What is Zcash?
Zcash is a cryptocurrency built on a decentralized blockchain that uses advanced applied cryptography to provide enhanced security and privacy through shielded addresses. It was originally built on an open-source code similar to Bitcoin.
Zcash is mainly focused on anonymity, which is realized through the use of the zk-SNARKs, a specific type of zero-knowledge proof technology that allows nodes on a blockchain network to validate transactions without disclosure of users’ transaction metadata. The built-in function, zk-SNARKs, needs a set of public parameters to allow users to construct and verify private transactions.
The public parameters are contained in an intricate secure multi-party computation known as a “Trusted Setup” on Zcash. Zcash’s popularity stems from the internet users’ demand for a cryptocurrency with enhanced privacy features.
Zcash also allows users to share transaction information, including addresses, to comply with audits and tax regulations. Zcash digital asset token or ticker symbol used for its representation on trading exchanges is “ZEC.”
The Zcash network is secured through the “proof-of-work” SHA-256 hash function. The function belongs to the SHA-2 set of algorithms also used by Bitcoin. Top crypto exchanges where Zcash is traded include HitBTC, Binance, BKEX, CoinTiger, OKEx, Huobi Global, and FTX.
Zcash (ZEC-USD) Price Chart Since Inception
As of August 31, 2021, Zcash (ZEC) was priced at $143.72, with a market capitalization of $1.8 billion.
Zcash Origins and History
Zcash was launched on October 28, 2016 by the Electronic Coin Company (ECC). The ECC was formerly known as Zerocoin Electric Coin Company, LLC before rebranding. The company was founded by an information security and cryptography expert, Zooko Wilcox-O’Hearn. He developed the Zcash protocol together with professors and academic researchers from John Hopkins University, MIT, Tel Aviv University, and Technion.
The ECC raised $3 million in funding to develop the initial Zcash protocol. Zcash was initially based on Bitcoin codebase. Zooko Wilcox-O’Hearn was also previously involved with Digicash, Mojo Nation, and the Tahoe Least-Authority File Store filesystem. He also co-invented the BLAKE3 cryptographic hash function.
Between 2016 and 2018, Zcash released a series of upgrades called the “Sprout Series” with two core protocol upgrades, i.e., Overwinter and Sapling. The Zcash Foundation was launched in March 2017 with an initial endowment of 273,000 ZEC, released from the “Founders Reward.” The foundation organized the largest multi-party computation ceremony called the Powers of Tau Ceremony.
Blossom, the third network upgrade for Zcash, was carried out in December 2019 and halved the target block interval to 75 seconds. The fourth and fifth network upgrades, Heartwood and Canopy, occurred in July 2020 and November 2020, respectively. After the first halving in November 2020, Zcash did away with the “Founders Reward” and cut miners’ rewards from 6.25 ZEC to 3.125 ZEC.
The smallest ZEC unit is called the “zatoshi,” which equates to 0.00000001 ZEC or one hundred millionth of a ZEC. All transactions of Zcash are recorded on the Zcash blockchain. Zcash can be purchased on cryptocurrency exchanges and stored in a Zcash wallet or any other regulated exchange crypto wallet.
The amount of Zcash coins that can be mined is limited to 21 million, the same as for Bitcoin. The price of Zcash or ZEC is purely determined by various macroeconomic factors and crypto-market dynamics. There is approximately 12.5 million Zcash in circulation as of August 2021.
Zcash vs Bitcoin
The main differences between the two cryptocurrencies are:
- Zcash uses a built-in zk-SNARKs privacy protocol, not on Bitcoin. Other privacy-based cryptocurrencies include Monero, DASH, Horizen, and Verge, among others.
- Most cryptocurrencies like Bitcoin are not anonymous but rather pseudonymous and come with addresses that can be traced back to the identity of the user. However, Zcash transactions through zk-SNARKs do not disclose the addresses of sender and receiver as well as the transaction amounts involved since they are relayed through a private blockchain.
- Zcash comes with a 75-second block time compared to a 10-minute block time for Bitcoin.
The two types of Zcash addresses are:
The two address types are interoperable, which means funds can be transferred between them in either direction. However, users must be aware of the privacy implications of each address. Most wallets and exchanges can support t-addresses, and others are in the progress of upgrading to support z-addresses.
2. Transaction types
There are four main Zcash transaction types, as illustrated in the table below:
3. Funding structure
The creation of new ZECs is done in the form of “block rewards,” which means as a new block is mined and added to the end of the blockchain, coins are minted and split in the ratio 80:20, i.e., 80% into “miners’ reward” and 20% into “founders reward.”
As the ZEC limit approaches 21 million, the block reward is halved (the same as Bitcoin halving) after every four years to slow down the issuance rate. Following the halving event in November 2020, which did away with the founders’ reward, block rewards are still distributed in the 80:20 ratio, i.e., 80% to the miners, and the remaining 20% is distributed to Major Grants Fund (8%), ECC (7%), and Zcash Foundation (5%).
As of November 2020 halving, the block reward is equal to 3.125 ZEC.
4. Viewing keys
A z-address user can share transaction details through a view key, which allows read access only. The user retains control over the disclosure. Such selective disclosure is allowed for purposes of auditing, anti-money laundering, and tax regulations.
5. Other supporting features
- Low fee transactions of 0.001 ZEC by default, but configurable
- Encrypted messaging
- Transaction expiration to reduce mempool bloat. The default expiry is 40 blocks (or 50 minutes).
- Multi-signature transactions but currently available on public transactions only
How Zcash Is Mined
The proof-of-work cryptographic mining method works through application-specific computers competing to solve difficult mathematical problems defined by the Equihash hashing algorithm. The miners are rewarded with newly minted coins as a result of performing this work.
Before the recent upgrades, Zcash coins were mined by GPUs only. After the release of the Antminer Z9 mini in June 2018, more ASICs hardware’s been deployed on the Zcash Network, achieving over ten times growth.
1. Profitability calculation
Calculating the profitability of Zcash mining involves the calculation of revenues, expenses, and capital expenditure.
- Revenue: Current profitability can be calculated using publicly available crypto-mining calculators. There is a need to determine how much revenue per day is generated by 1Msol of hash power. A prediction of changes in revenue should be made preferably over a 1-year to 3-year investment horizon. Other factors to predict include the price of Zcash, hash rate, a decrease in revenue due to network difficulty, and expected changes to miners’ block rewards.
- Operating expenses: Operating expenses are determined by the miner’s electricity cost and mining pool fees. Hence, it is critical to use low-cost electricity to power equipment. Other miners are experimenting with renewable energy.
- Capital expenditure: There is a need for miners to procure up-to-date, robust, and efficient equipment which optimizes power usage with high throughput.
Hence, by leveraging on efficient equipment, low-cost power usage, and other factors, miners can generate strong risk-adjusted returns over time.
2. Purchasing mining hardware and hosting
Previously, Zcash could be mined using CPU and GPU machines. However, as a result of advancements in mining hardware, more efficient ASIC machines became the preferred hardware for crypto mining for professional miners and mining pools.
ASICs is an acronym for Application-Specific Integrated Circuit. They offer higher efficiency and can be customized for Zcash mining much better than the previous generation CPUs and GPUs.
The Equihash ASIC miners below are available on the market. However, some may become obsolete; hence, due diligence when purchasing is paramount.
ASIC machines can either be hosted at home or a mining hosting site. The drawbacks of hosting ASICs at home are notably the loud noise produced when they are running and the high electricity consumption, which can damage electrical wiring and fuses.
For a hosting fee, mining hosting sites can take care of setup costs, electricity availability, and ongoing maintenance. Popular mining hosting sites include Core Scientific, Skychain Technology, Optimum Mining Host, among others.
The ASIC machine can be powered up by connecting through a PSU and then connecting to a cable through a standard network cable. Users should utilize a scanning tool such as AngryIP or Locator to identify the machine’s IP address. By entering the IP address on the URL of a web browser, and dashboard will appear to start mining.
3. Join a mining pool
It’s recommended to join a mining pool as opposed to mining solo. Mining pools provide a steadier income stream based on the hash rate contributed.
Considerations for joining include the size of the pool, pay-out methods, geographic location of the pool, statistics, customer support, pool fee, user interface, and ping time to the server, among other considerations. It is best to select pools with high pay-out rates and a great user experience. Top Zcash mining pools include F2pool, Antpool, Poolin, Viabtc, Flypool, Slushpool, and Luxor.
4. Setting up a Zcash wallet
The final step is to set up a Zcash wallet and a Zcash address to receive payouts. It is important to choose a Zcash shielded address for receiving pay-outs for enhanced privacy. However, users should ensure the mining pool supports shielded addresses.
Advantages and Criticism of Using Zcash
The major advantages of Zcash are:
- Low-rate transactions
- The anonymity of users’ transactions metadata.
- Selective disclosure of payment data to a third-party
- Transaction expiration
- Multi-signature transactions
The major criticism of Zcash is the potential of being used as a secure haven for illegal transactions by cybercriminals (especially on the dark web). However, Zcash argued that there are several ways Zcash can be used legitimately, such as a user with a chronic medical condition buying drugs anonymously, companies protecting their trade secrets or supply chain information from competitors, and other legal privacy reasons.
Zcash founder Wilcox-O’Hearn recently advocated for Zcash to move away from the energy-intensive “proof-of-work” mechanism to an eco-friendlier “proof-of-stake” approach. “Proof-of-stake” nodes on the network can post holdings as collateral at risk of forfeiture should they act dishonorably.
“Proof-of-stake” is lighter, faster, and more secure at a lower cost, according to Wilcox-O’Hearn. It can go a long way to reduce the crypto carbon footprint. In an interview with Forbes, Wilcox recently indicated that “proof-of-stake” is already “proven,” and the successful launch of Algorand, Cardano, Tezos, etc., is evidence of that.
Thank you for reading CFI’s guide to Zcash. To keep advancing your career, the additional CFI resources below will be useful: