What Is the 0x Protocol?

The 0x (zero x) protocol is a protocol that enables the peer-to-peer exchange of assets on the Ethereum blockchain. The 0x protocol was launched in 2017 by 0x Labs, an organization based in San Francisco focused on creating new markets in the 0x ecosystem.

The protocol itself is not, by definition, a decentralized exchange; it allows for the creation of decentralized exchanges that can be used in broad applications.

Understanding the 0x Protocol

In the world of digital currencies, a protocol is a set of standard rules that can be used by a system (or by various transacting parties) to communicate with each other smoothly. The 0x protocol is essentially a standard messaging format that transacting entities can use to exchange digital assets or tokens.

The standard SWIFT messaging system used in the banking industry is similar to a protocol (except that it is used in a different context). Banks across the globe use the standard SWIFT messaging system to communicate about money transfers.

The system has a standard set of message fields defined for all users; their corresponding values are used in the SWIFT system to securely convey details between two parties, such as sender, recipient, amount, currency, source branch, and destination branch, among others.

Because each bank has adapted to the standard rules of the SWIFT messaging system, they can transact with each other directly. The situation would go awry if each bank followed its own distinct protocol because then they would have to adhere to a one-on-one communication channel with every other bank.

Goals of 0x

The goal of 0x Labs is to make the necessary infrastructure for the emerging cryptocurrency economy and enable markets to be created that couldn’t have existed before.

The 0x protocol attempts to work similarly to SWIFT, but in the context of operating decentralized exchanges for trading digital tokens and assets that run on the Ethereum blockchain. Built on the foundation of Ethereum token standards, 0x protocol acts as the key infrastructure layer for the burgeoning number of financial applications and instruments being created using blockchain technology and trading in digital forms.

With every passing day, tokens are becoming an increasing part of the world’s financial value. Consequently, the requirement to trade digital assets and tokens securely and efficiently is growing. With its clearly defined message formats and smart contracts, the 0x protocol attempts to answer this need.

It is used in a wide array of markets, such as gaming and financing, that enables users to trade tokens and assets.

ZRX is 0x’s native governance and staking token. ZRX owners have a say in how the protocol evolves, and token holders can also stake their tokens to earn ETH (the Ethereum token ether) liquidity rewards.

Special Considerations

The 0x protocol’s message format is composed of a set of data fields that carry vital information, such as the digital asset or token to be traded, the price value of the transaction, the expiration time, and the defined identities of the transacting parties.

Smart contracts take care of the necessary business logic for generating, sending, receiving, and processing the data linked to the trading activity. It also allows room for essential upgrades, if any, in the future. The provisions for upgrades are required if any changes are necessary for adhering to the modified regulations or any modifications linked to the intrinsic working of the Ethereum blockchain network.

The system also uses relayers, which act as order aggregators and broadcast orders from designated market participants to the marketplace or exchange.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author does not own cryptocurrency.

What Is an Application-Specific Integrated Circuit (ASIC) Miner?

An application-specific integrated circuit (ASIC) is an integrated circuit chip designed for a specific purpose. An ASIC miner is a computerized device that uses ASICs for the sole purpose of “mining” digital currency. Generally, each ASIC miner is constructed to mine a specific digital currency. So, a Bitcoin ASIC miner can mine only bitcoin. One way to think about bitcoin ASICs is as specialized bitcoin mining computers optimized to solve the mining algorithm.

Developing and manufacturing ASICs as mining devices is costly and complex. However, because ASICs are built especially for mining cryptocurrency, they do the job faster than less powerful computers. As a result, ASIC chips for cryptocurrency mining have become increasingly efficient, with the latest generation hashing at 158 terahashes per second but only using 34.5 joules per terahash.

Understanding Application-Specific Integrated Circuit (ASIC) Miners

Instead of being general-purpose integrated circuits—like RAM chips or PC or mobile device microprocessors—ASICs employed in cryptocurrency mining are specific integrated circuits designed solely to mine cryptocurrencies.

Initially, Bitcoin’s creator(s) intended for bitcoin to be mined on central processing units (CPUs) of commonly used laptops or desktop computers. However, Bitcoin ASICs surpassed both CPUs and graphics processing units (GPUs) because of their reduced electricity consumption and greater computing capacity. After gaining traction in mid-2013, when other hardware mining devices started hitting bottlenecks in their mining, Bitcoin ASIC miners increased and retained their lead.

A hash is a long hexadecimal number used to identify blocks in a blockchain, called the block header hash or block hash. To mine a block, miners begin adding values to a hash to generate new ones until a number less than the target difficulty (original hash) is reached. This is called hashing. The more hashes that can be performed in a set period, the more likely a miner is to earn bitcoin. ASIC miners are optimized to compute hash functions efficiently and quickly.

Although mining cryptocurrencies can be an expensive proposition of declining profitability, many people are drawn to it. Despite the uncertain return on investment, would-be cryptocurrency miners are willing to incur high upfront expenses for pricey ASICs and pay significant ongoing costs for electricity in return for the prospect of earning cryptocurrency.

Development of the ASIC Miner

Cryptocurrency mining is required by a proof of work (PoW) blockchain like Bitcoin to carry out its operations. The mining process involves solving a block’s hash by randomly generating numbers until reaching a number below the target difficulty number. The first miner to find the solution to the puzzle closes the block. Each winner in the bitcoin mining competition receives a reward (a specific amount of bitcoin) along with the transaction fees for the transactions in that block.

In Bitcoin’s early days, any computer with adequate processing power could mine bitcoin. However, those days are long gone; bitcoin’s soaring popularity and growing acceptance have attracted hordes of crypto miners.

At the same time, cryptocurrency mining has become exponentially more difficult because the mining difficulty changes as miners enter and exit the network. Over time, the number of miners has constantly grown, which increased the difficulty. These developments have resulted in a race to harness the most “hashing power,” the term used to describe how many hashes per second a miner can generate (or the combined hashes per second of a networked mining rig or pool). ASIC miners came about as a result of this quest for more hashing power; modern Bitcoin ASICs can hash at more than 150 terahashes per second (nine zeros, or 150 x 10¹² hashes per second).

ASIC devices were popularized by Bitmain (headquartered in China), which dominates ASIC Bitcoin mining activities through its Antminer ASIC product range.

ASIC Miner Advantages

Though GPU and CPU mining rigs rely on components that have more than one function, ASIC miners are designed for the sole purpose of mining cryptocurrency. This singular focus makes an ASIC miner much more powerful and energy-efficient than a comparable GPU miner.

Because each cryptocurrency has its own cryptographic hash algorithm, an ASIC miner is designed to mine using that specific algorithm. For example, Bitcoin ASIC miners are designed to hash the SHA-256 algorithm, while Litecoin (LTC) uses scrypt (pronounced es-crypt). Though this means that an ASIC miner could technically mine any other cryptocurrency based on the same algorithm, most miners who invest in ASIC hardware designed to mine bitcoin or Litecoin stick to mining that specific cryptocurrency.

ASIC Miner Considerations

Before investing thousands of dollars in an ASIC mining rig, here are some factors to be considered:

• What coins can be mined? The list of cryptocurrencies that can be mined with ASICs is far smaller than those that can be mined with a GPU rig. Cryptocurrencies that can be mined with ASICs include Bitcoin, Litecoin, and several others.
• Rig location: Though GPU mining rigs can be located in one’s home, ASIC miners are louder and generate much more heat. This means that one’s home is not ideal for an ASIC miner, and alternate locations like a basement or garage with cooling need to be considered.
• Power consumption: The latest generation of ASIC machines are more energy-efficient than GPU rigs but consume tremendous power nevertheless. An ASIC miner based in one’s home may necessitate upgrading the electrical wiring system to handle the increased power load.
• Choosing a Bitcoin mining pool: Mining pools enable miners to combine the power of their ASIC miner rigs to mine bitcoin and share the rewards for successfully minted blocks. Factors to be considered when choosing a pool include its reputation, size, and payment rules.
• Return on Investment: Is the return on investment sufficiently high enough to justify the upfront cost of an ASIC miner and ongoing operating expenses?

What Is an Atomic Swap?

An atomic swap is an exchange of cryptocurrencies from separate blockchains. The swap is conducted between two entities without a third party’s involvement. The idea is to remove centralized intermediaries like regulated exchanges and give token owners total control.

The term atomic derives from the term “atomic state” in which a state has no substates; it either happens or it doesn’t—there is no other alternative. This refers to the state of the cryptocurrency transaction; it happens or it doesn’t.

Most atomic swap-enabled wallets and blockchains use smart contracts. Smart contracts are programs within blockchains that execute when certain conditions are met. In this case, the conditions are that each party agrees to the transaction before a timer runs out. Using a smart contract in the trade prevents either party from stealing a cryptocurrency from the other.

Atomic swaps are also called cross-chain atomic swaps.

Understanding Atomic Swaps

Each cryptocurrency is supported by a blockchain, designed only to accept transactions in specific tokens. For example, Bitcoin (BTC) has a blockchain, and ETH (ether) has another. You cannot easily exchange BTC and ETH without first converting to fiat currency then buying the other; another technique is to convert between cryptocurrencies and exchanges multiple times to get the one you want. Atomic swaps allow you to exchange tokens from different blockchains in one trade.

Decentralized exchanges can conduct atomic swaps for you. A decentralized exchange (DEX) has no central authority regulating it; it is a platform you can trade on without third parties. You can also choose from cross-chain swap providers, where you transfer your digital assets into another wallet, conduct the swap, and transfer them back out.

History of Atomic Swaps

The concept was conceived shortly after altcoins—cryptocurrencies other than Bitcoin—materialized. The creation of altcoins meant some cryptocurrency owners became interested in moving capital between coins. This type of token swap first appeared in September 2017, when an atomic swap between Decred and Litecoin was conducted.

Since then, startups and decentralized exchanges have implemented swaps and allowed users the same facility. For example, Lightning Labs, a startup that uses Bitcoin’s lightning network for transactions, has conducted off-chain swaps utilizing the technology.

Special cryptocurrency wallets have also been developed that are capable of cross-chain atomic swaps—Liquality has developed a wallet that will swap Bitcoin, ETH, and more.

Atomic Swap Process

In an atomic swap, two token owners agree to exchange their tokens for any amount they agree on. The smart contract program sees that they both agreed to it, so it executes the trade for them. The transaction is recorded in the blockchain and validated by the network nodes, and then a new block is opened for another transaction.

The transaction cannot be reversed. Both parties must agree to another transaction to exchange the tokens again if they would like them back.

Atomic swaps use Hash Timelock Contracts (HTLC) to automate the exchange of tokens. As its name denotes, HTLC is a time-bound smart contract between parties that involves generating one cryptographic hash on each end.

HTLC requires both parties to acknowledge receipt of funds within a specified timeframe. If one party fails to confirm the transaction within the timeframe, then the entire transaction is voided, and funds are returned. This eliminates counterparty risk, or the risk that one party will accept the offered coins and decline the transfer of their coins.

For instance, suppose Jane wants to convert 1 BTC to an equivalent number of Litecoins with John. She submits the transaction through an atomic swap-capable wallet. A cryptographic hash function generates a hex number to encrypt the transaction during this process. The process is repeated at John’s end.

Both Jane and John unlock their respective funds using their encrypted numbers. They have to do this within a specified timeframe, or the transfer will not occur. The HTLC within the blockchains then executes the trade.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.

What Is a 51% Attack?

A 51% attack is an attack on a cryptocurrency blockchain by a group of miners who control more than 50% of the network’s mining hash rate. Owning 51% of the nodes on the network gives the controlling parties the power to alter the blockchain.

The attackers would be able to prevent new transactions from gaining confirmations, allowing them to halt payments between some or all users. They would also be able to reverse transactions that were completed while they were in control. Reversing transactions could allow them to double-spend coins, one of the issues consensus mechanisms like proof-of-work were created to prevent.

Understanding a 51% Attack

A blockchain is a distributed ledger—essentially a database—that records transactions and information about them and then encrypts the data. The blockchain’s network reaches a majority consensus about transactions through a validation process, and the blocks where the information is stored are sealed. The blocks are linked together via cryptographic techniques where previous block information is recorded in each block. This makes the blocks nearly impossible to alter once they are confirmed enough times.

The 51% attack is an attack on the blockchain, where a group controls more than 50% of the hashing power—the computing that solves the cryptographic puzzle— of the network. This group then introduces an altered blockchain to the network at a very specific point in the blockchain, which is theoretically accepted by the network because the attackers would own most of it.

Changing historical blocks—transactions locked in before the start of the attack—would be extremely difficult even in the event of a 51% attack. The further back the transactions are, the more difficult it is to change them. It would be impossible to change transactions before a checkpoint, where transactions become permanent in Bitcoin’s blockchain.

Attacks Are Prohibitively Expensive

A 51% attack is a very difficult and challenging task on a cryptocurrency with a large participation rate. In most cases, the group of attackers would need to be able to control the necessary 51% and have created an alternate blockchain that can be inserted at the right time. Then, they would need to out-hash the main network. The cost of doing this is one of the most significant factors that prevent a 51% attack.

For example, the most advanced application-specific integrated circuit (ASIC) miner is the Bitmain S19 XP Hydro. It costs more than $19,800 and has a hash rate of 255 terahashes per second (TH/s).

The top three mining pools by hashrate are:

• FoundryUSA, at 54.42 exahashes per second (EH/s); 23.75% of the total Bitcoin network hashrate
• AntPool, at 41.49 EH/s; 18.12% of the total Bitcoin network hashrate
• Binance Pool, at 34.48 EH/s; 15.06% of the total network hashrate

Combined, these three pools make up 56.93% of the network hashrate, a whopping 130.4 EH/s (1.304 million TH/s). To equal that hashrate, the attackers would need more than 511,373 S19 XP Hydros—which would put fixed costs close to $10.13 billion, plus a building to host the equipment, maintenance staff, electricity, and cooling.

Major cryptocurrencies, such as Bitcoin, are unlikely to suffer from 51% attacks due to the prohibitive cost of acquiring that much hashing power. For that reason, 51% attacks are generally limited to cryptocurrencies with less participation and hashing power.

After Ethereum’s transition to proof-of-stake, a 51% attack on the Ethereum blockchain became even more expensive. To conduct this attack, a user or group would need to own 51% of the staked ETH on the network. It is possible for someone to own that much ETH, but it’s unlikely; according to Beaconchain, more than 13.8 million ETH were staked at the end of September 2022. An entity would need to own more than 6.9 million ETH (more than $9 billion worth) to attempt an attack.

Once the attack started, the consensus mechanism would likely recognize it and immediately slash the staked ETH, costing the attacker an extraordinary amount of money. Additionally, the community can vote to restore the “honest” chain, so an attacker would lose all of their ETH just to see the damage repaired.

Attack Timing

In addition to the costs, a group that attempts to attack the network using a 51% attack must not only control 51% of the network but must also introduce the altered blockchain at a very precise time. Even if they own 51% of the network hashing rate, they still might not be able to keep up with the block creation rate or get their chain inserted before valid new blocks are created by the ‘honest’ blockchain network.

Again, this is possible on smaller cryptocurrency networks because there is less participation and lower hash rates. Large networks make it nearly impossible to introduce an altered blockchain.

Outcome of a Successful Attack

In the event of a successful attack, the attackers could block other users’ transactions or reverse them and spend the same cryptocurrency again. This vulnerability, known as double-spending, is the digital equivalent of a perfect counterfeit. It is also the basic cryptographic hurdle blockchain consensus mechanisms were designed to overcome.

Successful 51% attackers may also implement a Denial-of-Service (DoS) attack, where they block the addresses of other miners for the period they control the network. This keeps the “honest” miners from reacquiring control of the network before the dishonest chain becomes permanent.

Who Is at Risk of 51% Attack?

The type of mining equipment is also a factor, as ASIC-secured mining networks are less vulnerable than those that can be mined with GPUs; they are much faster. Cloud services such as NiceHash—which considers itself a “hash-power broker”—theoretically make it possible to launch a 51% attack using only rented hash power, especially against smaller, GPU-only networks.

Bitcoin Gold has been a common target for attackers because it is a smaller cryptocurrency by hashrate. Since June 2019, the Michigan Institute for Technology’s Digital Currency Initiative has detected, observed, or been notified of more than 40 51% attacks—also called chain reorganizations, or reorgs—on Bitcoin Gold, Litecoin, and other smaller cryptocurrencies.