What Is ZCash?

ZCash is a cryptocurrency with a decentralized blockchain that seeks to provide anonymity for its users and their transactions. As a digital currency, ZCash is similar to Bitcoin. Like Bitcoin, ZCash also has an including its open-source code, but their major differences lie in the level of privacy and fungibility that each provides.

Key Takeaways

  • ZCash is a cryptocurrency with a decentralized blockchain that seeks to provide anonymity for its users and their transactions.
  • ZCash increases user privacy by using zero-knowledge proofs (zk-SNARKs) to validate transactions without revealing information that could compromise a user's privacy.
  • ZCash is built on the Bitcoin framework, and, in many respects, is identical to Bitcoin.

Understanding ZCash

The success of Bitcoin paved the way for hundreds of alternative cryptocurrencies, including ZCash, to emerge. The demand for privacy increased as cryptocurrency users understood that their transactions were easily traceable in the blockchain. ZCash was founded by Zooko Wilcox-O’Hearn in October 2016 in response to Internet users' demands for an open financial system with added privacy features.

Bitcoin was a pioneer in the open financial system; ZCash seeks to maintain the same structure as Bitcoing but with privacy and fungibility as added feature. Fungibility refers to the ease with which one commodity can be substituted for another. Money–whether it is gold or a fiat currency like the U.S. dollar–is fungible because you can trade it for anything else.

Because fungible instruments are susceptible to fraud and theft, gold is kept in underground vaults and fiat currencies require constant surveillance by treasuries and central banks. Bitcoin's solution to fraud and theft was to make all transactions totally transparent and one hundred percent traceable.

Unfortunately, Bitcoin's deprecation of privacy is also a flaw that it has sought to solve. Some of Bitcoin's original users mistakenly believed that because wallet addresses were pseudonymous, that using Bitcoin was anonymous. However, legal action against darknet sites like the Silk Road proved that all it takes is a small amount of information in order to reveal the true identity behind a Bitcoin wallet.

Zcash innovated by adopting Bitcoin's open ledger system and encrypting information about the ledger's users. This means that even though all ZCash transactions are recorded on a blockchain, the transactions are encrypted and can only be viewed by users that have been given access to them.

Most digital currencies that provide anonymity–for example, Monero–rely on private keys that are built with alphanumeric characters. Crytocurrency users are also given a unique public address which acts as their identity (similar to the Internet Protocol, or IP, address assigned to computer network users). The public address is required to receive funds from another user; this also means that the sender has to be given the other user's address in order to facilitate the transfer. The user’s private key gives them access to their funds and the key is attached to the specific transactions that they make.

With enough transactions made over time, their public address can be linked to these transactions, which makes it easier for interested parties to identify the public address holder. In addition, if a seller of a product is able to track a buyer’s previous transactions based on their public address (given to the seller by the buyer), the seller may feel more inclined to reject a payment from the buyer, especially if their purchase history reveals a difference in moral opinion or behavior.

ZCash employs a cryptographic tool called zk-SNARKs, which stands for Zero-Knowledge Proofs. This took allows two users to engage in transactions without either party revealing their payment addresses to each other. This tool also makes ZCash transactions untraceable on ZCash's blockchain by obfuscating the payment addresses of both parties and the amount involved in each transaction.

Because the payment addresses recorded on the blockchain are not the actual user’s address, it’s close to impossible to trace the path of any given funds to its sender or receiver. This makes ZCash different from Bitcoin and other blockchains that make public the amount transferred from one user's real payment address to another user's address.

Special Considerations

Zero-knowledge proof provides a high level of fungibility because one party involved in a transaction is not privy to the other party's identity and payment history. This prevents the counterparty from rejecting a coin payment on the basis of their suspicion (or knowledge) that the money is being used by a criminal source.

Like Monero and other highly anonymized cryptocurrencies, ZCash is criticized for potentially providing a secure haven for illegal transactions; however, ZCash is not just used by cybercriminals who engage in illegal transactions in the dark web.

There are a number of legitimate reasons why a user would opt for anonymous cryptocurrencies, such as ZCash. Some of these reasons include: an individual with a chronic medical condition who wants to purchase his pills online anonymously; a company that would like to protect its trade secrets or supply chain information from competitors; an entity using legal services for a private matter like bankruptcy; a couple who are into taboo sexual toys.

As of May 2020, ZEC (the currency symbol for ZCash) is ranked 26 on CoinMarketCap's list of ranked cryptocurrencies. As of April 30, 2020, ZCash's total market capitalization is $403 million.