The privacy coin Zcash is expected to be halved on the 17th of this month. Learn about its development status and privacy mechanisms.
Written by: Paul Veradittakit, Partner of Pantera Capital Translator: Lu Jiangfei
Pantera Capital is an early investor in Zcash. As a partner of Pantera Capital, I believe they have made significant progress in business development, community and governance.
In terms of cryptocurrency financial transactions, Bitcoin does provide a powerful model in terms of security, privacy, and decentralization. However, the privacy and anonymity protection provided by Bitcoin to users still has major limitations, which means that Bitcoin is currently unable to realize the vision of a financial system that is fully controlled by users.
Zcash is a fork of Bitcoin, which provides a stronger guarantee for user privacy by allowing private transactions between parties. Zcash has two types of addresses: hidden addresses (addresses starting with z, used to mask transaction balances) and transparent addresses (addresses starting with t, used to disclose transaction balances). Users can use hidden addresses to support private transactions. Such transactions will not disclose transaction metadata (including information such as sender, recipient, and balance). To achieve these guarantees, Zcash uses cryptographic tools called “zk-SNARKs.
Given that Zcash provides users with strong privacy guarantees, people’s interest in this currency is also growing. Everyone wants to know how Zcash can be used in various use cases that better support the entire crypto community. E.g:
- In the past year, the total amount of ZEC tokens deposited in hidden (private) addresses has almost doubled, indicating that more and more users are choosing private asset management.
- The exchange Gemini introduced a feature that allows users to withdraw funds from hidden addresses and deposit them into their Gemini exchange accounts, which means that this company is owned by Cameron Winklevoss and Taylor The exchange founded by the two brothers Tyler Winklevoss is using Zcash features to enhance user privacy.
- Many interoperable projects (such as the Ren Protocol protocol) are also studying ZEC’s encapsulated token model to help users support Zcash to trade with Bitcoin, Bitcoin Cash, Ethereum and more cryptocurrencies.
Like Bitcoin, the supply of ZEC tokens is also limited to 21 million units. ZEC tokens are rewards paid to miners in the Zcash proof-of-work protocol; these miner rewards are halved approximately every four years. Zcash is expected to conduct its first halving (from 6.25 ZEC to 3.125 ZEC) in November 2020, which may increase the value of Zcash’s assets and ease market concerns about its inflation rate. Most importantly, Zcash provides many of the same currency function guarantees as Bitcoin, so it is a very powerful multifunctional financial asset.
The Zcash community has always been committed to reducing centralized governance and providing better community-driven support. Recently, the Zcash development company Electric Coin Company (ECC) is transitioning to the non-profit project Bootstrap. The Zcash network will be composed of ECC, independent developers and the Zcash Foundation. Responsible for follow-up development and maintenance work, but incentives will be more closely integrated with the broader Zcash community.
Ultimately, Zcash will build a multifunctional financial asset model that can provide strong security, privacy and anonymity guarantees. In the past year, Zcash’s functions and storage, as well as the scale of assets in hidden addresses, have achieved tremendous growth. The upcoming blockchain reward halving event will also promote Zcash to become a more practical financial asset. In the cryptocurrency industry, more and more projects are beginning to explore the economic and privacy guarantees provided by Zcash, and there are more and more related use cases. §There is no doubt that Zcash is accelerating.
Take privacy further
The birth of Bitcoin is an important first step in introducing privacy, anonymity, and decentralized security into financial transactions. For the first time, users can send and receive funds without recording transaction history on a centralized public ledger. By “aliasing” transactions and decentralizing the financial system, Bitcoin has built a powerful privacy protection model in the financial ledger based on community governance.
However, the Bitcoin model still has some encryption and technical restrictions, which may prevent users from obtaining complete privacy services. For example, the Bitcoin blockchain needs to store the address of the payer and the recipient of each transaction. If someone maps the address to a certain person, they can theoretically identify all that the person has done by mining the blockchain information. transaction.
In addition, the transaction amount on Bitcoin is also public (in the form of UTXO), so these amounts can usually help observers infer where the funds are sent or how the funds are processed, thus compromising certain privacy rights of users. In addition, Bitcoin’s consensus algorithm and storage model are also very slow, which also limits the transaction speed and transaction capacity that the network can support.
With more and more practical use cases of cryptocurrency in the privacy-first financial system, the community must design a new model to solve the “pseudonym” problem, while also using new research and encryption technology to maintain a publicly verifiable state It is important to further “mask” transaction metadata.
What is Zcash?
Zcash is a cryptocurrency specially designed to protect user privacy. It is a fork of Bitcoin, but unlike Bitcoin, Zcash allows private transactions between parties.
Specifically, Zcash supports cryptocurrency transactions with two types of addresses: hidden addresses (addresses starting with z, used to hide transaction balances) and transparent addresses (addresses starting with t, used to disclose transaction balances). A transparent address can display the transaction balance, but a hidden address will encrypt the transaction balance, thereby increasing security. If users want to verify the details of the hidden address, they must share a special access key with the relevant parties to explicitly grant them access to the information, but this information will not be publicly listed in the ledger.
Figure 1: Zcash transaction. In the above figure, the “shield” represents the hidden address, and the “circle” represents the public transparent address. (Source: Grayscale)
In fact, Zcash meets the three core requirements of Bitcoin:
- No double spending;
- Have explicit authorization from the payer;
- The transaction input must be equal to the transaction output.
At the same time, Zcash also brings stronger privacy protection to users because they use the “Zk-SNARK” encryption technology, which is a well-known non-interactive zero-knowledge proof in the industry, which can effectively and concisely prove certain information knowledge At the same time, no relevant information will be exposed during the certification process, which means that zk-SNARK can not only verify the validity of private transactions, but also does not need to explicitly expose the data on the blockchain.
Not only that, because Zcash can cover up transaction history, all tokens are fungible (fungible)-that is, all parties involved in a transaction treat Zcash equally, no matter what transactions these tokens have history. This feature of Zcash is very different from Bitcoin. This is because ZEC token transactions do not essentially rely on the “unspent transaction output” (UTXO) related to transaction history. Each ZEC token is considered Independent and universal, similar to the current way of using legal cash.
The development of Zcash
With the support of privacy protection, Zcash has developed rapidly. At present, it has supported dozens of new financial applications that can protect consumer data. The use cases cover many expense payment scenarios that contain sensitive data, such as medical expense payment, supply chain Payment etc. As a result, more and more applications have begun to explore the acquisition and use of Zcash, and market interest has surged.
In the past year, the number of ZEC token transactions stored in hidden addresses has almost doubled, indicating that more and more users are choosing to use private transactions and want to check transaction metadata (such as account balance, sender) And recipient identity information, etc.) to retain more anonymity and security.
Today, there are not many cryptocurrencies that support such security guarantees in the market, and Zcash is one of them. As users begin to explore more private transaction use cases, we expect to see the number of ZEC tokens in hidden addresses soon There will be further growth. In a broad sense, it also means that the encryption market has an increasingly urgent need for decentralized verification of blockchain private transactions/computing. Computing technologies such as zk-SNARKs can provide support for many Zcash-based applications. The scope of use cases It will no longer be limited to the financial system.
Figure 2: Time-based Zcash transaction history. It can be seen that the number of ZEC token transactions in hidden addresses has almost doubled in the past year. (Source: zcashcommunity)
Figure 3: The growth trend of ZEC tokens over time. It can be seen that the size of the ZEC token pool in hidden addresses has been increasing
In view of the increasing user interest in Zcash, cryptocurrency exchanges are also stepping up their work to support the provision of a better Zcash trading experience.
The Gemini Exchange, founded by brothers Cameron Winklevos and Taylor Winklevos, launched a feature for users to support withdrawals from hidden addresses, and was the first cryptocurrency exchange to launch this feature. So. In Gemini exchange accounts, ZEC tokens will be stored in a transparent address starting with t, but Gemini Exchange allows users to withdraw ZEC tokens from a transparent address starting with t to a hidden address starting with z, or ZEC Tokens are deposited from the hidden address starting with z to the transparent address starting with t, which provides them with greater flexibility in fund management.
This feature is particularly interesting because exchanges are generally considered to be the most “centralized” entity in the cryptocurrency industry-but now, by building this feature to provide more private money management services, Gemini Exchange actually gives Users are given more privacy control, which in turn better supports the widespread trend of decentralization.
In order to support blockchain interoperability, as well as cross-protocol and cross-token transactions, the crypto community has begun to invest extensively in infrastructure. As there are more and more cryptocurrencies on the market, we must develop a “clean” method of trading BTC, ETH, USDC and other tokens. Many protocols use “wrapped tokens” to achieve this goal. “Wrapped tokens” essentially represent another type of asset’s ERC-20 representative (for example, wBTC stands for BTC), in which wrapped tokens The value of the asset it represents is the same, and it can be anchored 1:1 with the underlying asset through smart contracts. Many protocols are investing a lot of effort in building “encapsulated tokens” for Zcash so that they can be used on Ethereum and other blockchains. Ren Protocol is a currently popular interoperability solution that helps users to better use Bitcoin (BTC), Bitcoin Cash and Zcash on Ethereum. Wrapped Zcash (WZEC) is another package token representing Zcash, initiated by Wrapped, a partner of Tokensoft and Anchorage.
In terms of interoperability, Zcash actually has many other additional considerations, which also show that Zcash solves the privacy transaction requirements in many financial use cases that have not been met in the cryptocurrency market in the past. Not only that, as these “encapsulated tokens” and interoperability protocols become more powerful, users will be able to use Zcash more easily in the DApps they build, which means that more and more people will be able to easily use Zcash. Applying hidden addresses to various use cases has even inspired Zcash to grow further.
With the further improvement of interoperability and the joint efforts of the community, scalability will gradually be integrated into the blockchain. For example, Halo 2 is a Zcash project that uses zk-SNARKS. The project provides users with efficient and compact computing services through recursive proof combination, thereby making transactions easier, faster, and trustless.
To make a long story short, the current crypto community has begun to invest more in the experience and abstraction that Zcash requires in order to promote its acceptance by the mainstream. When users find that more and more applications start to use Zcash to protect their privacy, and build a more privacy-protected financial paradigm in the cryptocurrency industry, the use of Zcash is bound to grow exponentially in the future.
Halved
Since Zcash is considered a fork of Bitcoin, it also uses a “halving model” similar to Bitcoin to limit the supply of ZEC tokens. The ZEC token is a reward for miners who use the proof-of-work algorithm to mine Zcash. The total supply limit is 21 million like Bitcoin.
Zcash’s rewards to miners are halved approximately every four years to make ZEC tokens a deflationary asset and limit the number of ZEC tokens mined in the future. The first blockchain reward halving of ZEC tokens will be carried out in November 2020, when the reward per block will be reduced from 6.25 ZEC to 3.125 ZEC.
The upcoming halving event shows that Zcash is a limited currency asset like Bitcoin, which can provide the same currency and economic guarantees as Bitcoin, but the only difference is that Bitcoin is already a mainstream encrypted asset.
In addition, one of the issues that Zcash community users are most concerned about for a long time is its high inflation rate, and the upcoming halving event will alleviate the community’s long-term concern about Zcash inflation by reducing the block reward by half. On the other hand, for Zcash traders, they may see some market fluctuations and/or price increases during the period of the halving event, but they should stabilize within a few weeks, just like the Bitcoin zone Like when the block reward is halved.
Decentralized governance
Since Zcash can provide a strong guarantee for user privacy, in terms of decentralization and anonymity, Zcash is generally regarded as one of the best-performing privacy cryptocurrencies on the market. To further achieve this goal, the stakeholders who manage Zcash are working together to achieve decentralized governance.
In October this year, the Electric Coin Company (ECC) responsible for the development of Zcash announced that it had voted unanimously to donate ECC to Bootstrap, a 501c3 non-profit organization that uses technology to improve human well-being. (Chain note: 501c3 is a clause of the U.S. tax law that grants tax-exempt treatment to religious, charitable, educational and other organizations. For example, the Bill Gates Foundation is also a 501c3 non-profit organization.)
As for the idea behind the ECC donation, it is actually to ensure that Zcash development incentives are consistent with effective methods that support more financial freedom and access to opportunities. This structure enables ECC to maintain its “founding” team structure while retaining the ability to further improve Zcash. It not only provides decentralized governance, but also allows incentives to review the goals of the broader Zcash community. It is reported that ECC has donated the Zcash trademark to the Zcash Foundation, which is another independent non-profit organization dedicated to building better financial privacy features on Zcash. The Zcash Foundation will receive a 5% overall reward to provide further help and support for more projects.
The Zcash community also elected a Major Grants Review Committee (Major Grants Review Committee), the committee consists of 5 members, these members have the Ethereum Foundation, the Open Privacy Research Society (Open Privacy Research Society), other Zcash agreements, etc. background. The main tasks of the Core Appropriation Review Committee include:
- Manage important grant funds;
- Review and support various projects that use Zcash features.
After the block reward halving event is completed in November, Major Grants Fund will receive 8% of all mining rewards in the next 4 years to accumulate funds to provide support for dozens of projects in the Zcash field.
Final thoughts
For the broader blockchain and encryption community, privacy and anonymity are still the most important value propositions that deserve attention. Zcash has proposed a very promising model to let users understand how to use cryptocurrency to conduct truly private and anonymous transactions, while at the same time obtaining the same economic and security guarantees as Bitcoin. There has been a surge of interest in Zcash in the crypto market recently, such as:
- The number of ZEC tokens stored in the hidden address doubled;
- Some mainstream cryptocurrency exchanges have introduced specific functions to support Zcash transactions;
- Release of Wrapped Zcash (WZEC) proposal supporting cross-chain transactions.
All this shows that Zcash is building an important niche market around user privacy.
In November, we will usher in the Zcash block reward halving event, which can increase the value of ZEC tokens while controlling the inflation rate, so that Zcash will have a better development in the next few years. The Zcash community has also carried out a lot of support work, such as:
- ECC, responsible for the development of Zcash, announced its donation to Bootstrap;
- Appoint a core appropriation review committee to be responsible for allocating project grants.
These measures will also stimulate Zcash to achieve greater growth in the form of legal financial assets.
Ultimately, Zcash will lay the foundation for a privacy-oriented encryption paradigm and provide help and support for more use cases.
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