Top Cryptocurrency Stories of 2016: Part 1 Launch of Zcash

Unfortunately, 2016 wasn’t a year that can be summarized by saying “this is the year that cryptocurrencies really took off and hit the mainstream.” However, it feels like we are getting close to being able to say that. Looking over what has occurred over the past twelve months it is clear that there were some really exciting developments in the cryptocurrency space.

This series of posts represents my attempt at understanding the developments in cryptocurrencies by highlighting some of the most important cryptocurrency news stories of 2016. I will also provide some analysis and speculate on how these events might affect the cryptocurrency ecosystem in 2017.

The cryptocurrency scene is difficult to cover and understand. Because of the anonymity involved, news posted on non-mainstream sources tends to be rife with hidden conflicts of interest. News posted on mainstream sources tends to be poorly written and full of inaccuracies. This leaves people like me, who are not cryptographic or security experts having to constantly question the validity of any information posted. In writing this post I tried to cover the key events relating to Zcash using sources that are primary sources or otherwise validated and credible.

Zcash blockchain went live

After a year or two of development, a new fully-anonymous blockchain based cryptocurrency called Zcash went live with mining beginning in November.

Zcash is a decentralized and open-source cryptocurrency that offers privacy and selective transparency of transactions. Zcash payments are published on a public blockchain, but the sender, recipient, and amount of a transaction remain private.

Zcash is interesting because of the improved privacy and anonymity properties vs other cryptocurrencies. It is also Bitcoin-core-based so it starts off with a proven code-base and credibility.

Finally, Zcash is worthy of attention because of an interesting governance model. Developing and launching a cryptocurrency requires software development, security, and cryptographic expertise. In the case of Zcash the primary incentive for contributors is the founders reward. The founders reward is a 10% reservation of the (eventual) 21 million ZEC (the name for Zcash currency units) saved for the founders, investors, employees and advisors. The founders reward is distributed out gradually via the regular mining process over the course of the first four years of mining. This aligns the incentives of the founders with ensuring a long-term successful cryptocurrency.

The founders reward proved to be controversial with some people arguing that it was too much and others arguing that it is not much difference than a pre-mine.

These incentive schemes are considered controversial because they have resulted in pump and dump schemes where a new cryptocurrency (generically called an altcoin) is released, with pre-mined coins going to the people involved with the scheme. Those pre-mined coins are dumped on the market after the price is driven up from the initial enthusiasm of a new cyrptocurrency being released. Eventually the price collapses. The founders run off having sold their altcoin for a profit while the buyers see their altcoin value collapse. The alt-coin may even die out making it worthless.

The birth of Zcash is itself interesting with a top-secret crytpographic signing “ceremony” taking place as a requirement of creating a secure protocol. An article at IEEE’s Spectrum blog covers it pretty well:

A secret ceremony was underway. Before the company could release the source code of its digital currency and turn the crank on the engine, a series of cryptographic computations needed to be completed and added to the protocol. But for complex reasons, Wilcox had to prevent the calculations from ever being seen. If they were, it could completely compromise the security of the currency he had built.

Peter Todd, a participant in the ceremony wrote extensively about it on his website. The details of the cryptographic reasons behind the ceremony go way over my head but you can’t tell me that reading his introduction doesn’t make you want to dig deeper, learn more, and better understand what all is going on at one of these ceremonies.

Nothing you will read below changes the fact that you’re trusting me and five other participants not to collude. Full stop. End of story. It is IMPOSSIBLE for myself and the other participants to prove to a third party that we did not collude to keep the secret key. If you do not believe you can trust me, you should stop reading now.
The purpose of this writeup is for education, entertainment, and peer review. If you are not reading this writeup for one of those reasons, STOP NOW.

The signing ceremony had its share of skeptics who believe that it was compromised and should not be trusted. It’s hard to know who to believe here so I’m avoiding linking to anything but you can use your google fu to find people who are not happy about how it went down.

Zcash got off to a rocky start with a bug present in early versions preventing private transactions from being mined. As privacy was key selling point, this raised some eyebrows in the community. This issue was addressed in a patch release.

ZCash ended 2016 fairly strong. As of 1/11/2017, one ZEC is worth ~$45. It has a market cap of about $19M USD giving it the 13th largest altcoin market cap. ZEC price has trended flat to slightly up over the course of the three months it has been in existence.

Zcash in 2017

I predict the increased privacy provided by Zcash will result in it being accepted by one or more darknet markets which will drive up the price. Other than that, there will probably be competition between Zcash and Monero proponents to gain mindshare for their cryptocurrency of choice.

It will be interesting to see if the Chinese government gets involved somehow in an attempt to control the currency and prevent untraceable capital flight from the Chinese economy.

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