What is Zcash?

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

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

The developers involved started the Zerocoin project to address the security limitations of bitcoin. The protocol they created allowed users to convert bitcoin to zerocoins, which provided a greater level of anonymity by concealing the origin of a payment. The protocol allowed 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 offered by Zerocoin and has since been developed into the cryptocurrency Zcash.

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

Under the Zerocash protocol, users have the ability to conceal both the senders and recipients involved in transactions, as well as the amounts transmitted. The Zcash staff refrain from describing the new technology as anonymous, although in 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 important because it ensures that one person’s money is as good as 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 as payment for their goods, but can easily 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 in this manner, users are given an additional burden of confirming the origin of these coins. Past that, requiring users to verify a coin’s user history could produce additional problems, for example users finding themselves unable to use a specific coin because of someone else’s past actions.

Security concerns

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

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

Todd went into further detail:

“There appears 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 breaking the crypto directly, even without having access to the trusted setup backdoor.

Technologists have also pointed out that challenges could arise as a result of the 'ceremony' that was used to create SNARK public parameters. Developing these parameters, which are numbers with a “specific cryptographic structure that are known to all of the participants in the system,” essentially requires creating a public/private keypair and then destroying 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 burning them to DVDs.

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

After following this process, the six participants destroyed 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 as “toxic waste”.

In reference to the ceremony, Zcash stated that:

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

Following the ceremony, the participants proceeded to destroy 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 as being fake.

This approach 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 been compromised somehow, resulting in an outside party receiving the information needed to create another public key.

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

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

How the market works

While ZEC is far newer to the scene than some digital currencies like bitcoin, its market functions in a similar fashion. Traders can buy and sell it outright through exchanges like Poloniex and Kraken.

ZEC has been available for trade since 28th October, 2016, when the Zcash genesis block was mined and the 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 as the underlying currency pair. Traders can use these 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 gain exposure to Zcash tokens by mining them.

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