What Investors Should Know Before Trading Zcash

Overheen the last several years, the number of digital currencies has skyrocketed. While some of thesis have developed substantial market capitalizations and carved out their own unique niches, few have shown promise for suggesting users a high level of privacy and fungibility.

Bitcoin, which had its genesis block mined ter 2009, wasgoed the very first digital currency to scale. While many early adopters took rente te bitcoin because of its promise of privacy, the digital currency failed to provide this benefit, spil interested parties can examine the transactions recorded on bitcoin’s blockchain to get a sense of exactly what a person or entity has purchased.

Te the years following bitcoin’s release, developers have created privacy-oriented digital currencies including Dash and Monero. Both of thesis use innovative technologies to help increase the chances of their users remaining anonymous.

Dash leverages a technology called “CoinJoin”, ter which several users waterput funds into the same transaction te order to increase the chances of privacy. Alternatively, Monero harnesses stadionring signatures to reduce the chance of detection.

Both of thesis cryptocurrencies have made excellent progress toward realizing the aim of anonymous transactions, and Monero has received widespread adoption te the dark web.

However, Zcash’s technology seemingly gives users the capability to love an even greater level of privacy. By permitting users to remain anonymous, Zcash can provide them with greater fungibility.

This is because many digital currency transactions rely on the use of private keys – strings of letters and numbers that identify a user. An address can become linked to several transactions overheen time, making it effortless for friends, family, marketers or even government authorities to learn more about a person’s purchasing trends.

And if a user’s private key is affixed to certain transactions, some parties may reject to accept his or hier money. This is where Zcash comes te.

What is Zcash?

Zcash leverages zero-knowledge proof constructions called zk-SNARKs, which permit two users to exchange information without exposing their identities. While the bitcoin blockchain contains records of the participants te a transaction, spil well spil the amount involved, Zcash’s blockchain shows only that a transaction took place, not who wasgoed involved or what the amount wasgoed.

Zcash is the result of continuous efforts by developers to create cryptographic protocols that suggest greater privacy. Zooko Wilcox has founded and served spil CEO of both Zcash and the Zerocoin Electrified Coin Company, which created a protocol named Zerocoin inbetween 2013 and 2014.

The developers involved commenced the Zerocoin project to address the security limitations of bitcoin. The protocol they created permitted users to convert bitcoin to zerocoins, which provided a greater level of anonymity by concealing the origin of a payment. The protocol permitted users to split up or alternatively merge zerocoins, and also convert them back to bitcoins.

More recently, the aforementioned developers collaborated with cryptographers from MIT, Tel Aviv University and The Technion (Israel Institute of Technology) to create Zerocash – an improved protocol that provided payments with greater privacy than suggested by Zerocoin and has since bot developed into the cryptocurrency Zcash.

Zerocash offers zerocoins, which help users insure privacy, spil well spil basecoins, which do not have the reserve privacy features.

Under the Zerocash protocol, users have the capability to conceal both the senders and recipients involved te transactions, spil well spil the amounts transmitted. The Zcash staff refrain from describing the fresh technology spil anonymous, albeit ter most cases, the technology has that quality.

One major benefit that has stemmed from this higher level of anonymity is greater fungibility.

Why fungibility matters

Fungibility, the ease with which units of a certain asset can be substituted for one another, is significant because it ensures that one person’s money is spil good spil another’s. When history exists for money, that money may not be accepted for all kinds of transactions.

For example, if a vendor accepts digital currency spil payment for their goods, but can lightly track the history of the currency it accepts, the vendor can simply reject payment from certain would-be customers based on their prior purchasing behavior.

‘Blacklisting’ coins

Bitcoin users have already encountered challenges stemming from the public nature of the blockchain. Some bitcoin exchanges have “blacklisted” or refused to accept certain bitcoins after significant amounts of the cryptocurrency were stolen from wallets.

When certain coins are blacklisted ter this manner, users are given an extra cargo of confirming the origin of thesis coins. Past that, requiring users to verify a coin’s user history could produce extra problems, for example users finding themselves incapable to use a specific coin because of someone else’s past deeds.

Security concerns

While Zcash’s cryptography is bleeding-edge, it is “very experimental” and “relatively feeble,” Bitcoin Core developer Peter Todd wrote te a blog postbode. He further elaborated on his skepticism, writing:

“[I]f zk-SNARKS turned out to be totally violated, unlike more mainstream crypto, it just wouldn’t be all that surprising.”

Todd went into further detail:

“There emerges to be uncertainty about the strength of the actual parameters chosen for Zcash’s crypto,” he said. “The threat here is that an attacker may be able to create fake zk-SNARK proofs by cracking the crypto directly, even without having access to the trusted setup backdoor.

Technologists have also pointed out that challenges could arise spil a result of the ‘ceremony’ that wasgoed used to create SNARK public parameters. Developing thesis parameters, which are numbers with a “specific cryptographic structure that are known to all of the participants te the system,” essentially requires creating a public/private keypair and then ruining the private key.

The ceremony, which is formally called a multi-party computation protocol, involved six participants creating individual “shards” of the private/public keypair and then searing them to DVDs.

Participants, including Todd, followed instructions contained te a document called “Zcash Multi-party Computation Instructions” to create thesis individual shards. This document, which wasgoed acquired by CoinDesk, provides technical requirements for the hardware used, spil well spil instructions for downloading the needed software and searing the shards to DVDs.

After following this process, the six participants ruined their shards of the private key and combined the shards of the public key to create the SNARK public parameters. ZCash referred to the private key shards spil “toxic waste”.

Ter reference to the ceremony, Zcash stated that:

“If that process works – i.e. if at least one of the participants successfully ruins their private key shard — then the toxic waste byproduct never comes into existence at all.”

Following the ceremony, the participants proceeded to demolish the computers used to create the shards with the intention of preventing anyone from using the keystrokes entered into those computers to create counterfeit Zcash currency (which goes by the token symbol ZEC) that users cannot identify spil being fake.

This treatment comes with a few drawbacks. For starters, there is no way to prove that the six participants did not conspire together to keep the public key. Past that, they could have bot compromised somehow, resulting te an outside party receiving the information needed to create another public key.

Individuals interested ter creating counterfeit Zcash tokens could potentially recover the keystrokes from the computers used te the ceremony through traditional cameras, radio signals, satellites and other methods, said Todd.

If they could recreate the aforementioned ceremony without missing anything, it would give them the capability to create counterfeit currency. Because all Zcash transactions involve zero-knowledge transfers, users would be incapable to distinguish inbetween counterfeit Zcash coins and ones created through legitimate mining.

How the market works

While ZEC is far newer to the toneel than some digital currencies like bitcoin, its market functions te a similar style. Traders can buy and sell it outright through exchanges like Poloniex and Losbreken.

ZEC has bot available for trade since 28th October, 2018, when the Zcash genesis block wasgoed mined and the very first tokens became exchange listed.

Before ZEC tokens began trading on exchanges, interested investors could buy or sell Zcash futures on BitMEX, where they trade under the ZECZ16 contract. This contract, which went live on BitMEX 15th September, uses ZEC/XBT spil the underlying currency pair. Traders can use thesis futures to either speculate on the future value of Zcash or hedge their existing holdings of ZEC tokens.

Before futures trading became available, interested parties could build up exposure to Zcash tokens by mining them.

Mining Zcash

Like many other digital currencies, Zcash offers interested parties the capability to mine blocks. The Zerocash protocol harnesses a proof-of-work algorithm which relies on how much RAM a miner wields.

On 9th September, Zcash announced the very first beta release of the Zcash reference implementation (v1.0.0-beta1), which it deployed to the testnet. All coins mined using this software remained testnet coins, and therefore had no monetary value, until Zcash’s official launch te October.

Following this release, the digital currency attracted a tight-knit group of developers. On 27th September, Zcash announced that it wasgoed hosting a challenge whereby competitors could submit fresh methods for mining the currency. Thesis participants were given until 27th October to provide fresh potential methods.

On 5th October, hosted mining rock-hard Genesis Mining demonstrated its support for the privacy-focused digital currency when it announced that it would soon permit customers to purchase miners operated by Genesis for the sake of mining Zcash.

Unique mining prototype

Zcash’s supply monster is rather similar to that of bitcoin, albeit it has some key differences. Like bitcoin, the Zcash protocol caps the total number of tokens at 21 million. Ter addition, its mining prize is cut te half harshly every four years, just like bitcoin.

One major difference that sets Zcash mining speciaal is that 10% of the 21m units mined using the Zerocash protocol will go to Zcash’s stakeholders, ie: its founders, employees, investors and advisors. This is called the “Founder’s Prize”.

The stakeholders will not receive this prize te a linear style. Ter the beginning, the protocol results ter the creation of 50 ZEC every Ten minutes, with 20% going to the founders and the remainder going to the miners. Every four years, this mining incentive will be cut ter half, but 100% of this prize will go the miners after the very first four years.

Slow-start mechanism

Another significant difference is that the Zerocash protocol harnessed a slow-start mechanism, which impacted the incentive provided for the very first 20,000 blocks (mined overheen approximately 34 days). The rationale behind taking this treatment wasgoed managing the risk of the protocol having a “major bug or security vulnerability.” If such a problem wasgoed discovered, the slow-start mechanism would help reduce its influence.

Pursuant to this mechanism, the mining incentive leisurely enlargened until it reached 12.Five BTC at the 20,000th block. The rate of increase wasgoed such spil the very first 20,000 blocks would create a total mining prize of 125,000, half spil much spil the 250,000 it would be if they all provided an incentive of 12.Five ZEC each.

The Zerocash protocol scheduled the next halving for the 850,000th block, at which point the prize would decrease to 6.25 ZEC.

Price volatility

Several factors have combined to help fuel price volatility ter ZEC. The cryptocurrency loved very strong request shortly after its release, resulting te its price surging to toughly Trio,300 BTC (more than $Two million) on its very first day of trading, according to Poloniex. However, ZEC quickly moved te the other direction, falling to 48 BTC the same day.

By 20:15 UTC on 23rd November, ZEC wasgoed trading at 0.097 BTC ($71.82), less than one-tenth of a bitcoin, according to extra Poloniex gegevens.

Photo source: Poloniex

Thesis acute price fluctuations took place after BitMEX Zcash futures experienced acute appreciation leading up to the digital currency’s 28th October release, which surged from spil little spil 0.027 BTC ($Legal.50) on 15th September to 0.78 BTC ($535) on 28th October, BitMEX figures expose. However, the futures had plunged to 0.049 BTC ($36.17) spil of 15:00 UTC.

Ter addition to the Zerocash protocol’s zk-SNARKS being largely untested, the digital currency had yet to be adopted by any platforms that might use it spil a currency. Spil a result, its value wasgoed purely speculative at the time.

Going forward, Zcash prices will depend on supply and request, with the former steadily enlargening and the latter uncertain. Fortunately, the volatility that goes along with speculation has created opportunities for traders, who might invest te Zcash te an attempt to turn a profit.

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake ter Zcash.

This article is not intended to provide, and should not be taken spil, investment advice.

Coins picture via Shutterstock

The leader ter blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a stringent set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests ter cryptocurrencies and blockchain startups.

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