Bitcoin was the first digital currency that was able to scale and get a lot of interest from the general public. While many people still believe that Bitcoin offers a lot of privacy, this is simply not true. The currency is completely transparent. It records all the transactions that occur on the bitcoin network in its blockchain. Knowing an address, it is easy to see all the transactions that involved this address. This means that if an organization or a person uses an address on a website to collect donations, it is possible to check how many donations came to this address using https://blockchain.info/ at any time. For this reason, many of the coins that entered the market after Bitcoin focused on adding privacy features to their networks. The list of such coins includes Monero, Dash and ZCash. All of these coins use technologies that help their users remain anonymous.
How various coins solve the issue of privacy
Dash does it with a feature called PrivateSend. Dash network uses CoinJoin method that mixes inputs and outputs of several transactions into one. This way, it is impossible to tell who sent what amount to whom. While Dash doesn’t apply PrivateSend to all the transactions on the network, this privacy option does help all the users because while it is possible to see transactions that have occurred on the network, it is not possible to tell whether the transaction occurred using PrivateSend or not. This means that it is not possible to tell whether the numbers for the transaction are actual numbers or not.
Monero is another currency that helps its users to remain anonymous. It does so using ring signatures. Most of the currencies in the crypto world, including Monero, use unique public and private keys. A public key is similar to an IP address and allows a third party to identify a user on a network. To receive funds, a user needs to give a public address to a sender. While most blockchain networks allow users to generate an unlimited number of public addresses for free and instruct users to use one public address per transaction, not everybody does so all the time, which means that it is possible for third parties to identify holders of addresses and track their transactions.
This is also where the issue of fungibility arises. In economics, fungibility means that units of the same asset are interchangeable and have the same price. Applied to cryptocurrencies, it means that all coins on a blockchain network are worth the same. When transactions on a network lack privacy, some users may decide that they do not want to accept funds from certain other users based on where and how these certain users have obtained their coins. For example, a user on a network may choose not to deal with someone who engages in transactions that violate certain beliefs or ethical stance of the user. When a network does offer privacy to its users, it solves the issue of fungibility because when users don’t know the history of the coins on the network, all coins are equal.
ZCash solves the issue by allowing users to engage in transactions without exchanging addresses. The network can also hide essential information about transactions when posting them on its blockchain, making transactions untraceable. This is very different from how Bitcoin records transactions on its blockchain because with Bitcoin it is possible the amount and the address behind a transaction.
ZCash in detail
Zooko Wilcox-O’Hearn founded ZCash in 2016. The founding team of the network included Matt Green, a crypto scientist from John Hopkins University. Roger Ver was one of the first investors in the company. ZCash takes privacy of its users to a new level by applying zk-SNARK.
While ZCash, just like other blockchain networks, publishes the transactions that occur on the network on its blockchain, users have an option to conceal all the important data about transactions using a method called zk-SNARK. The method can hide information about the sender, the recipient of the funds and the amount of the funds that was sent. This method allows parties to prove ownership of information without actually sharing the information with anyone and without having to interact with the party that wants to verify the information. zk-SNARK on ZCash network works very quickly and doesn’t use require vast amounts of information.
In zk-SNARK, zk stands for “zero knowledge.” SNARK is an abbreviation for “Succinct Non-Interactive Argument of Knowledge.”
The word “succinct” in the name of the method means that the length of a message that allows a sender to convince a verifier about the validity of the message is short compared to the length of actual information that the message is about.
“Non-interactive” means that there’s no or very little interaction between the parties. Typically, there’s only one message.
“ARguments” means that there is protection against wrong statements from participants with enough computational power. Is it important to mention here that with enough computational power any blockchain network and encryption can be broken. One of the reasons why bitcoin and other blockchain networks are safe to use today is because a computer that could break the cryptography behind the networks does not exist. However, this doesn’t mean that such a computer won’t exist at some point in the future.
Finally, “Knowledge,” for which K stands in SNARK, means that the entity that wants to prove a statement can’t do so without having certain knowledge, such as an address where the coins are coming from.
Scarcity and founders’ rewards
Just like bitcoin, ZCash will eventually have 21 million coins on the network. Also just like on the bitcoin network, ZCash miners mine coins eventually over time. What makes ZCash different from other coins is that 10% of the mining reward during the first four years of the existence of the currency goes to the founders of the network. ZCash creators have developed the network this way so that there is an incentive for them to keep working on improving and developing the network and this incentive is publicly known and transparent. Out of the 10%, investors who initially supplied funds to create the network will get 1.65% of the total coin circulation.
In 2016, ZCash raised over$2 million from investors that included Vlad Zamfir, Roger Ver, Maple Ventures, and Fred Ehrsam. ZCash published all the data about the investment rounds on its website. The total amount it raised by September of 2016 was $3 million. The investors of the $2 million round valued the company at $32 million and collectively all the investors owned 16.4% of the entity. As a part of the agreement, investors received not only a right to future ZCash token, but also a stake in the ZCash Electric Coin company, which the founders of the ZCash network said can have value independent from ZCash network.
Eventually, founders, their advisors and employees of the company will get 5.72% of the entire coin reward. The biggest receivers of the funds will be ZCash Strategic Reserve and a non-profit called ZCash Foundation. The reserve will get 1.19% and the foundation will get 1.44%. The mission of the reserve is to fund new improvements of the network and the foundation will be maintaining the protocol.
In the past, ZCash team members said that if Bitcoin is similar to http protocol on the Internet, then ZCash is https. The opportunity to have transactions in which details are hidden obviously makes the currency very attractive to criminals and parties engaging in activities of questionable legal status. However, ZCash founders insist that a person or an entity may have quite a few legitimate reasons to want to protect their privacy. For example, a person with a medical condition may not want for others to know about the condition and may want to purchase medicine online anonymously. A business may want to pay its vendors and partners anonymously because it doesn’t want the competition to be able to identify its vendors and partners. Finally, a company that provides legal services may also want to shield the privacy of its clients by using a system that offers fully anonymous payments.