Zcash: A DeFi Alternative

Cameron Tuths

On October 28, 2016, a group of world-class cryptographers, engineers, and computer scientists from the Zerocoin Electric Coin Company, or the Zcash Company, unveiled Zcash as one of many new digital currency projects aimed at expanding upon the capabilities of Bitcoin. The project’s purpose was to create a permissionless financial network that would give users more freedom and security by utilizing advanced cryptographic technologies that protect financial privacy. The Zcash development team, born out of the Zerocoin project and managed by Zooko Wilcox, the Zcash Company’s Founder and CEO, has decades of experience in distributed systems, cryptographic security, and multistage entrepreneurial initiatives.

Preserving what Bitcoin got right was fundamental in designing Zcash. The platform shares many of Bitcoin’s characteristics, such as decentralization and immutability in governance, a disinflationary economic model with a finite supply, and a tried-and-true Proof-of-Work (“PoW”) consensus method for trustless transaction verification. 

Zcash employs a novel zero-knowledge cryptographic technique known as zk-SNARKs (“Zero-Knowledge Succinct Non-Interactive Argument of Knowledge”), which allows miners to verify transactions and balances on the Zcash Network without requiring users to reveal any information about their identities, transaction value, or other metadata. It is based on a proof structure that allows one to show ownership of particular data (for example, a secret key) without revealing that information or requiring interaction between the prover and the verifier. Zcash provides its users with the highest level of secrecy and fungibility of any existing digital currency network, thanks to zk-SNARKs. There are four types of transactions that can occur on the Zcash Network:

Public Transactions: All balances and transaction amounts are displayed at the public address. The letter “t” is always used to start a public or transparent address. 

Shielding Transactions: When a transaction is sent from a public address to a private address, the balance transmitted from the public address and the transaction amount are revealed at the start of the transaction but are shielded upon receipt. Private addresses, also known as shielded addresses, always begin with the letter “z.”

Deshielding Transactions: Transactions between a private address and a public address in which the transaction amount is published, but the overall balance in the private address stays hidden. 

Private Transactions: A private address is one in which the balance in each address and the value of each transaction are totally hidden, ensuring complete financial privacy. These are the transactions that demonstrate the Zcash Network’s entire privacy capabilities.

Zcash’s design is antifragile, inheriting the decentralization and immutability concepts that have contributed to Bitcoin’s organic development as an open and permissionless financial network free of fraud, censorship, and unjust interference by a central actor. Zcash uses a stress-tested PoW consensus process for transaction verification, but the development team also introduced Equihash, a memory-hard algorithm that differs from Bitcoin’s SHA-256 hash function. Equihash aims to reduce the advantage that specialized hardware miners (such as ASICs) have over commodity hardware (such as desktop computers and smartphones), while also improving lightweight privacy operation verification, which is critical for making applications like zk-SNARKs on Ethereum affordable. 4 Equihash is, in general, considered by the Zcash community to be the greatest consensus solution for achieving the network’s goals.

The Zcash monetary model is quite similar to Bitcoin, and it maintains a game-theoretic incentive structure that balances the economic interests of investors, developers, network users, and miners. The ZEC supply schedule is disinflationary, and every four years, the number of ZEC tokens issued to block miners is “halved.” There were roughly 3.13 million ZEC in circulation on January 24, 2018. By 2032, it is expected that more than 90% of the whole ZEC supply will be online.

Zcash aims to prove valuable to users by possessing the following characteristics in particular: 

Divisibility: Digital currencies are among the most divisible types of payment currently available. A “zatoshi,” the smallest unit of ZEC, represents 0.00000001 of a single token. ZEC can be shown to eight decimal places, giving each token a total of one hundred million units. 

Portability: ZEC can be moved electronically across borders and cleared almost instantaneously, making it a viable alternative to Bitcoin and far more portable than precious metals or fiat money. 

Fungibility: One unit of ZEC has the exact same value as another unit of the same size. Fungibility is also improved by the addition of private addresses and transactions. 

Verifiability: ZEC is one-of-a-kind cryptographic tokens that can be confirmed in real-time on the blockchain with selective disclosure from anywhere in the globe.

ZEC is becoming more widely recognized as a transactional token with perceived utility, with thousands of transactions taking place every day and rising. To qualify a digital currency’s token as a store of value, the protocol behind it must also have the following properties:

Decentralization: Zcash is a decentralized, open-source network. Because there is no single point of failure, decentralized networks are more secure and stable than centralized networks. Decentralized networks include commonly used Internet protocols such as SMTP for email and HTTP for the web. 

Immutability: Zcash uses an immutable global ledger to avoid other parties’ fraud, censorship, or unlawful interference. 

Adaptability: The Zcash protocol’s open-source nature enables continual adaptation and enhancement. Any technology’s future viability depends on its ability to adapt.

Due to the value that Zcash brings to users, along with the increase in funds moving into the crypto space, Zcash could be primed for a large bull run in the following months. The fear over a global financial incident in regards to the ongoing situation in Ukraine could also push people away from currencies such as the Ruble and possibly to the crypto space. This has already been seen in the fact that Zcash is up over 80% this month. As we move into the world of DeFi in the coming months, this should only continue. 

Disclaimer: Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. Please conduct your own due diligence before making any investment decisions.