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4Rev Coin Analysis: Zcash

By | May 07, 2018

4Rev Coin Analysis: Zcash

The Basics:

Zcash is one of the two most prominent private coins that seeks to provide its users with a completely untraceable coin, the other being Monero. Founded in 2014 with a whitepaper debuting the idea behind the modern Zcash, then named Zerocoin, the P2P cryptocurrency platform was actually forked out of Bitcoin as the most popular cryptocurrency becomes increasingly deanonymized. The method for providing this security and anonymity within Zcash is referred to as “proof of construction”. Furthermore, GPU (graphic processing units) mining is utilized to prevent centralization.

Like its predecessor Bitcoin, Zcash has a potential of 21 million total tokens to be mined and all are expected to be in circulation by 2032. At the time of this writing, Zcash maintains a $179.64 price with a $659.6 million market cap, meaning a circulating supply of 3,671,769 ZEC. At current transaction levels, each block takes around 2 minutes to process and a 20% tax is charged on all mined coins, 10% of which is earmarked as a “founder’s reward” for the first four years of the project, a point that I will return to later in the article.

The project was picked up by Zooko Wilcox and implemented as a traditional startup company to allow for more agile innovation from dedicated developers, at least for the initial years when this type of development will be key to the project’s long-term success and adoption.

The Problem(s):

The etymology of cryptocurrency is fairly obvious, coming from as far back as the Greek words kruptos and krupte, meaning hidden and vault, respectively. Combine that with currency and you should have a hidden and encrypted medium to transact value. However, with further iterations of Bitcoin and other newer cryptocurrencies, the secretive nature of this movement has lost its shine. Zcash seeks to solve the original problem of centralized censorship and control with a truly anonymous coin that will be true to the meaning of cryptocurrency.

The definition of words can sometimes be more romantic than their connotation in the real world. In the case of cryptocurrency this has become to be the case because, in order for the idea to work at all, there needs to be widespread adoption, gauged by fiat entered into the blockchain. In order for this to happen, those with the most fiat dollars need to be at least open to the idea of changing the current system that has made them so wealthy. Central banks, stock icons, and other fiat -aires are unlikely to accept a coin that is completely untraceable and that has no visibility. Governments even less so will want to allow transactions to occur without a way for them to trace this money. This could be a major barrier to Zcash’s success if regulation comes down hard on this type of token that doesn’t allow for regulatory bodies to keep tabs on sums of money, fiat or crypto.

The Solution:

As previously mentioned, Zcash hopes to solve the problem of de-anonymity in the crypto space by implementing a “proof of construction” model or zero-knowledge proof (znSNARK). Effectively, this model allows a block to be verified, along with all of its contained transactions, without revealing the amount of each, or which parties transacted. The article hyperlinked above provides a wonderful and simple example of how this works when testing for color blindness, a test I’ve undergone, and failed!

Zcash has attempted to solve this problem, which would get in the way of its greater adoption by implementing a sort of “selective transparency”. The way it works is keeping transaction data confidential but allowing some information to be disclosed to relevant groups like auditors or regulators. In this way, both those who wish for the openness of transaction data for regulatory purposes and others who value privacy will be appeased.

Fundamental Analysis: Monero vs Zcash: A Public Battle of Private Coins

As stated before, Zcash’s rise to prominence has been coupled with Monero’s as both coins try to accomplish the original goal of cryptocurrencies to be completely anonymous P2P transaction networks. Despite their shared motives, the two groups behind the projects have adopted vastly distinct methods to accomplish their goals.

Monero

Monero’s focus has been on creating an ecosystem that values community input to ensure decentralization in its most pure sense. This method is valued so highly because Monero’s privact actual becomes greater as more users interact on the system. This excludes HODLers referring only to actual regular transactions on the network. Effectively, in the Monero network, both users and developers are responsible for the increased privacy of the network.

Monero currently sits at $166.90 following a fall from grace that outpaced the rest of the cryptocurrency market in the first months of 2018. The coin has fallen from $466 in early January, which is directly related to steep drop in total volume, over $500 million in January to only $24 million in the past weeks. Those who realize the impact of transaction volume on the Monero value proposition will be worried about this fall from grace.

Zcash:

Whereas Monero focuses on user input and adoption for long term success, Zcash’s momentum is more dependent on technology and new cryptography. In the simplest terms, Monero relies on the crypto community and Zcash relies on the developers’ ability to innovate and implement code, at least in the short term. For now, this makes Monero’s on-chain privacy better than Zcash’s as only 31.5% of transactions are currently shielded. However, if Zcash were to achieve its goals, the coin could be said to have greater privacy, barring a monumental rise in the adoption of Monero.

With Zcash’s value hinging on the developers’ talent and motivation, their compensation will have to be hefty. This is where the Founder’s Reward comes in. The founder’s reward accounts for 10% of the total 20% that is a tax on each coin mined. This idea was first proposed by Andrew Miller. It is important to note that this system will last only four years and that 20% of the block reward that is common across most cryptos is dedicated to early investors, advisors, employees, etc, accounting for 10% of all Zcash ever. This system represents an alternative funding method to an ICO where investors pay for a product that has yet to be produced and has the potential never to be made. By offering a founder’s reward to developers for their work, they’re incentivized to deliver on the promise of a truly private network.

Is the founder’s reward too much?

This is purely an opinion question but of course, I have one. I would state that the founder’s reward is not too high because there is value in it that comes from dedicated developers that won’t create sidechains or become compromised by other products. With that being said, this percentage is technically an inflationary cost that isn’t directly contributing to the security of the network. Nevertheless, this reward will only last in the protocol’s infancy when, arguably, the creation of a working, popular blockchain is marginally more important than security.

The real loser of this system is the Zcash miner how loses out on this percentage, but not the end user. Would the miners trade 20% less profit for 4 years for a better chance at a protocol with longevity? That’s a question for the miners, but end users will appreciate their service.

A Centralized Solution to Achieve Effective Decentralization

There is another reason that Zcash is quite different than Monero, namely the Zcash company that is responsible for development, governance, and infrastructure operation. This company’s control over the direction of the project will also be short-lived like the founder’s reward and has a similar purpose. Just as the founder’s reward ensures that developers are incentivized to produce the necessary code, the Zcash company works to drive this production and keep it on track, avoiding hard forks and sidechains when necessary for the long-term success of the coin.

Following the comparison between the founder’s reward and the company, as the Zcash code and use grows, a centralized company leading the project becomes counterintuitive. That is why once the breaking point is reached, all business functions will be passed over to the Zcash foundation. By utilizing a non-profit foundation to direct the conversation around the future of the project, the potential for self-serving actions by the company is reduced significantly but there also exists less space for ambiguity, disputes, forks, and ultimately the disintegration of the project.

In order to ensure the effectiveness and positive image of the foundation, none of the founders nor company personnel will be a part of the foundation, but the founders have donated half of their rewards to the foundation to ensure it has the proper resources to take the reins when necessary. Here’s a quote from the company’s website…

However, in the long run it would not be appropriate for a single for-profit company to have this much power over the evolution of the Zcash technology. Ultimately, there will need to be an independent, inclusive, non-profit body to steward the technology in the interests of all users.” — Zcash Website.

Technical Analysis

In this bear market it is tough to truly analyze any crypto technicals with any hope of seeing meaningful trends. With that being said, we’re going to try. Zcash has been on a free fall similar to just about every other crypto in the first four months of the year, starting out at max price of $890 and falling down all the way to the $178 range that we discussed earlier. The saving grace for Zcash is that the first four years of its existence can be seen as the build-up, while waiting for its true potential to be realized.

Support levels all the way down from the high have been violated and I’m afraid to say that Zcash, like most alts, is at the mercy of a turnaround in the wider market before any recuperation in price can be had.

Does Any of this Matter?

Cryptocurrencies is an emerging space with a name that is as broad as the scope of all of the coins that have come out in the past few years. The terms may change along with the purpose and applications of blockchain and fintech together. No matter what changes, there will always be a demand for untraceable, anonymous mediums of exchange that allow people from all over the world to send funds quickly, securely, and without big brother watching. With Bitcoin steering away from filling this void, it will be up to coins like Monero and Zcash to pick up the pieces. Whichever one of these coins gains the most traction in this market will likely drive the other to extinction, but I wouldn’t expect that to happen for a number of years as the market, as a whole, is nascent, and Zcash especially won’t reach its potential for at least another few years of incentivized development.

It will be worth watching the transaction levels of Monero and the percentage of shielded transactions on the Zcash network to see which one will be capable of encrypting the majority of transactions whose actors wish to remain anonymous.

2018-06-12T02:21:16+00:00 May 7th, 2018|

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