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As well as bitcoin has performed this year, which has seen its price increase by 88%, it is far from the most profitable crypto year-to-date. One that has had an even better year is zcash, a leading privacy coin that shares many core elements of bitcoin’s value proposition, including its hard cap of 21 million units. (Privacy coins operate on blockchains such as bitcoin but take additional steps to protect user identities and transaction amounts.)
In fact, zcash has actually returned 105% to investors since January 1, 2020.
Zcash and bitcoin price comparison YTD
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Additionally, zcash just received a major boost. Through a process known as ‘wrapping’, a synthetic version of zcash is now available on Ethereum that is compatible with all of its major wallets and applications. This means that zcash is much more widely available than it was a few weeks ago.
Chris Burniske, Partner at venture capital firm Placeholder VC told me that this news was ‘amazing’. He went on to say that “Zcash is the best-in-class privacy crypto money out there with an institutional grade team…When you think of a crypto money like this with a logarithmic supply curve converging upon 21 million units, we know what the supply will be over time. The variable is just what demand is going to be. Wrapping zcash in this way opens up more avenues for people to use and demand it. We anticipate that zcash will be a base privacy store of value.”
This story originally appeared in our premium newsletter, Forbes CryptoAsset and Blockchain Advisor. Click here to subscribe.
How It Works
Holders can ‘wrap’ their zcash through a partnership between the qualified custodian Anchorage and tokenization platform Tokensoft called Wrapped. For each zcash deposited, they receive one ‘wrapped zcash’ that can be held in any Ethereum wallet.
This process is facilitated through a novel implementation of the Tokensoft-led ERC-1404 standard template contract for creating regulatory-compliant Ethereum-compatible tokens. It is interoperable with the more familiar ERC-20 standard. However, it comes with some added protections that should make wrapped zcash more palatable to regulators, which have had concerns about potential illicit uses for privacy coins such as zcash.
Speaking to the benefits of using this new token standard, Tokensoft CEO Mason Borda told me that, “The ability to freeze or revoke a token is very key. The ability to have the owner of the contract operate out of cold storage was very important. Having an admin for day to day use also makes it a bit more usable and secure at the same time.”
Further speaking to how Wrapped will maintain regulatory compliance, especially if someone purchases wrapped zcash on ethereum and tries to redeem it for the base asset in order to obfuscate their financial activities, Anchorage Co-Founder and President Diogo Monica said that “We do AML/KYC for every single client, not just the entities but also each individual user. There is no way for you to interact with the wrapping or unwrapping of zcash in a way that we don’t know and will prevent us from meeting our regulatory obligations.”
Why Wrap Zcash?
Zcash is an appropriate choice to be transferred onto Ethereum. First, given many of its properties similar to bitcoin, zcash’s primary value proposition is as a store of value. This fact alone means that zcash is predisposed to benefit from any developments, such as adding liquidity on Ethereum, that will reduce friction when it comes to accessing and trading the asset.
Second, its network fundamentals remain strong.
- According to Coinmetrics, the number of active addresses has increased almost 350% from mid-July (9,556-36,210)
- It’s hashrate has has also increased 35% to an approximate rate of 5.52 Ghash/s
- Finally, the daily average transfer value and total number of transactions have also been increasing this year
Third, and perhaps most importantly Zcash is scheduled to undergo its first ‘halving’ around November 18th. Halvings, which reduce the amount of cryptocurrency created in each block by 50%, tend to be extremely bullish events for cryptos. For bitcoin, the 2012 and 2016 halvings led to 9,000% and 3,000% appreciations respectively.
Because zcash was created in 2016, it is approaching its first halving. When this occurs, block rewards will be reduced by 50% from 6.25 ZEC to 3.125 ZEC.
Will They Come?
It will be interesting to watch how much zcash gets transferred onto Ethereum and the level of adoption that it will receive from various decentralized finance (DeFi) applications. With a total of 13,000 units, ‘wrapped zcash’ accounts for 0.001% of the total circulating supply. Therefore it is starting from a very low base. But everyone starts somewhere.
For a bit of context, the amount of wrapped bitcoin on Ethereum was negligible until the middle of the summer, but as a result of the DeFi craze over the summer +143,000 (valued at $1.86 billion) bitcoin has been ported over to ethereum.
Questions Remain
The timing of this launch may seem curious to some observers who watched much of the frothiness burn off of DeFi applications. However, if you look under the hood many proponents remain bullish. The fact that over $11 billion remains locked in various DeFi protocols despite the climbdown adds credence to their resolve. In fact, down periods are often when builders do their most work.
That said, assuming wrapped zcash (or another wrapped asset – which is coming) takes off, it will lead to more difficult questions, such as whether or not it will be valued to the same extent as the base asset. The wrapping process will cause wrapped zcash to lose some of its privacy-enhancing features. However, many investors and enthusiasts are undaunted. For instance, Paul Varadittaki, Partner at Pantera Capital, told me that while “wrapped zcash will have some element of not being completely anonymous like traditional zcash, at the end of the day it will serve well its use case of getting more utility, asset diversification, and awareness of zcash.”
Finally, the DeFi craze over the summer led to substantial congestion on Ethereum, which may only be exacerbated if we see even more assets get placed onto Ethereum. A major value proposition of making these assets Ethereum-compatible is reduced friction and added liquidity. If Ethereum’s transaction fees approach or surpass the record fees we saw over the summer, which averaged $14 a transaction, this could become untenable.
Of course, Ethereum is undergoing a major upgrade that could substantially increase throughput to 100,000 transactions per second from its current level of <20. On the other hand, the answer may be for some of this transaction demand to bleed over to Layer 1 protocols such as Tezos, Polkadot, Near, Tron, Solana, etc.
Forbes will cover some of these questions in more detail in future posts.
This story originally appeared in our premium newsletter, Forbes CryptoAsset and Blockchain Advisor. Click here to subscribe.