This was originally shared as a members-only post through faybomb.substack.com - I hope you guys enjoy the "behind the wall" look!
I’ve made it no secret that I’m a major advocate for privacy-focused cryptocurrencies in the past. I obviously have an affinity for Zcash (ZEC-USD), which is not something that has helped my crypto investment portfolio all that much. ZEC has essentially been in meltdown mode for a good 18 months or so. There are of reasons for this:
Down with everything due to Crypto Winter
Block space attack in 2022
Core developer company layoffs earlier this year
Privacy-focused crypto being generally out of favor
Unprofitable mining hurting network security
It has been a bloodbath for ZEC longs to say the least. Back in May, I wrote that the “bottom was in” on Seeking Alpha. ZEC was $37 per coin at the time. Today, it’s about $27. Evidently, the bottom was in. One of the things that I loved about running BlockChain Reaction (my crypto-only research service through SA) for the year that I did was that it opened my eyes to just how awful some of these protocols, coins, and tokenomic structures in the crypto industry truly can actually be. I explored literally hundreds of these coins looking for diamonds in the rough and it is admittedly a harder thing to do than I anticipated when I launched BCR. Most of them just don’t solve a real problem.
For all of the problems ZEC bulls have endured the last two years, the Zcash protocol is not a project that fails to solve a problem. Namely the lack of privacy on base layer chains like Bitcoin or Ethereum. For the remainder of this article, I’ll detail why I think 4 or the 5 issues listed above are effectively now solved or close to solved. I’ll also detail what I think the last major hurdle is.
1: Crypto Winter
There is very little doubt in my mind at this point that we’re in the process of exiting “Crypto Winter” and entering “Crypto Spring.” We’re seeing it in the explosiveness from some of the alt coins, see Solana. We’re also seeing it in broader crypto investment data from institutions:
According to data from CoinShares, the $326 million pumped into crypto funds last week is the single biggest week of inflows since July 2022. There is clearly demand for digital assets and it’s increasingly looking like the SEC is going to cave and soon approve a spot Bitcoin ETF.
To be sure, Bitcoin is leading this charge. And from that same CoinShares , the chart above shows the price of BTC measured in Peso, Lira, and Niara; all examples of fiat currencies failing in real time. Surely the dollar will be different?
2: Block space attack
I’ve covered this here and elsewhere. I’ll touch on this very quickly by sharing one of my previous explanations
Since the Zcash network didn't account for block size through a proportional fee structure that charged more fees for more data, it allowed a spammer to maximize the outputs on unused Zcash block space at very little cost. This spam attack lasted for roughly 10 months and I believe it is the core reason behind ZEC's underperformance. Last month, the Zcash development community finally fixed the issue.
We can see through the average block size chart that the average size per block was indeed a problem for the better part of a year but the spam attack has indeed ended given the necessary changes to the network:
Following this and other upgrades to the Zcash mobile SDKs, the ECC declared victory over the network’s recent challenges:
A journey that began in the late summer of 2022, has finally come to a joyful end. Third-party Zcash wallets are working again, and Electric Coin Co. (ECC) is exiting Emergency Mode
3: Layoffs at ECC
Look, layoffs at the company that is serving as a blockchain’s core developer are not a good thing. But one thing that layoffs do force is development work getting pushed to the broader community.
We’ve admittedly seen a decline in contributor count since the beginning of the year, which isn’t terribly uncommon going back through Zcash’s history. One thing to note though is the biggest single week spike in code commits happened just a few weeks ago. This is despite ECC layoffs in May. I think that’s a good sign an indicative of work continuing.
4: Privacy-crypto is a hot stove
Let’s call this one a “push.” There’s no question usage of the crypto mixer protocol Tornado Cash fell off immediately following sanctions last August
We’ve also seen competing privacy-focused layer 1 blockchains like Horizen completely punt on privacy all together this year. Yet, the shielded pool on Zcash has remained near 1.4 million ZEC for most of 2023. This represents about 8-9% of circulating ZEC supply:
In my view, what has really hurt the ability for the shielded pool to grow is just how annoying it has been to download the chain and run a full node. Essentially, using ZEC for its intended purpose hasn’t been enjoyable. Given the upgrades to mobile SDKs and how much better the UE now is, I’m hopeful that we’ll see this pool supply start to trend higher again.
5: Mining vs PoS
The final element missing for a proper ZEC rally is network security. As I detailed in a prior ZEC postHeretic Speculator, one of the major concerns I had at that time was the unprofitability of ZEC mining. When coins aren’t profitable to mine, hash rate comes offline and the chain is more susceptible to 51% attack and we’re already at that point with Zcash.
ViaBTC controls 56% of the distributed hash. This is very dangerous territory and if ViaBTC was a bad actor, they could essentially destroy the viability of the ledger. Fortunately, hash rate has rebounded slightly from summer lows. But we’re still well off highs.
This largely because it is still unprofitable to mine ZEC at current coin prices. In time, none of this will even matter because Zcash is following Ethereum’s lead and migrating from a Proof of Work to Proof of Stake consensus mechanism in the future.
I want to make it clear that I actually really like Proof or Work consensus mechanisms. I think it’s important that we have cryptos that validate in this way and I’m glad the Bitcoiners believe so strongly in PoW as a principle. However, proof of work is not perfect. It does require more energy and that can lead to consolidation. But for me, the most important problem with proof of work mining is the more expensive it becomes to secure the network, the further away it gets from “the people’s” thing.
Proof of stake also has quite a bit of of imperfections. For instance, in PoS the one with the biggest stack may have the most power and that’s not ideal either. But if one is going to do proof of stake, doing so with a fixed supply is the right way to go in my view. This way network users will end up paying for transactions through fees rather than coin holders paying through inflation.
Final Takeaways
I’ve started buying ZEC again. I’m not going to say we can’t see a retest of $24 or $25 in the days and weeks ahead. But I do think the worst is over for ZEC.
The coin continues to be totally undervalued compared to other payment-focused L1 chains like Bitcoin, Bitcoin Cash, and even Litecoin based on 90 day average NVT ratios.
In my view, ZEC has taken an enormous amount of punches this year and it’s still chugging along. We’re probably still quite some time away from PoS migration and I’m sure there will be more bumps along the road, but I do think the worst is over. And I suspect with some of the alts now catching bids again after Bitcoin dominated for much of the year, ZEC will garner some interest.
ZEC may not outperform Bitcoin over a long stretch of time. But even before PoS migration, I think Zcash it’s going to get some turns here and there in a crypto market that feels like it has bottomed. Anyway, those are just my thoughts on all of this for now. Best of luck out there.
Disclaimer: I’m not an investment advisor. I’m wrong a lot. I’m long ZEC and holding a paper loss on that position.
