Originally launched as “Zerocoin” in 2014, Zcash has evolved into one of the leading privacy-protecting digital assets on the market today. The motivation behind Zcash originally derived from the inability of Bitcoin and other major digital assets to provide strong privacy guarantees. While Bitcoin is pseudo-anonymous by nature, many details surrounding the transactions on the ledger are completely public. Information such as the sending address, receiving address, amount sent and anything in the memo field is viewable to anyone. This information ultimately leaves digital crumbs for anyone to find every time you interact with the network.
If you’re like most people, you’ve used centralized exchanges as fiat on and off-ramps. With this, you’ve likely had to verify your identity with the exchange by uploading your name, birthday, address, and sometimes even your social security number. This in combination with the open nature of public blockchains means that every transaction you’ve ever sent has likely been recompiled and stored into an institutional database linked to your real world identity.
Blockchain analysis tools such as Chainalysis makes analyzing this data easy for institutions. It allows major financial institutions, exchanges and governments to detect and investigate money laundering, fraud, or compliance violations by putting meaning behind every transaction. The company has recently entered purchase agreements with major government agencies including the IRS, ICE, and the FBI. Governments are beginning to understand and prosecute against crypto asset users. Over the next few years, we suspect this theme will exasperate as governments defend their control over money and suppress the proliferation of decentralized money.
With this in mind, we believe that financial privacy is vital for the overall success of the crypto ecosystem.
In our current financial system, I can go to the coffee shop and spend money without the barista now knowing the balance in my bank account, and every transaction that I’ve made before the purchase. With Bitcoin or Ethereum, this becomes a bit harder. Users must leverage mixers and other applications just to gain basic privacy rights.
As the world begins to shift towards a decentralized architecture, financial privacy will come to the forefront and having the ability to transact value and data with basic privacy guarantees will becoming increasingly more valuable.
Thanks to the advent of zk-SNARKS, Zcash allows users to transact value and date without revealing information about the parties involved.
What are zk-SNARKS?
The acronym zk-SNARK stands for “Zero-Knowledge Succinct Non-Interactive Argument of Knowledge” and in essence, creates a mathematical proof where one can prove the possession of a certain piece of information, like a private key, without ever revealing that information. Zcash uses zk-SNARKs to prove that the conditions for a valid transaction have been met without ever revealing any crucial information about the addresses or the value involved.
There are decades worth of mathematical and cryptographic research which have allowed the implementation of zk-SNARKS. If you’re interested in diving into the technicals behind this, feel free to visit Zcash’s official page on zk-SNARKS here.
With Zcash, there are two types of addresses: z-addresses and t-addresses. Z-addresses are private addresses where as t-addresses are public addresses. These two address types are interoperable and create four main types of possible transactions on the network.
Private (Z-address to z-address): Appears on a public blockchain, so the transaction is known to occur and fees are paid. However, the addresses, the transaction amount and the memo field are all encrypted and not publicly visible.
Deshielding (z-address to t-address): The sending address is shielded and cannot be seen by the public. However, the amount received (which is the amount sent) and the address of the recipient becomes viewable by the public.
Shielding (t-address to z-address): The amount sent and the sending address is publicly available. However, the recipient and their account information has a high degree of privacy guarantees.
Public (t -address to t-address): This is identical to a normal Bitcoin transaction where both the sender and recipient addresses, the amount transacted, and anything in the memo field is known.
Token Sale and Distribution
Given that Zcash was a fork of Bitcoin, it has very similar network economic properties. Like Bitcoin, Zcash has a total supply of 21,000,000 ZEC where block rewards are halved every 4 years. However, ZEC has a few differentiating properties from BTC.
Rather than 10 minute block times that begin with 50 BTC block reward, Zcash leverages 2.5-minute blocks with 12.5 ZEC per block. This ultimately allows Zcash to have a higher throughput capacity than BTC at the cost of security. In addition, Zcash has implemented a “founder’s reward” which has taken some criticism for the crypto community at large.
Zcash’s founder's reward takes 20% of the newly issued ZEC in every block for the first 850,000 blocks (~4 years) and issues them to the owners and employees of the Electric Coin Company (formerly the Zcash Company). The Founder’s Reward ultimately results in 10% of the total supply going to the stakeholders of the development company. Following the first halving, the founder’s reward will cease and all block rewards will go to miners.
As stated in the FAQ, the ending distribution of the founder’s reward is as follows:
Back in 2014 at the very inception of what is known today as Zcash, the Zcash Company raised $1M in seed funding. In exchange for this funding, investors would receive a portion of the founder’s reward as outlined above.
Examining ZEC Price Movement
If you’ve ever looked at Zcash’s chart, you may have noticed the violent decline at the launch. In order to give the network and its development some breathing room, Zcash implemented a slow-start mechanism for the first 20,000 blocks (~34 days). This was to protect the network in the instance of a major bug or security vulnerability. With the slow-start, the ZEC block reward would gradually increase linearly to the fully 12.5 ZEC over the first 34 days. This in combination with the fact that there was no premine, like the majority of ICOs in 2017 and 2018, creates an extremely low circulating supply of Zcash at its inception.
Moreover, the issuance rate was extremely high during the first few months of launch. As an example, after the first day the network launched on October 28th, there were 450 ZEC in circulation. By October 31st, there were 1,950 ZEC in circulation. This is an increase of 333% in the circulating supply in less than 3 days which obviously would have a negative impact on price. Here’s a better idea of how the token issuance rate played out over the first 200 days.
It goes without saying that the necessity to bootstrap the network with zero premine, the increased scarcity at the very beginning of the distribution, and the relatively high liquidity for the asset despite it’s immaturity, would cause hyper-volatile price movements.
Demand and Scarcity for Zcash
The driving factors behind the demand and scarcity of Zcash are rather similar to Bitcoin. There’s a fixed supply of ZEC with the issuance programmed to halve every four years. The two main economic differences between Bitcoin and Zcash right now are (1) the focus on privacy guarantees and (2) there’s yet to be an issuance halving. ZEC is currently in its first reward era with 12.5 ZEC being issued every 2.5 minutes. The first Zcash halving is to occur in late 2020, where the block rewards will reduce to 6.25 ZEC per block.
If you’re not familiar with the price movement of Bitcoin following each halving event, feel free to reference one of our articles on Medium which outlines this in detail. In short, the Bitcoin halvings have been largely responsible for the surge in prices following each halving as the stock-to-flow ratio increases.
In summary, the fixed supply with diminishing rewards combined with the growing need for privacy guarantees should drive up the price of Zcash in the future. This assumes Zcash can continue to stay relevant and maintain a high level of security. Moreover, the fact that ZEC is still in its first reward era presents an enticing opportunity for prospective investors looking to capitalize on the importance of privacy in the future.
Drawbacks / Concerns
The biggest concern to date is the controversy over the founder’s reward. With 20% of every block mined going to the ECC and its investors, this largely goes against the nature of decentralized networks and creates an opportunity for the receiving members to dump ZEC on the open market. However, we’d like to note that compared to the ICO boom in 2017 and the saturation in pre-mined tokens where the teams would retain upwards of 50-60% of the total token supply, the ECC having 10% of the total supply is rather minimal in the long run.
More importantly, the founder’s reward secures the funding and development of the protocol over the next few years. This is something that many “decentralized” projects struggle with as who should be responsible for the maintenance and growth of the network, especially during these immature stages.
The community has definitely had it’s fair share of words to say about the founder’s reward. Most notably, the Todero brothers over at BlockTown Capital have proposed the founder’s reward to be halved to 10% of the block rewards rather than 20%.
The other notable drawback with Zcash, more along the lines of the user base, is that the majority of users are using the regular, public transaction between t-addresses to transact on the network. This can be seen in the transaction chart which outlines the number of each transparent transaction (black) and the shielded transactions (blue) over a 24 hour basis.
With this in mind, it’s apparent that the majority of Zcash users actually do not care about the privacy features native to the protocol. It is important to note that by default, transactions are public. If a user wants to make a shielded transaction, they must do so through the wallet interface and pay the associated transaction fee.
Over the next few years, financial privacy will become crucial as nation-states begin to police digital assets. We’re beginning to see this with the recent delisting of Zcash and other privacy coins from OKEx as they violate FATF regulations. Zcash and other privacy coins offer the protection and autonomy that users will need in the future to protect their assets from overreach by government agencies.
As Zcash continues to mature, it will be interesting to see how the network combats these issues. Other centralized exchanges with listed privacy coins will likely be subject to the same obligations as OKEx as FATF continues to regulate the space. As such, Zcash will likely have to rely on the blockchain-agnostic decentralized exchanges for users to easily access the assets such as REN (which we wrote about in an earlier Token Tuesday).
Lucas Campbell and Cooper Turley