Zcash Network Update: Halving and Beyond
Zcash is a privacy-preserving digital currency launched in October 2016. Originally a fork of the Bitcoin codebase, Zcash was designed to act as both a medium of exchange and a store of value. The protocol is known for its novel privacy features, funding mechanism, and well-recognized research team. The project has ambitious goals with an aim to reach 10 billion people by 2050.
Background
Zcash uses cutting-edge cryptography known as zero-knowledge proofs (zk-SNARKS) to enhance the privacy and security of its users. Zk-Snarks are used to validate transactions on the Zcash network without revealing information related to the transaction amount or parties involved. Participants are able to send two types of transactions on the network: shielded (private) and unshielded (public).
Furthermore, users have the ability to make selective transparency disclosures so that transaction data may be shared for audit and compliance purposes. In that sense, privacy is currently an optional feature, where unshielded transactions function the same as the Bitcoin blockchain. This has helped differentiate the project from other private digital currencies, improve its standing with regulators and drive institutional adoption.
Zcash is the most recent iteration of the Zerocoin protocol, developed by a group of researchers at John Hopkins University. Currently, two separate entities exist for the development of the ecosystem: Electric Coin Company led by Zooko Wilcox, and the non-profit Zcash foundation, which provides support by hosting events, distributing research grants, and participating in governance. Both entities receive funding through the distribution of mining rewards, and whether or not this will continue is currently up for debate.
Token-economics & Ecosystem Development
Zcash uses a proof-of-work consensus mechanism to produce new blocks. The current block reward is 12.5 new Zcash (ZEC) per 2.5 minutes. It was designed to follow the same issuance schedule as Bitcoin, which is subject to a block reward halving every four years. In October 2020, it is scheduled to have its first halving event, which will cut the issuance rate of new Zcash tokens to 6.25 ZEC per coinbase reward.
The halving event is scheduled to coincide with the fourth Zcash network upgrade (NU4), which will determine key aspects of the project’s future. Notably, the community is considering proposals to extend the founder’s reward, which currently allocates 20% of tokens mined during the first four years to founders, initial investors, and product development (10% of total supply). The other 80% is distributed to miners.
The founders reward has enabled the project to dedicate more resources toward development, with ECC and Zcash Foundation receiving 4.2% and 3% respectively (note: due to a budget deficit in the 2018 bear market, ECC effectively negotiated with early founders and investors to award ~8% of the coinbase reward to the company starting in June 2019). This has proven to be a competitive advantage for the digital currency. The team at ECC has produced excellent research, worked with regulators, and made technology breakthroughs, such as the Sapling upgrade, that have significantly improved the performance of the Zcash protocol. Comparably, competing digital currencies with no pre-mine or founder’s reward have shown it is difficult to sustain long-term development without reliable sources of funding.
The community generally seems to be in agreement on the following:
- The developer’s fund should continue, albeit with additional transparency and accountability requirements.
- Early investors have been sufficiently compensated and should no longer receive a coinbase reward.
- There shall be no change to the upper bound of ZEC supply.
Additional proposals have been considered including protocol level opt-in functionality from miners and/or users; however, both ECC and Zcash Foundation have identified challenges with this approach. In Zooko’s initial assessment of proposals, he notes this would “give special interests — such as miners in this case — control over ECC’s direction… For example: what if Zcash users want to evolve the consensus algorithm to include Proof-of-Stake, but the Proof-of-Work miners refused to allow that?” Thus, miner opt-in proposals run the risk of misaligning incentives between price appreciation and long-term protocol development.
Users that disagree with the idea of more than 10% fully diluted supply — or 21 million tokens — being allocated to the founder’s reward could also exchange their Zcash for Ycash, through a friendly fork that occurred on block 570,000.
The deadline to submit a Zcash Improvement Proposal for NU4 is August 31st with final selection scheduled for October 31st.
Adoption Outlook & Partnerships
Privacy and scalability are fundamental drivers of blockchain adoption — among both retail users and institutions. Privacy is, perhaps, one of the largest misconceptions about the Bitcoin blockchain. While transactions are pseudonymous, it is fairly easy for data analysis firms to construct personal identifying information of certain wallets with a high degree of certainty. Zero-knowledge proofs enable Zcash to ensure privacy without sacrificing compliance. They may also be used to facilitate new scaling methods by reducing the amount of computational resources it takes to process on-chain transactions. For example, on the Bitcoin blockchain, every node is required to verify the correctness of all previous work done on the network. This makes it really difficult to scale on layer 1; however, zero knowledge proofs can enable a succinct and efficient way to verify that these operations were done correctly.
Zcash and Electric Coin Company have made substantial progress increasing adoption and awareness among institutions, merchants, and regulators.
- Institutions: Custodians (Anchorage, Bakkt, Bitgo, Coinbase); investment vehicles (Grayscale Zcash Investment Trust), and OTC desks (Cumberland, Circle, Genesis Trading).
- Merchants: Flexa recently announced Zcash integration for its Spedn wallet to enable users to spend digital currencies with thousands of retailers, increasing utility for Zcash and furthering its mission to be used as a medium of exchange.
- Regulators: Engages with regulators and policymakers through support of organizations such as Coin Center. Worked with New York State Department of Financial Services (NYSDFS) to get listed on Gemini exchange.
Furthermore, a technology partnership between the Zcash Foundation and Parity Technologies to build a consensus-compatible node is expected to provide additional utility for Zcash miners and users, and further enhance the decentralization of the protocol.
Conclusion
As society transitions to digital, the need for privacy-preserving technologies increases. Zcash is an innovative digital currency that offers private peer-to-peer transactions. The team has taken a unique approach to protocol development, which has been positive for the digital currency. In contrast to many ICOs, Zcash receives a steady and reliable stream of income from the founder’s reward, which is used for development of the Zcash protocol and ecosystem. By resolving uncertainty around the developer fund, the Zcash community can ensure that the Zcash Foundation and Electric Coin Company can continue to operate in pursuit of its key objectives for years to come.
References
· A Personal Letter About The Possibility of a New Zcash Dev Fund
· Envisioning Zcash at Global Scale — Nathan Wilcox (Video)
· Placeholder Considerations: Resources, Governance, and Legitimacy in NU4
