Privacy-centric cryptocurrencies have gained in popularity in the past 12 months as it has become clear that bitcoin’s pseudonymity does not provide enough transaction anonymity for privacy-focused users.
One of the most popular privacy-centric cryptocurrencies in the market today is zcash. In this guide, you will learn what Zcash is and whether the digital currency makes for a good investment or not.
What is Zcash?
Zcash is a decentralized, open-source cryptocurrency that providers users with privacy and selective transaction transparency. Zcash transactions, while broadcasted on a public blockchain, details about the sender, the recipient, and the transaction amount remain private.
Zcash grew out of the Zerocoin project, which aimed to improve anonymity for bitcoin users, and is built using Bitcoin Core’s codebase. The improvement over bitcoin that zcash provides is that it uses advanced cryptographic privacy-enhancing technique knows as zero-knowledge proofs to guarantee the validity of financial transactions without revealing any information about them. The developer team created Zcash’s own proprietary zero-knowledge proof cryptography called zk-SNARKs.
Zcash has a total supply of 21 million coins just like bitcoin and also uses a proof-of-work (PoW) consensus mechanism to verify and process transactions.
Zcash (ZEC) is currently in the top 20 largest cryptocurrencies with a market capitalization of over $500 million and in the top 10 according to CoinGecko. The digital currency can be traded on several leading exchanges including HitBTC, Bithumb, Bittrex, Bitfinex, Poloniex, and Kraken. At the time of writing, the price of zcash stood at $236.
Zcash was launched in 2016 by founder and CEO Zooko Wilcox. Wilcox brings over 20 years of experience as a computer scientist. He has worked on decentralized systems, information security, cryptography, and startups. His previous work includes DigiCash, ZRTP, “Zooko’s Triangle,” Mojo Nation, Tahoe-LAFS, SPHINCS, and BLAKE2.
Zcash launched on October 28, 2016, when its genesis block was mined. However, the launch of zcash was not without controversy.
Controversy Surrounding Zcash
The controversy around the launch came from the fact that media outlets owned by zcash investors, such as Roger Ver and the Digital Currency Group, created a massive hype around the new digital currency enticing investors to buy and, thereby, effectively inflating the price of the coin to ridiculous highs. For this reason, some suggested that zcash was just a massive well-executed ‘Pump and Dump’ scheme to enrich its founders and early-stage investors. For instance, BitMex’s Crypto Trader Digest stated at the time, “October 28, 2016 has set its place in the Cryptocurrency History books with what must be the record for the largest Pump and Dump.”
On the first day of trading, the price of zcash experienced massive volatility with one exchange, Poloniex, showing the price of one ZEC being worth 3,299.99 BTC, which was the equivalent of $2.3 million at the time. Needless to say, the price dropped aggressively from that irrational high within minutes but still ranged from $400 to $2,200 throughout the first few days of trading before finding a range around $500. This was at a time when the price of bitcoin was at around $700.
Furthermore, Zcash mining involves what is referred to as the ‘founders reward’ for the first four years. 10 percent of all coins mined are distributed to the stakeholders in the Zcash Company, namely its founders, investors, employees, and advisors. This includes the likes of Gavin Andresen, Vitalik Buterin, Arthur Breitman, Roger Ver, Barry Silbert, Fred Ehrsam, among other blockchain heavyweights. When looking into the details of how the founder’s reward is structured, you can see that 20 percent of all coins mined in the first year will go to Zcash’s team and its backers and that there is a “slow start” to mining to reduce supply to push up its value early on.
The ‘slow start’ feature means that the expected inflation is amongst the highest out of the most well-capitalized cryptocurrencies (see below). The Money Supply (MS) Inflation factor, which accounts for the inflation due to the supply of new coins anticipated to enter the market, is extremely high for zcash, at 876 percent, compared to a range of 16 to 29 percent for bitcoin, litecoin and monero. The sheet also shows that, at most, 11.12 million freshly minted ZEC will enter the supply over the next five years.
Unsurprisingly, the founder’s reward has added to Zcash’s controversy and has left a bad taste in the mouth of miners who are economically incentivized to mine for their own profit and not for the profit of others. This has also thrown a bad light on the new anonymous cryptocurrency as this incentivizes everyone who has been backing this coin to push up the currencies price to earn as much as possible in the form of their cut of the founders reward.
Furthermore, the trusted setup used in the launch of Zcash also receives its fair share of criticism. If this setup was compromised somehow, the saboteur would be able to create an infinite number of ZEC and sell these slowly on the market, all without anyone noticing. But at least the team has stated that they are looking to remove the trusted setup eventually and making the entire network private. While zk-STARKs allow for a non-trusted setup, they are not as efficient as zk-SNARKs, explaining the reason for going with the trusted setup in the first place.
The discontent about the Zcash’s founders reward has actually led to the creation of new altcoin based on Zcash’s open-source code. Two of these projects include ZClassic (ZCL) and ZenCash (ZEN).
ZClassic is a hard fork of Zcash that was founded to create a coin that entails all the advanced technological features of Zcash minus the “founder’s tax.” ZenCash, on the other hand, is a hard fork of ZClassic but goes a step further by using Zcash’s technology to build “the world’s first private, distributed, and reliable platform for communications, transactions, and publishing.”
Zcash’s “Corporate Feel”
Zcash’s founders have made it clear that they do not want their coin to become the cryptocurrency of the dark web. Instead, the Zcash team has begun working with Wall Street giant JPMorgan run by everyone’s favorite bitcoin-bashing banker, Jamie Dimon.
Zcash is helping JPMorgan add a layer of privacy protection to users of JPM’s enterprise-grade blockchain platform, Quorum. Zooko Wilcox stated in November, “I’m excited that our first enterprise customer is the most valuable bank in the world.” Suresh Shett, JPMorgan’s blockchain center of excellence lead architect, said:
“By adding the Zero-knowledge Security Layer into Quorum, we are able to explore how state of the art cryptographic privacy technology will enhance the next generation of financial services applications.”
Since many cryptocurrency community members see the financial industry as “the enemy” Zcash’s involvement with JPMorgan is one of the reasons why many privacy-focused libertarian cryptocurrency users prefer Monero (XMR) over Zcash. The “corporate feel” of Zcash does not bode well with those who want to hide their financial transactions from financial institutions and governments.
Having said that, the company behind Zcash, Zerocoin Electric Coin Company, of course, is a for-profit business and engaging into a business relationship with one of the largest financial institutions in the world absolutely makes business sense regardless of what Zcash’s critics may think.
Should Zcash be in Your Cryptocurrency Portfolio?
Next to monero, zcash is currently the leading anonymous cryptocurrency and due to its active developer team and strong backing, it will likely keep this status for a long time.
If you believe anonymous cryptocurrencies will play an essential role in the cryptocurrency community then adding exposure to one of the leading privacy-focused coins with revolutionary technology would make sense.
While you may not like certain aspects of Zcash when it comes to investing you should not let your emotions stand in the way of you earning money. Given that Zcash has backing, either directly or indirectly, from several leading blockchain investors and thought leaders this project could be poised to succeed technologically and the cryptocurrency is well-positioned to continue to gain value. Subsequently, ZEC is a serious contender for your cryptoasset portfolio.
However, the risks lie with the trusted setup and high inflation factor over the next five years, not accounted for by simple market capitalization figures.