Zcash Digital Asset Report: Introduction
Zcash’s genesis block was mined in October 2016, since then the cryptocurrency has aimed to provide enhanced privacy and security to its users. Zcash uses advanced cryptography, so-called zk-SNARKS or Zero-knowledge proofs, to shield transactions. It enables one party to prove to another that something is true, without revealing any information, apart from the fact that this specific statement is true.
Zcash was able to capitalize on the privacy issues of Bitcoin and forked its codebase. There are two types of transactions on its blockchain: shielded (using zk-SNARKS) and unshielded (just like on the original Bitcoin blockchain), making privacy an option for its users.
Due to optional privacy, Zcash faces stiff competition from both types of payment coins: private and non-private. In fact, only 12% of the total Zcash transactions are private.
Still, in the privacy coin sector, there are players like Monero which have privacy by default and have greater adoption levels amongst its users.
So while Zcash is considered a privacy coin it needs to find its niche in that sector. Otherwise, with no apparent use cases, it will lose out to either a more advanced and private altcoin rival or to Bitcoin, which has a larger user base.
Part One: The Business Case
Zcash Market Opportunities
As a payment solution Zcash has the opportunity to disrupt several markets. It has the potential to become a form of payment in the retails industry. Only in the U.S., retail sales reached $5.7 trillion in 2017, while global retail sales are expected to grow over $27 trillion by 2020. Increasing adoption in this market represents a substantial opportunity for growth.
Furthermore, while more than half of world adult population has access to banking, 1.7 billion people still remain unbanked (without an account at a financial institution or through a mobile money provider), according to Global Findex Database. Blockchain payment solutions may offer all types of banking services, such as payments, loans, money transfers, etc. These individuals represent a large market outside of the traditional banking system that is ready to adopt blockchain payment solutions.
Also, with its privacy features Zcash can capture the offshore wealth market. The extremely wealthy have accumulated at least $21 trillion in secretive offshore accounts. If even 1% of it will be held in Zcash it will drive the price of the coin up to new heights.
The payments market has been one of the most promising areas for the blockchain industry. Cryptocurrencies have the opportunity to eliminate multiple “middlemen fees” and make transactions cheaper. Therefore there have been multiple coins that have been trying to compete and become a means of payment for the crypto adopters.
Zcash compares itself to different payments solutions, such as credit cards, Bitcoin and cash.
The space is competitive and the company is facing stiff competition across all of the sectors. Below is a table representing some of the key blockchain-based rivals.
Competition in the Blockchain Space
Currently, Zcash is losing to competitors in both private and non-private sectors of the crypto market.
In the private coin sector, its main competitor is Monero. The coin is private by default and is considered to be the first choice for those who want to hide transactions from the general public. If you are using Zcash private transactions your actions may be considered suspect, just for doing that. When someone is using shielded transactions while everyone else is using transparent ones, questions are bound to arise, as only 12% of the transactions are shielded on the Zcash blockchain.
Moreover, when coins move from “unshielded” to “shielded” and back to “unshielded” addresses they may lose some of the anonymity they had. This partially explains why Zcash has a low percentage of private transactions on its blockchain.
The market for privacy coins is competitive, and rivalry can even go beyond “doing a better product.” The Chairman of Zcash Foundation, for example, was working on the research paper that studied linkability of Monero transactions.
The paper was published an hour before the scheduled Monero hardfork and was considered as “paid for hit piece” by the community since the largest vulnerability in the paper was noted over two years before, was mitigated over a year before, and was nearly completely resolved before the first version of the paper was published.
In the non-private sector, companies like Stellar have been able to move much further in terms of technology and ecosystem development, and with 3 to 5 seconds confirmation time are much more suitable for payments.
Dash is another coin that provides privacy as an option. Although there are many questions regarding the level of privacy it provides, Dash is probably the most popular cryptocurrency in Venezuela and it keeps building relationships and infrastructure in different countries which increases adoption and helps gain market share.
NVT comparison reveals a similar story. Zcash transactions are priced much lower comparing to Dash and Stellar. This is reasonable since investors, for the most part, are using Zcash as non-private coin, which makes it identical to bitcoin, but with a much lower network effect.
Zcash NTV Comparison with Bitcoin, Stellar, Monero and Dash
Zcash is also likely to face competition from companies that are not currently building blockchains but are already providing payment services in the traditional markets. These companies have high network effects, and if they enter the blockchain market, they can quickly become dominant players.
If these companies adopt some of the technologies that the current blockchain payment systems have, they could become dominant players in the market.
Competition in the Traditional Space
Furthermore, the competition will increase even further when we see new private Mimblewimble coins enter the market in Q1 2019. They will be much more scalable than current privacy coins and promise to provide complete confidentiality. This might reduce the market share of the current privacy coins even further.
At the same time, Bitcoin is growing the lightning network, which will increase its fungibility. This could one day make Zcash simply unnecessary if similar privacy features are present.
Zcash is trying to find a balance between its novel privacy technology and its non-private side, which is dominating the network at 88%. This strategy is somewhat questionable.
On one side, according to its developers, it will eventually become private-by-default. However, if they do it in a too distant future, they would enter the world of privacy coins that are already private-by-default, and which have benefited from continuous development in that area. It is questionable that the users will migrate from the already established alternatives.
On the other side, if Zcash does not substantially increase the number of privacy transactions on its network, it will remain a non-private payment coin and face stiff competition from the numerous rival options already available in the market.
Zcash utilizes the Equihash proof-of-work algorithm. It was chosen for its efficient verification, which could be important for the future development of light clients. Equihash is a memory-oriented Proof-of-Work algorithm, which means mining is constrained by RAM.
As of May 2018, Zcash Equihash parameters have been implemented in ASICs. The emergence of ASICs has been the source of division in the Zcash community. ASICs centralize mining power in the hands of a few large corporate players because the equipment is expensive and not easily available for retail miners. Such centralization can skew mining competition and increase the risk of an attack on the network.
For Zcash centralization has also led to a drop in the number of active accounts from around ~80,000 to ~20,000. Such a steep drop off in the user base is discouraging, as it negatively affects adoption and hinders future development.
Zcash is still evaluating whether ASICs should be allowed to mine its coin. In fact, there are two separate entities that work on this issue and the overall ecosystem development. One of them is the Zcash Company, which created Zcash and stewarded it since 2016. The other is the Zcash Foundation, which is a public charity wholly independent from the Zcash company. The foundation was launched in March of 2017 to help guide the evolution of Zcash.
In the future, there is a plan to transfer all of the control functions to the non-profit Zcash Foundation. This is a quote from the announcement of Zcash Foundation:
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.
Currently, both entities are funded through the distribution of mining rewards. During the first 4 years, founders and other stakeholders will receive 20% of the mining reward (10% of the total supply).
The Zcash company emphasizes the importance of this funding mechanism for securing the continuous development of the project during the initial stages of its life when there is a need for massive infrastructural investments. However, it may lead to funding problems in the future.
Currently, the Zcash Foundation and the Zcash Company receive about 12,688 ZEC per month (~$722,000) – 29% of the Founders Reward. The rest is distributed between founders, investors, employees, advisors and is equal to about 31,112 ZEC per month (~$1,777,000) – 71% of the Founders Reward.
After 2020 some of the employees, advisors, and founders will not receive direct money inflows from Founders Reward, the same goes for the Zcash Foundation and the Zcash Company, which might start paying employees from savings.
In the absence of a new funding mechanism, the insolvency of such a structure is a matter of time and price of ZEC. If the company is not going to find a sustainable funding solution, it may lead to a budget deficit and development setbacks. It can also cause governance conflicts between the Zcash Company and the Zcash Foundation.
From the conversation with team, it appears that the company is planning to amp up the level of discussion in the community regarding this issue. However, no decision has been made, and the question will be open for debate.
The Company also proposed that, in the long run, it will transfer its stewardship rights to the Foundation. However, the process might not be as smooth, giving the fact that foundation is still young and slow in its development.
This problem was also pointed out by Eric Meltzer, the partner, of the Chinese Blockchain fund, and one of the early investors in Zcash. As a solution, he proposed to form a Zcash Ecosystem Fund, which would be funded from the Founder’s Reward.
In his proposal, he noted: “The foundation is moving too slowly. The risk of deploying money too fast from the foundation is that it runs out of money and can’t fund more promising stuff, and it seems to be this risk that the foundation board is most concerned with.”
Slow moving development creates the risk that Zcash can fall behind, giving the fact that there is increasing competition in the market.
Adoption Incentives and Partnerships
To help with adoption, the Zcash Foundation runs the Grants Program, which supports projects that suppose to benefit the Zcash ecosystem and community. The last Grant distribution happened in Q2 2018 and amounted to $264,100.
In total 13 projects received funding covering a wide range of topics: analysis and improvement of Zcash security, wallet-building, community outreach, proof-of-work algorithms, online services, second-layer technologies, financial integration, additional research and more.
The support for different projects is a positive sign for ecosystem development. Another positive sign is partnerships. There have been a number of technology partnerships.
The Zcash Foundation announced that Parity Technologies will build a consensus-compatible Zcash node. An independent node implementation provides more options for Zcash miners and users and increases decentralization.
Zcash Company has also partnered with JPMorgan. It will help to integrate zero-knowledge security layer technology on Quorum, J.P. Morgan’s private enterprise blockchain, based on the Ethereum platform. However, it is unclear how this would benefit the ZEC token since the Company is simply licensing the technology.
Quality partnerships benefit ecosystem development. However, when the company licenses the technology to others, it may potentially create rivals, that may later take away its market share.
Zcash has been struggling to increase its market presence in the privacy coin sector.
Recently, Zcash was added to Coinbase which is a sign of quality in the crypto world. However, Coinbase will only support withdrawals to transparent addresses, which again, limits the privacy function of the cryptocurrency. The same pertains to Gemini, withdrawals, which are only available to transparent addresses.
Government regulations are likely to remain one of the most crucial factors for private cryptocurrencies, and US exchanges are not willing to take on risk when there is uncertainty about their future. At present time, this devalues privacy features of ZEC, which, at the same time, negatively affects their adoption.
In terms of community involvement, Zcash is losing the competition to its closest competitor, Monero.
During the past month, Zcash had 190 unique nodes. Most nodes are run from Germany (32), United States (28), and France (18). Comparing to its closest competitor – Monero (1600 full nodes), Zcash has a significantly lower number of active nodes.
There is no real benefit to run a node on Zcash other than knowing that you are securing the decentralized trust and helping other users connect and use the network. Rather, this is an additional sign of the community support for the cryptocurrency.
As it was mentioned above, there has also been a steep decline in the number of active addresses since June 2018. There appears to be a negative correlation between Zcash’s network hashrate and the number of active addresses.
In the absence of users, it is getting difficult to see how Zcash will compete with its rivals, and especially with Monero which remains far ahead in terms of the number of on-chain private transactions.
Active Address Comparison
Zcash was able to establish good relationships with some of the cryptocurrency market leaders, which gave it a lot of attention during hyped 2017.
However, going forward, such factors as mining centralization, limited privacy, potential, governance problems could negatively impact ecosystem development.
Zcash Token Economics
ZEC is the native currency of the Zcash blockchain. Its main application within the ecosystem is to serve as a payments instrument.
Fees – current Zcash fees are equal to around $0.000017. Current fees are amongst the lowest in the privacy coin sector.
Transaction Fees Comparison
Speculation – Zcash is traded on many of the popular crypto-exchanges.
Taxes – the Zcash team has implemented a Founders Reward in the mining distribution scheme, to support ongoing development. For the first 4 years, 20% of the Block Rewards will go to Zcash team. After the first 4 years, 100% of the rewards will go to the miners.
This means that 10% of all supply will be distributed to the team. Such concentration of money in hands of few individuals somewhat concerning, given the fact, that the currency aims to become a global payment solution.
Zcash uses a proof-of-work mining algorithm, which means that miners compete against each other using processing power to produce a new block on the chain.
As with most PoW algorithms your reward depends on the hashpower of your equipment, emission schedule, and the total hash rate of all other miners.
Since the release of ASICs for Zcash, in May 2018, the network hash rate has been growing, making it unprofitable to mine ZEC on regular GPU.
Current block reward is equal to 12.5 ZEC with 2.5 min. per block. Similarly to Bitcoin, every 4 years the block reward will be subject to Halving. The first block was mined in late 2016 so the first halving will happen in late 2020, making block reward equal to 6.25 ZEC.
Zcash inflation schedule is identical to that of Bitcoin — a total supply of 21 million with the halving of block reward every 4 years. Zcash has the lowest current supply and highest inflation rate among its competitors. The inflation will remain high and will decrease only after the first Halving in late 2020. This factor increases down pressure on the token price, and can only be mitigated by increased adoption.
Zooko Wilcox – Zooko is the CEO of Zcash Company. He has more than 20 years of experience in secure distributed systems, free and open source software, and startups. He is known for his work on DigiCash, Mojo Nation, ZRTP, “Zooko’s Triangle”, and more.
Andrew Miller – Andrew is the president of Zcash Foundation Board of Directors. He is also Assistant Professor in the Electrical and Computer Engineering department at the University of Illinois at Urbana-Champaign, and an associate director of the Initiative for Cryptocurrencies and Contracts.
Zcash Company has established a well-rounded team with over 30 people from various backgrounds, including web developers, marketing professionals, scientists, legal personnel, business developers, and more.
There are many notable professors that drive advanced research on ZK-snarks. It should be noted that this technology is highly complex for understanding, and there are few people in the world who understand the math behind it. The research team is a valuable asset for the company and it will drive further research on ZK-snarks for the industry.
The company is also supported by well-known advisors, such as Vitalik Buterin (Ethereum Founder), Gavin Andresen (Bitcoin Foundation founder), Arthur Brietman (Tezos Founder), etc. Having such advisors, can open many doors for the Company in terms of different partnerships and business development.
However, the team does not see having a centralized company in charge of a private cryptocurrency as an ideal strategy for long-term development. Therefore, in 2017, the Company decided to establish the Zcash Foundation, which is supposed to be entirely independent of the Zcash Company. A portion of the Founders Reward will be distributed to the Zcash Foundation until November 2021.
Currently, the roadmap progress is still driven by Zcash Company, and this will continue for at least a few years. If Zcash Foundation will ever mature and become truly independent of Zcash Company we may see a migration towards more decentralized decision making. However, these processes are still unclear for the Company and for the community.
Zcash has a strong team behind the project and it will remain so for at least a few years before the company will have to switch to a different funding scheme, and possibly transform its governance.
Part Two: The Technology Case
Zcash Underlying Technology
Zcash is a code fork of the bitcoin protocol and utilizes the Equihash proof-of-work consensus algorithm. Equihash was originally chosen due to its very efficient
verification features, which are necessary for certain functional development such as that of light client’s implementation, Z-cash client on Ethereum, and more.
Zcash also enables privacy preserving transactions using zero-knowledge proofs (zk-SNARKS).
The acronym zk-SNARK stands for “Zero-Knowledge Succinct Non-Interactive Argument of Knowledge,” and refers to a proof construction where one can prove possession of certain information, without revealing that information, and without any interaction between the prover and verifier.
However, due to its cryptographic limitations, these parameters must be generated in a setup phase. The obvious way to construct SNARK public parameters is just to have someone generate a public/private key pair, and then destroy the private key. If the keys are not destroyed, they can be used to issue an unlimited amount of ZEC tokens, and inflate the total supply.
In order to mitigate this risk, the company devised a multiparty computation ceremony in which multiple users each generate a «shard» of the public/private key pair, then destroy their shard of the private key, and then bring together their shards of the public key to form the SNARK public parameters.
To this date, Zcash has been through two multiparty computation ceremonies in October 2016 just before the launch, and in October 2018 in anticipation of the Sapling network upgrade.
The requirement for such a trusted setup is generally considered a weakness for a cryptocurrency since it does not rely on cryptography or math and relies on general trust that founders do not compromise the setup.
Assuming the ceremony was not compromised, there are four basic types of Zcash transactions: private, deshielding, shielding, and public.
There are private Z-addresses and transparent T-addresses.
A Z-to-Z transaction appears on the public blockchain, but the addresses, transaction amount and the memo field are not publicly available.
T-to-T transactions are public like in the original Bitcoin.
Z-to-T and T-to-Z transactions are not entirely private and in some cases can be linked to each other, revealing sensitive information.
Currently, the number of shielded transactions on Zcash blockchain is only about 12%.
If we look even deeper, the number of Z-to-Z transactions is equal to about 0.4% out of all transactions ever made, which is quite low for a coin that is considered to be private.
The problem with low adoption of shielded transactions was supposed to be solved by the Sapling update, which introduced significant efficiency improvements for shielded transactions: a time reduction of 90% for constructing transactions, and a memory reduction of over 97%.
Before Sapling, confidential transactions were relatively heavy and inconvenient to use. They required over 3GB of memory to perform and over 40 seconds to complete. This was reduced to 40 MB of memory and to a few seconds to complete.
Sapling should allow broad mobile, exchange and vendor adoption of shielded transactions, and is a clear breakthrough for the company. Furthermore, from the conversation with the team, it appears that there is a significant interest from wallets and exchanges to implement shielded addresses.
On the other side, updating to Sapling reveals users’ funds. This was done intentionally by the developers, in order to prove that the first multiparty computation ceremony was not compromised. This a big concern, giving the fact that Zcash is a privacy coin. In the future, centralized decisions makers may be influenced by the government, which potentially can repeat the situation. Such precedent can scare away users who seek privacy.
This could partially explain why, since the release in October 2018, there has been no significant increase in shielded transaction activity. The number of shielded transactions stays relatively low, which indicates little interest in privacy among Zcash users.
The GitHub activity has mostly been steady during the spring, summer, and fall periods while the developers worked on Sapling. There has been a decrease in activity after the release, which is reasonable given the winter holiday season.
The network performance of Zcash is similar to Bitcoin. In order to become scalable, in the upcoming year, Zcash is planning to implement BOLT (Blind Off-chain Lightweight Transactions). The BOLT solution was inspired by the Lightning Network.
However, years may pass before the solution will be developed and users will start using it. It is only planned for the next update in October 2019 and giving the fact the overall network effect of the currency is quite low, time may pass before we see a reasonable number of nodes and payment channels implemented on it.
By comparison, the Lightning Network provides some degree of privacy for Bitcoin and makes the currency much more scalable. As a result, Bitcoin may become somewhat private and much more scalable in the near future. Its lightning network is growing fast, which will be a severe threat to Zcash if it is not able to implement and grow its off-chain second layer solution.
*if the block contains only private transactions.
Zcash utilizes complex cutting-edge cryptographic technology in order to allow private transactions for its users. Nevertheless, low adoption of privacy transactions indicates that most users either do not need privacy or do not use Zcash for such means.
Its closest competitor Monero is far ahead, in terms of the number of shielded transactions with a less advanced and scalable solution. If Zcash is going to push for privacy by default the company could potentially reach similar numbers as Monero has, but this can also result in delisting from Coinbase and Gemini since they do not allow withdrawal to shielded addresses.
With that said, Zcash needs to find how to apply its advanced technology to real-life use cases and promote shielded transactions among its users, otherwise, the currency will remain superfluous and lose the competition in the privacy coin space.
Zcash has a publicly available roadmap for 2019, with several key goals including facilitating the adoption of shielded transactions and implementation of the next protocol upgrade.
(Click for larger version)
The protocol upgrade is planned to be activated in October 2019, and should include several important features:
Harmony Mining – dual-proof-of-work scheme, which will be compatible with current mining equipment, and also with GPUs on a temporary time scale.
Split Founders’ Reward – alter the consensus rules so that there are distinct addresses for the Zcash Foundation, Zcash Company Strategic Reserve, and the remainder.
Transaction Confirmation Usability and Security Improvements – improve usability and security of fees and confirmations while accounting for growing transaction volume and demand.
Light Client Protocol Dovetailing – Alter the base consensus protocol to reinforce light client support.
BOLT Support – Base consensus support for the BOLT second-layer protocol.
Custodian Reinforcement – This includes a variety of potential features that can potentially protect typical end-users as well as specialized custodians.
Giving its past performance, Zcash will be able to complete its technological upgrades in the upcoming year. However, one of the most important questions that the company should focus on is increasing adoption. The roadmap is not clear on this side. The complementary effect of improving technology may not be sufficient in order to push for further adoption of the cryptocurrency.
Part Three: The Investment Case
ZEC Token Performance
Zcash (ZEC) is a top-20 blockchain project based on market cap, and a top-15 based on 24-hour volume rankings. The price of the token is correlated with the overall market and has fallen over 93% since January 2018.
Zcash and its rivals have very similar price charts. All of the coins have experienced a steep drop in price since November 2018.
ZEC trading is dominated by ZEC/ETH, ZEC/BTC, and ZEC/USDT markets. The fact that ETH and BTC are taking up over 80% of the volume is discouraging given the fact that the company is trying to become a global payment solution. Increasing adoption should amplify fiat volumes and move the coin away from pure speculation.
Exchange volume for ZEC is quite stable. However, it is dominated by the exchanges that are not well known to the industry which is a concern, because some of that volume may not be real.
30-Day Volatility Comparison
ZEC token is highly correlated with the market which still has a long road to the overall adoption phase. The token is mostly used for the speculation purposes and by the miners. Both of these groups, in general, do not care about privacy and security, they care about profits that the token can bring.