Cryptoassets Explained: Zcash – ZCash USD (Cryptocurrency:ZEC-USD)

Fibo Quantum

Zcash (ZEC-USD) is a so-called privacy coin. The focus of this cryptocurrency is to protect users being tracked while providing Bitcoin-like (BTC-USD)(COIN)(OTCQX:GBTC) functionality. Zcash was recently added to Coinbase (COINB) through their pro platform, with the expectation of being added to the retail site soon afterwards.

Purpose and Classification

If you have some time, you might check out The Ceremony from Radiolab, which covers the creation of this coin from the inside.

Source: Radiolab

I thought it was a great episode, well worth the listen. Radiolab explains the process in such a way that everyone can understand – the finest sponsored journalism you can find on the topic.

One thing that’s important to note about Zcash is that the privacy part is optional. If you choose to “shield” your transaction, then it will be sent in such a way that’s difficult to trace. However, this mode is not on by default, and for the Coinbase launch there will be some limitations.

Initially, we will support deposits from both transparent and shielded addresses, but only support withdrawals to transparent addresses. In the future, we’ll explore support for withdrawals to shielded addresses in locations where it complies with local laws. For more information on privacy considerations specific to ZEC, visit the official Zcash support page. – Coinbase Blog.

This is similar to what Dash (DASH-USD) does, enabling private transactions upon request. However, Monero (XMR-USD) provides shielding at all times, with no option of turning off this feature.

Taxonomy: Privacy Coin

Age, History, Current Status

Zcash started trading just before Halloween in 2016. There was much fanfare upon its release, and briefly a single Zcash was trading for more than 7 BTC each!

Chart

Zcash Close Price data by YCharts

Zcash has a circulating supply of only 5.36 million at the time that I’m writing this (Dec. 1, 2018).

Earlier this year, ASIC machines started to be built to mine Zcash. This caused a stir in the community, because it’s (or was) believed that ASIC machines would centralize the mining power of the network. However, some said that this was inevitable (including Zooko Wilcox, the founder of the project and CEO of the Zcash company). In the end, the decision was that ASIC resistance was not a priority.

Software Development

Because Zcash has a foundation, a company, and a community – I was expecting to see a bit more activity than this.

zcash github activitySource: Github.com

However, the Zcash team is responsible for several breakthroughs in cryptography. One of these is the zkSNARK, which will likely be coded into other cryptocurrencies, such as Ethereum (ETH-USD).

The term zkSNARK stands for “zero-knowledge succinct non-interactive arguments of knowledge.” Basically it’s an easy way to verify something without having to reveal anything yourself.

One way to think about this problem is the following: Imagine you walk into a bar. The bartender asks for your ID. Why is he asking? Well, he can’t serve alcohol to anyone under the age of 21. But, what other information do you reveal when you hand someone your driver’s license? Well, there’s your height, weight, street address, eye color, driver’s license number and what else?

The only information the bartender needed was proof that you were at least 21. But he ended up getting a lot more than he needed. If there was a zkSNARK for this situation, the bartender would get the proof he needs to cover his rear, while you don’t have to reveal anything extra. That’s the basic concept. Oh, and it’s way faster.

Market Capitalization

Zcash got a nice bump up in price with the Coinbase listing, moving from the $60 range to the $80 range in the last week. Currently, Zcash is number 19 in market cap.

market capSource: coinmarketcap.com

Exchange Liquidity

There’s something funny about the exchange volume for Zcash. The top three trading pairs all come from an exchange called LBank, which I personally have never heard of. This single exchange makes up 68.61% of the trading volume, and the next exchange up has the exclusion star next to its price. That means something fishy is going on, so the price is excluded from the average.

zcash exchangesSource: coinmarketcap.com

This smells to me of heavy market manipulation. If you would like to trade Zcash, I recommend using Coinbase Pro (and transferring to a cold storage device as soon as possible).

Token Issuance Model

Zcash is a proof of work cryptocurrency, meaning that it’s mined. Mining used to be done with GPUs, but now it’s all about the ASICs. Below you will see a list of the top mining pools.

zcash top mining poolsSource: miningpoolstats.stream

Zcash was actually forked from Bitcoin, but several parameters were changed. One of these parameters was the hashing algorithm, which was changed from SHA-256 to Equihash.

However, the most controversial change was the distribution of the mining reward. You see, with Bitcoin 100% of the mining reward goes to the miners. With Zcash, 80% of the reward goes to the miners and the remaining 20% goes somewhere else.

zcash token distributionSource: Twitter

The Zcash foundation gets 3%, the company gets 2.8%, and Zooko personally receives about 2,033 new tokens per month. In today’s terms, that’s a measly $162k per month, down from the $1.88 Million he used to make back in January of this year. Who says you can’t have golden parachutes in crypto?

Security

Zcash has received the stamp of approval from Edward Snowden. However, hard core security proponents will draw a firm line, placing Zcash and Dash in a different league than Monero. Monero is the current “gold standard” for privacy in the cryptoasset world.

Cold storage

Zcash can be stored in a Ledger Nano S or a Trezor hardware wallet.

Security is a main theme of the white paper, so let’s turn to that section now.

White paper

The white paper is 62 pages long, so going through it line by line would be a great replacement for Ambien or sheep counting. But, if you are so inclined, you can do so here.

Some things I noticed while going through it, were:

  • The documentation and references are very thorough.
  • The paper relies heavily on the Bitcoin white paper, from which the project was forked.
  • There are two types of address, shielded and transparent. This is ostensibly for auditability and control over information which people may want to hide or reveal.
  • Zcash builds on top of the Zerocash scheme, but is separate and distinct from it.
  • Private transactions have an address that starts with a z, while transparent addresses always start with a t.

There’s a good amount of discussion in dealing with certain types of attacks and exploits. Overall I think the paper is well written and does not come off like marketing fluff (which happens all too often in this space).

Community

The Zcash company has 72k followers on Twitter. Dash has 319k followers, but they are a much older organization.

On Reddit, there are 14k subscribers on /r/zec. For comparison, Monero has 147k.

Zcash also has a popular community forum. According to SimilarWeb, they got around 95k hits in the month of October.

zcash community forumSource: SimilarWeb

Google trends tells the story from the point of view of Google search volume.

google trends dataSource: Google Trends

Monero is the elephant in the room, but Zcash seems to be staying ahead of Dash. Interestingly, the gap between the privacy coins (it should be noted that the Zcash company sees the term “privacy coin” as diminutive) seems to be closing during this bear market. It will be interesting to see if there’s a shake up once the market turns a corner.

Criticism

Zcash has taken criticism for branding itself as being focused on privacy, and then making the privacy portion optional. Additionally, the large founder rewards have drawn criticism as well.

If you did listen to the Radiolab podcast, then you know there’s an additional threat to Zcash. That threat is that the magic “seed” or secret code used to initially spawn the network also acts like a skeleton key. If someone were to obtain this key, they could spend funds from the Zcash blockchain at will. This is a big deal.

Many steps were taken to ensure that this code was never discovered, but strange things did happen during “The Ceremony.” Some have questioned whether or not the measures taken were sufficient. You’ll have to make up your own mind on this front, because the truth is that we don’t know for sure.

Conclusion

Despite the risks, I think Zcash is an interesting proposition. The team has proven their acumen both academically and in the business world. I still believe that Monero is a superior choice for privacy, but getting and storing Monero is still a chore (but, we’ll talk about that in another article).

I may take a small position in Zcash in the near future.

Cheers,

Hans

This article was published first in Crypto Blue Chips.

Disclosure: I am/we are long BTC-USD, ETH-USD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.