Mining Zcash

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

On 9th September, Zcash announced the 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 in October.

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

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

Unique mining model

Zcash’s supply model is rather similar to that of bitcoin, although it has some key differences. Like bitcoin, the Zcash protocol caps the total number of tokens at 21 million. In addition, its mining reward is cut in half roughly every four years, just like bitcoin.

One major difference that sets Zcash mining apart 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 Reward".

The stakeholders will not receive this reward in a linear fashion. In the beginning, the protocol results in the creation of 50 ZEC every 10 minutes, with 20% going to the founders and the remainder going to the miners. Every four years, this mining incentive will be cut in half, but 100% of this reward will go the miners after the first four years.

Slow-start mechanism

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

Pursuant to this mechanism, the mining incentive slowly increased until it reached 12.5 BTC at the 20,000th block. The rate of increase was such as the first 20,000 blocks would create a total mining reward of 125,000, half as much as the 250,000 it would be if they all provided an incentive of 12.5 ZEC each.

Slow start rate of Zcash

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

Price volatility

Several factors have combined to help fuel price volatility in ZEC. The cryptocurrency enjoyed very strong demand shortly after its release, resulting in its price surging to roughly 3,300 BTC (more than $2 million) on its first day of trading, according to Poloniex. However, ZEC quickly moved in the other direction, falling to 48 BTC the same day.

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

ZEC chart
Image source: Poloniex

These sharp price fluctuations took place after BitMEX Zcash futures experienced sharp appreciation leading up to the digital currency’s 28th October release, which surged from as little as 0.027 BTC ($18.50) on 15th September to 0.78 BTC ($535) on 28th October, BitMEX figures reveal. However, the futures had plunged to 0.049 BTC ($36.17) as of 15:00 UTC.

In 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 as a currency. As a result, its value was purely speculative at the time.

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

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