verify who their customers are and to monitor suspicious activity. On public blockchains, addresses are pseudonymous, so firms rely on analytics and screening where digital assets enter or leave the regulated system. Obligations generally follow the activity rather than the technology.

Question 38

Why do regulators often use sandboxes for blockchain pilots?

Accepted Answer

Regulatory sandboxes are supervised environments where firms can test new financial products under modified, temporary conditions and regulator oversight. They let supervisors learn how a technology works in practice before writing general rules. For blockchain pilots, sandboxes help test controls, data handling and consumer safeguards without exposing the broader market to unproven risks.

Question 39

What is a gas fee on a blockchain, and why does it vary?

Accepted Answer

A gas fee is a charge paid by the sender to compensate network participants for the computing resources needed to process a transaction or smart contract. Fees usually rise when network demand is high, because users compete for limited space in each block. Unpredictable fees can complicate pricing and small payments.

Question 40

What is a smart contract audit and why do financial firms commission one?

Accepted Answer

A smart contract audit is an independent review of a contract's code to find bugs, security weaknesses and logic errors before deployment. Financial firms commission audits because a flaw in deployed code can lead to direct losses, and immutable contracts often cannot be patched. An audit reduces risk but does not guarantee error-free code.

Blockchain for Finance Flashcards

1Blockchain Fundamentals

2Cryptography and Consensus

3Digital Assets and Tokens

4Payments and Settlement

5Applied Finance and Regulation

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