Anonymity is the name of the game when it comes to cryptocurrencies.
It’s the reason that cryptocurrencies got their start to begin with. Bitcoin was created as a way to decentralize the way finance works, but it also was really attractive to people who didn’t want the world to know about their personal information.
When you sign up for a credit card or a bank account, all your information is there in a central server. It can be hacked and your details stolen cleaning out your account, or a government can seize your account. The various ways you can be compromised are well known at this point.
The attractiveness of anonymity on the blockchain soon gave way to some concerns about the transparency of a public blockchain.
There are now privacy coins that address the nature of how encrypted transactions on the blockchain can be. One of these privacy coins is Zcash.
Why Use a Privacy Coin like Zcash?
Unfortunately, since some people used Bitcoin in its early days to purchase drugs online, the first reason people think of for using a coin that hides a transaction is a nefarious one.
There are a lot of reasons to use a privacy coin that has nothing to do with any illegal activity.
For an example, let’s suppose that you are sending money to your friend. With most coins, your wallet is transparent and anybody can see how much currency you have. The other users on a blockchain don’t know what your identity is, but your friend sure does. Now he knows how much money you have. Try telling him you can’t loan him more money when he knows how much you have!
Hackers may have a hard time infiltrating a blockchain as they are hard to hack, but assuming they find a vulnerability, they are going to target full wallets. If nobody can see how much you are holding in your wallet, they aren’t likely to get your funds.
Authoritarian governments are quick to crack down on citizens that use money in ways that they don’t want. It is very easy for a government to stop banking transactions or even potentially find your identity on the blockchain. Having more privacy means a citizen can trade or invest wherever they please without government interference.
A corporation will want to keep its transactions a secret to avoid clueing competitors in on their business.
Then there is the issue of fungibility. An asset, in this case a coin, can always be substituted for another of the same value. So, the same token for another token or a good or service.
When the history of a user can be seen, the possibility of the coin being fungible decreases. What happens when a bank doesn’t want to accept your money because they don’t like how you made it? Or, even worse, if the history of the coin before you received it causes problems even if you didn’t have anything to do with those prior transactions.
And those are just a few reasons that Zcash hopes you will use their coin to have peace of mind on the blockchain.
How Does Zcash Work?
Zcash uses a special proof to secure the network called Zk-Snark - or proof of construction. Using Zero Knowledge Proofs, the protocol can verify transactions maintaining a secure ledger of balances without disclosing parties or amounts involved in transactions. They allow you to prove knowledge of some facts about hidden information without revealing that information.
Zcash's blockchain shows only that a transaction took place, not who was involved or what the amount was. The protocol allows users to split up or merge Zerocoins, the token protocol on the Zcash platform, and also convert them back to bitcoins. There is a string of data that each user sends and this string includes encrypted data to prove the transaction is valid. It has a unique nullifier that marks the tokens as spent.
How Does the ZEC Token Work?
Mining of the blocks works much the same way as Bitcoin where a miner receives tokens as a reward for a successful validation of a block in a Proof of Work protocol.
The difference is that 50 ZEC gets created every 10 minutes with 10 of those tokens going to the founders. The rest gets split up by the miners. After four years, however, the reward is halved to the miners, but they don’t have to split any of the tokens with the founders. All of the tokens they are rewarded are theirs.
The token is capped at 21 million, so the value can raise as more transactions happen on the chain.
The way to use it is the same as any other coin. Think of it the same way you would Bitcoin. You can use it to pay for things that accept ZEC, or you can use it to store value and trade it for Bitcoin when you want to use it where ZEC is not accepted.
The fact that Ethereum is looking to implement the cryptography that Zcash and other privacy coins employ is a sign that this might be the way that all cryptocurrencies head in the future. There are massive benefits that will be enjoyed if Zcash proves to be a sustainable model on how to safely and sustainably make transactions completely anonymous.
The Zcash encryption model on its face seems like an efficient way to keep transactions secret. As with everything in the crypto world, the market will decide how well Zcash does in the future with this technology.