What is Zcash (ZEC)? How does It work? Complete Beginner’s Guide [2024]

One of the more well-known privacy cryptocurrencies, Zcash (ZEC) harnesses advances in cryptography to offer users optional anonymity when transacting. 

Before Zcash, cryptocurrencies were mostly designed to be “pseudonymous” like Bitcoin (BTC), meaning data about the amount users exchanged, the addresses they sent funds to and the addresses they received funds from were always recorded on the blockchain for all to see. 

So, while you may hear people tout cryptocurrencies for privacy, this isn’t the case by default. Data can (and sometimes is) linked back to the individuals who made transactions, whether by companies, governments or nefarious actors. 

Launching in 2016, ZEC offered a higher level of privacy by introducing “shielded addresses,” which were designed to encrypt the transaction and address data stored on its blockchain. 

Still, Zcash lets users choose the level of anonymity they’d like, offering two types of addresses: transparent addresses (which appear on blockchain) and shielded addresses (which do not). 

Users can send transactions between the two types of addresses, as well, though this brings additional privacy considerations.

Understanding What Is ZCash (ZEC)?

ZCash emerged in 2016 when a group of scientists decided they wanted to create a cryptocurrency similar to Bitcoin but with some additional features. They developed a fork of the Bitcoin blockchain, with enhanced user security and anonymity. The scientists first invented Zerocoin, which became Zerocash not too long after its initial release. Eventually, the cryptocurrency was renamed ZCash.

Key features of ZEC

As ZEC uses a modified version of Bitcoin’s code, it shares some features. The total supply of ZEC, like Bitcoin, is capped at 21 million coins. New ZEC are minted via Zcash mining or proof-of-work (PoW) consensus protocol. 

Bitcoin was designed to be “pseudonymous” rather than completely anonymous because transaction and wallet address information are recorded on the Bitcoin blockchain and can be viewed by anyone. The solution for greater anonymity with ZEC is its option for users to choose “shielded addresses” that don’t appear on the ZEC blockchain. Alternatively, users can stick with “transparent addresses” that are openly recorded.

A further unique feature of the Zcash blockchain is the “Zcash ceremony” or “Zcash trusted setup,” which occurred when the blockchain was created and required a trusted group to create a master public key for the blockchain. 

Once the setup was completed, the group was required to destroy any data relating to the master key to protect ZEC from manipulation at later stages. Criticisms of this design stem from concerns such as there is no proof that the setup process was performed as expected or that sensitive information has been destroyed.

History of ZCash (ZEC)

ZCash is forked from the original Bitcoin codebase. In 2014, Eli Ben-Sasson, Alessandro Chiesa, Christina Garman, Matthew Green, Ian Miers, Eran Tromer, and Madars Virza believed there were security flaws in the way transactions were tracked through Bitcoin’s blockchain. In their whitepaper outlining their ideas, they called their cryptocurrency Zerocash.

The scientists created Zerocoin (Electric Coin Company) in 2015. In 2016, the name changed to Zcash, by the Electric Coin Company.

ZEC uses the zk-SNARK security protocol to ensure the parties involved in a transaction are verified without revealing any information to each other or the network.

Zk-Snark allows for fully shielded transactions in which the sender, recipient, and amount are encrypted. This feature is a large deviation from other cryptocurrencies, where transaction transparency is an underlying concept aside from securing user information.

In 2019, Electric Coin Company (ECC) passed the trademark and license for ZEC to the Zcash Foundation in a bilateral usage agreement. In April 2024, ECC announced its intent to terminate the agreement and pass all governance decisions to the Foundation, effectively removing itself from the project.

What makes Zcash unique?

The difference between Zcash and most other types of cryptocurrency is the privacy it offers. There’s a common misconception that cryptocurrencies are confidential or untraceable, and it couldn’t be further from the truth. The majority record every transaction on a public blockchain.

The transactions don’t have names attached, but they show the amount and the wallet addresses for the sender and recipient. If a person’s name is tied to their wallet address, other people can learn how much crypto they’ve sent and received.

Privacy coins keep amounts and wallet addresses confidential. If you send or receive ZEC tokens, you can choose to shield your wallet address and the amount.

ZEC is also different from most privacy coins. While these cryptocurrencies typically only offer confidential transactions, ZEC has transparent transactions available. If you choose that option, your wallet address and the transaction amount will be public information.

Where Zcash came from

In 2013, Johns Hopkins University professor Matthew Green and some of his graduate students came up with the idea for Zcash (at the time called “Zerocash”). It was originally going to be a privacy extension to Bitcoin (BTC -1.93%), but Bitcoin’s core developers weren’t on board. Zcash’s developers ended up building the coin on the original Bitcoin code base.

The team behind the ZEC protocol started Zcash Company, recruited CEO Zooko Wilcox-O’Hearn, and raised more than $3 million from venture capitalists. (Highlighting the importance of privacy, ex-NSA whistleblower Edward Snowden claims to have played a role in Zcash’s beginnings as one of six people who collectively generated the first ZEC public address prior to the network’s launch.) They launched Zcash on Oct. 28, 2016.

ZEC Company later rebranded as the Electric Coin Company. Along with the nonprofit Zcash Foundation, it manages the Zcash protocol and blockchain.

How does Zcash work?

Apart from its privacy features, ZEC operates similarly to other cryptocurrencies. 

Both shielded and unshielded ZEC transactions are verified by nodes and recorded on the blockchain. Blocks are added by an open network of computers using an algorithm called Equihash, which calculates the amount of RAM a miner is devoting to securing the blockchain.

This design was meant to mitigate the impact of specialized mining equipment, allowing smaller computers to better compete for rewards. (As of 2018, however, large-scale mining businesses had developed Zcash-specific mining machines.)

Another uncommon attribute of Zcash was how its cryptocurrency was set up to be distributed. 

For the first four years of the blockchain’s operation, 80% of its block reward was programmed to go to miners, with 20% allocated to the Electric Coin Company, the Zcash Foundation as well as some of their key employees and stakeholders. 

This subsidy was supposed to expire in 2020, around the time that the protocol experiences its first “halving,” in which the supply of new ZEC the protocol can produce is reduced. 

As of early 2020, a vote to extend the rewards allocation to these companies has yet to occur.

The owner of a z-address can choose to disclose the address and transaction details with trusted third parties. This allows them to fulfill auditing and compliance requirements if necessary.

Partnerships

ZEC landed a high-profile partnership in 2017 when it started working with JPMorgan Chase (JPM -0.61%). The banking giant used Zcash’s zero-knowledge security layer on its own blockchain project, which is built on Ethereum (ETH -1.79%), to improve security.

Ethereum is also connected to ZEC. Electric Coin Company, which manages ZEC, entered into a partnership with the Ethereum Foundation and the companies managing Filecoin (FIL -2.73%), Protocol Labs, and the Filecoin Foundation.

The partnership started in 2021 with the goal of exploring how Ethereum and Filecoin could implement Zcash’s Halo 2 technology, a zero-knowledge protocol. The companies are also looking at how they can increase interoperability between their respective blockchain projects.

Unique risks

There’s doubt about whether ZEC truly provides private, untraceable transactions. For a privacy coin, that’s a massive issue.

Part of this doubt arises from statements made by the Zcash team. In an article from 2013, Matthew Green mentioned the possibility of adding a backdoor so that the project wasn’t used for criminal activity, and he gave the example of law enforcement using it to track money laundering. In tweets from 2017, Wilcox-O’Hearn said he thought they could make ZEC “too traceable for criminals,” while still being “completely private.”

According to the Zcash website, there’s no backdoor and shielded transactions are private. However, those prior comments indicate the team has been open to some degree of traceability in the past.

ZEC’s private transactions are also only private if enough users choose shielded addresses. In 2020, researchers from Carnegie Mellon University evaluated the privacy of Zcash and rival Monero. They reported that “Zcash’s privacy guarantees are questionable,” in large part because of the high volume of public transactions.

Advantages and Disadvantages of Zcash

ZEC is a cryptocurrency known for its strong privacy features. It uses zero-knowledge proofs to obscure transaction details, offering users a high degree of anonymity. However, like any cryptocurrency, it has its pros and cons.

Advantages

• Strong Privacy: ZEC’s primary advantage is its ability to shield transaction details, protecting user anonymity. This is particularly attractive for individuals concerned about financial privacy.
• Transparency Optional: Users have the choice to make transactions public or private, offering flexibility.
• Security: ZEC employs robust cryptographic techniques, ensuring the security of user funds.
• Decentralization: Like Bitcoin, ZEC operates on a decentralized network, reducing the risk of censorship or control by a single entity.

Disadvantages

• Complexity: The underlying technology of zero-knowledge proofs can be complex to understand, potentially deterring some users.
• Scalability: While improvements are being made, Zcash’s scalability may still be a challenge compared to some other cryptocurrencies.
• Regulatory Concerns: The high level of privacy offered by Zcash can raise concerns among regulators due to its potential for misuse.
• Price Volatility: Like most cryptocurrencies, Zcash’s price can fluctuate significantly, making it a risky investment for some.

ZEC upgrades and developments

In 2019, ZEC launched a new zk-SNARK called Halo. This is a “trustless recursive” ZK-proof designed to address scalability and the “trusted setup” issue. The Halo 2 source code was released to the public in September 2020. 

Previously, zk-SNARKs required a trusted setup like that which occurred when ZEC was launched. The Halo 2 code allows a Zcash network to be created without the trusted setup process, removing the concerns of manipulation associated with having a trusted group of parties initiate the network and master key. 

A sixth major Zcash upgrade in 2022 added components of Halo Arc, further innovating zk-SNARK technology. It moved ZEC to the Halo proving system, removing the need for a trusted setup and improving the protocol’s cryptography. 

The network also launched its open-source, shielded ZEC wallet in 2020 and upgraded the blockchain to add Shielded Coinbase and FlyClient support. Shielded Coinbase allows miners to receive mining rewards to a z-address. FlyClient enables light client Zcash use cases and contributes to cross-chain interoperability. 

Zcash performed its first halving in 2020, reducing block rewards from 6.25 ZEC to 3.125 ZEC, and implemented the Canopy upgrade, which established a development fund and removed a controversial “Founders Reward.” The next ZEC halving is anticipated to occur around November 2024 (the exact timing depends on block production rates).

How Is ZCash Different from Bitcoin?

The Bitcoin community prides itself on transparent transactions while maintaining anonymity. However, anyone interested or who has a stake in a transaction could trace the parties within it.

ZEC doesn’t eliminate transaction information. Instead, it encrypts it so that it cannot be tracked. The ZCash blockchain is still transparent, but the security protocol zk-SNARK adds additional user security and anonymity.

Bitcoin uses the hashing algorithm SHA-256. ZEC uses Equihash, which is incompatible with hardware and software designed for Bitcoin mining. It also has larger blocks and increased hashing times, which increases the network’s hash rate. A cryptocurrency’s hash rate is the processing power of the network of miners—it’s a measure of how fast the transactions can be verified and validated to open a new block.

Goals of ZEC

ZCash was designed to be efficient, safe, and anonymous. The developers behind ZCash also promoted complying with regulatory requirements. Additionally, full transparency is an option when using ZCash. If this option is chosen, its transparency is similar to Bitcoin’s when transfers are conducted.

How to Mine ZCash

New coins are produced by mining. You can use an application-specific integrated circuit (ASIC) miner or your computer if it has a graphics card capable of mining. Operating systems supported by ZEC are Docker, Debian/Ubuntu, Mac, and other Linux flavors. However, it recommends using an ASIC miner and mining pool because the network difficulty has gotten so high that PC mining is not worth the time and costs.

ZEC uses a proof-of-work mining algorithm, which requires miners to compete against each other to produce a new block by racing to solve a cryptographic problem. The first miner to find the solution opens a new block and receives the block reward.

Who Founded ZCash?

ZCash was founded by a group of scientists and Zooko Wilcox O’Hearn, a computer security specialist who created the Electric Coin Company.

The future of Zcash

ZEC has been criticized for its potential to facilitate illicit transactions in the cryptocurrency space, although this isn’t the goal of the Zcash founders. It faces regulatory scrutiny for offering anonymous transactions and has been delisted from some exchanges along with other privacy coins over concerns privacy and anonymity are abused by criminals. 

It’s also a large and energy-intensive blockchain that, like many others, must work on better scalability. Zcash did unveil plans to move to a proof-of-stake (PoS) consensus mechanism in 2021. As of 2024, those plans still appear to be underway with an approach that would see Zcash move to a hybrid consensus model before a final move to pure PoS. 

On the positive side, some believe Zcash’s privacy features add to its value and that as the crypto market grows, there will be increasing demand for privacy-focused coins and blockchains. Ethereum developers and institutions, such as JPMorgan, are exploring the benefits of zero-knowledge technology for their own projects. However, it is yet to be seen if Zcash can overcome potential regulatory hurdles and gain widespread acceptance to truly rival traditional forms of cash in everyday use.

Is Zcash a good investment?

If you’re looking for a cryptocurrency investment, you’re better off avoiding Zcash. The simplest way to explain why is to consider the question of who’s going to use it.

ZEC is a privacy coin, so its main target market is those who want to remain anonymous. Here’s the thing: If someone wants a privacy coin, you can bet they want the most private option with the smallest risk of anything being traced. Monero, not Zcash, is the cryptocurrency that best fits that description.

The argument for ZEC is that it also offers public transactions. But for people who don’t care about anonymity, there are hundreds of cryptocurrencies out there that work just as well. Ultimately, ZEC ends up in a middle ground where it isn’t the best option for either private or public transactions.

Those who want to invest in a privacy coin should stick to Monero, which is the more trusted option. If you’re not sure which cryptocurrencies to invest in, an alternative is to go with cryptocurrency stocks.

How to buy ZEC

If you want to buy ZEC, it’s available on several of the best cryptocurrency exchanges. Here are a few options:

• Gemini
• Coinbase Global (COIN -2.93%)
• Binance.US
• Kraken

Of those exchanges, Gemini is the only one that allows shielded withdrawals of ZEC. The other three only offer transparent withdrawals.

ZEC’s most unique feature is also one of its potential risks for users with privacy concerns. If too many people use transparent addresses, it could make it easier to deduce information for shielded wallets as well.

The jury’s still out on whether ZEC can provide as much protection as it claims. That makes it a risky buy, whether you’re more interested in it for privacy or as an investment.

The Bottom Line

ZCash is a cryptocurrency that was developed from a fork of Bitcoin to enhance the anonymity of its users. It is still an actively traded cryptocurrency on many exchanges, but its user base has dropped somewhat since 2018.

Disclaimer ||

The Information provided on this website article does not constitute investment advice ,financial advice,trading advice,or any other sort of advice and you should not treat any of the website’s content as such.

Always do your own research! DYOR NFA

Coin Data Cap does not recommend that any cryptocurrency should be bought, sold or held by you, Do Conduct your own due diligence and consult your financial adviser before making any investment decisions!