What is Zcash (ZEC), and how does it work?

Zcash is known as a privacy cryptocurrency. Zcash users can opt for anonymity when executing transactions. It was launched in 2016 as a means of payment and shares similarities with Bitcoin but has been developed with unique and innovative features.

What is Zcash (ZEC)?

Zcash is based on Bitcoin’s codebase but has a different hashing algorithm and security protocols. It started as Zerocoin before becoming Zcash, and it offers users “shielded addresses” via the use of zk-SNARKs, which provide anonymity.

Zcash users can choose shielded transactions or transparent transactions. Zcash is designed to be a means of payment, a decentralized and open-source cryptocurrency with privacy and security available for anyone to use.

Is Zcash a Bitcoin fork? Yes, Zcash is a fork of the Bitcoin codebase. However, it significantly diverges from Bitcoin by incorporating advanced privacy features using zk-SNARKs.

The history of Zcash

The Zerocoin white paper was published in 2013 by Matthew Green and Eli Ben-Sasson, and it received contributions from other cryptographers and academics. The group believed Bitcoin didn’t offer enough privacy for users and proposed solutions.

Zerocoin was initially designed to work with the Bitcoin blockchain, hence using its codebase. Zooko Wilcox began working to advance the project in 2015, and Zcash was released in October 2016.

Wilcox is the CEO of the Electric Coin Company (ECC), whose developers work to forward the Zcash blockchain, supported by the nonprofit Zcash Foundation. The work of the Electric Coin Company and the Zcash Foundation is in part funded by the newly minted ZEC released by the Zcash protocol.

Key features of Zcash

As Zcash uses a modified version of Bitcoin’s code, it shares some features. The total supply of ZEC, like Bitcoin, is capped at 21 million coins. New ZEC are minted via Zcash mining or proof-of-work (PoW) consensus protocol.

Bitcoin was designed to be “pseudonymous” rather than completely anonymous because transaction and wallet address information are recorded on the Bitcoin blockchain and can be viewed by anyone. The solution for greater anonymity with Zcash is its option for users to choose “shielded addresses” that don’t appear on the Zcash blockchain. Alternatively, users can stick with “transparent addresses” that are openly recorded.

A further unique feature of the Zcash blockchain is the “Zcash ceremony” or “Zcash trusted setup,” which occurred when the blockchain was created and required a trusted group to create a master public key for the blockchain.

Once the setup was completed, the group was required to destroy any data relating to the master key to protect Zcash from manipulation at later stages. Criticisms of this design stem from concerns such as there is no proof that the setup process was performed as expected or that sensitive information has been destroyed.

Role of Zero-knowledge proofs and zk-SNARKs in Zcash

Zero-knowledge (ZK) proofs enable a unique transaction mechanism where a user can prove that a transaction is valid and adheres to the network rules without revealing any information about the sender, receiver or the amount transacted. This groundbreaking technology ensures that, while transactions are fully verified on the blockchain, they remain shrouded in anonymity.

Zk-SNARKs stands for Zero-Knowledge Succinct Non-Interactive Argument of Knowledge and is part of the Zcash ZK-proofs, developed by the Electric Coin Company. This innovation allows shielded Zcash transactions to be encrypted on the Zcash blockchain and verified by its consensus mechanism while retaining the anonymity promised to users.

How does Zcash (ZEC) work?

Transactions on Zcash either have anonymous shielded addresses (z-addresses) or transparent addresses (t-addresses). If two Zcash users both use z-addresses to make a transaction, it’s private and anonymous, so anyone tracking blockchain activity cannot see where the transaction originated or where it went. Zk-SNARKs ensure the transaction can still be encrypted and verified on the blockchain.

If a t-address sends funds to a z-address, the origin of the transaction is visible, and vice versa. It’s worth noting that the complete anonymity of cryptocurrencies like Monero and Zcash is often questioned. For example, in 2020, researchers claimed that 99.9% of Zcash transactions are traceable.

Zcash, like Bitcoin, has a PoW consensus mechanism that powers its blockchain and verifies and secures transactions. However, in contrast to Bitcoin, Zcash uses an algorithm called Equihash that checks the amount of computer random access memory (RAM) in Zcash mining that miners use to participate in securing the blockchain.

The Zcash consensus mechanism and network are reputed to be marginally faster than Bitcoin. Zcash transactions per second (TPS) are between six and 20, but the speed depends on the ratio of shielded transactions to transparent transactions. Most Zcash transactions are transparent because the majority of cryptocurrency exchanges do not support shielded transactions.

Zcash upgrades and developments

In 2019, Zcash launched a new zk-SNARK called Halo. This is a “trustless recursive” ZK-proof designed to address scalability and the “trusted setup” issue. The Halo 2 source code was released to the public in September 2020.

Previously, zk-SNARKs required a trusted setup like that which occurred when Zcash was launched. The Halo 2 code allows a Zcash network to be created without the trusted setup process, removing the concerns of manipulation associated with having a trusted group of parties initiate the network and master key.

A sixth major Zcash upgrade in 2022 added components of Halo Arc, further innovating zk-SNARK technology. It moved Zcash to the Halo proving system, removing the need for a trusted setup and improving the protocol’s cryptography.

The network also launched its open-source, shielded Zcash wallet in 2020 and upgraded the blockchain to add Shielded Coinbase and FlyClient support. Shielded Coinbase allows miners to receive mining rewards to a z-address. FlyClient enables light client Zcash use cases and contributes to cross-chain interoperability.

Zcash performed its first halving in 2020, reducing block rewards from 6.25 ZEC to 3.125 ZEC, and implemented the Canopy upgrade, which established a development fund and removed a controversial “Founders Reward.” The next Zcash halving is anticipated to occur around November 2024 (the exact timing depends on block production rates).

How to buy Zcash

ZEC is listed on many major cryptocurrency exchanges, decentralized exchanges (DEXs) and peer-to-peer (P2P) trading platforms. Users will create an account, deposit funds (often via bank transfer), and find the ZEC trading pair to place a buy order.

DEXs require connecting a crypto wallet and swapping another cryptocurrency for ZEC. P2P marketplaces involve finding a seller, agreeing on a price and payment method, and directly facilitating the ZEC transaction.

However, some cryptocurrency exchanges in certain regions may have delisted ZEC because of regulatory scrutiny of the privacy cryptocurrency.

The future of Zcash

Zcash has been criticized for its potential to facilitate illicit transactions in the cryptocurrency space, although this isn’t the goal of the Zcash founders. It faces regulatory scrutiny for offering anonymous transactions and has been delisted from some exchanges along with other privacy coins over concerns privacy and anonymity are abused by criminals.

It’s also a large and energy-intensive blockchain that, like many others, must work on better scalability. Zcash did unveil plans to move to a proof-of-stake (PoS) consensus mechanism in 2021. As of 2024, those plans still appear to be underway with an approach that would see Zcash move to a hybrid consensus model before a final move to pure PoS.

On the positive side, some believe Zcash’s privacy features add to its value and that as the crypto market grows, there will be increasing demand for privacy-focused coins and blockchains. Ethereum developers and institutions, such as JPMorgan, are exploring the benefits of zero-knowledge technology for their own projects. However, it is yet to be seen if Zcash can overcome potential regulatory hurdles and gain widespread acceptance to truly rival traditional forms of cash in everyday use.

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