In the world of cryptocurrencies, one coin stands out: Zcash. Edward Snowden calls it one of the most interesting cryptocurrencies that exist. Last year Fortune magazine ran a cover story on the eclectic group of people building Zcash.
With over $1.4 billion in market cap, Zcash is arguably one of the fastest growing cryptocurrencies in the world — around this time last year, the value of Zcash was hovering around $32 and now it’s over $450 a piece.
The company behind Zcash has raised close to $3 million from investors including Naval Ravikant of Angel List, keenly followed for the early trends he spots, and a clutch of investment firms.
Last week, we interviewed Bryce “Zooko” Wilcox, a cypherpunk and the founder of Zcash, to understand why the world needs another cryptocurrency, how likely are cryptocurrencies to go mainstream and will enterprises ever put the blockchain to real use?
Bitcoin is unsuitable for personal or commercial use because it fails to provide its users privacy, says Wilcox on a call from Moscow, where he travelled to speak at a conference. Edited excerpts:
What problem is Zcash solving?
To appreciate the problem, it’s useful to look at Bitcoin. Before, we had centralised financial systems like the banking system. None of the centralised systems are native to the internet and they don’t go everywhere the internet goes. Bitcoin was a great leap forward because it is a financial system that goes anywhere the internet goes, like the email.
Bitcoin is really useful to send money across borders. It’s very important that Bitcoin doesn’t have a central governing organisation that controls it because that way people can rely on Bitcoin to continue to be scarce. But it has a deep problem that it exposes the records of transactions used to move money from one account to the other to everyone on the whole network.
You can’t use Bitcoin for personal use. If you got paid your salary in Bitcoin and then you bought coffee with it, then the coffee shop owner could learn what your salary was (by looking at the Blockchain) and your boss would learn what you do after work. Worse than that, even just random criminals who are looking for targets could find out what your salary is and where you go after work. So Bitcoin is completely unsuitable for consumer use because of complete loss of privacy.
We reuse all of the good ideas from Bitcoin and then we add this layer of encryption so that the payment of Zcash from one user to the next is included in the global replicated ledger for integrity.
It’s also unsuitable for commercial use because companies require confidentiality of their transactions for either regulatory or competitive reasons. That’s why we invented Zcash which is just like Bitcoin. We reuse all of the good ideas from Bitcoin and then we add this layer of encryption so that the payment of Zcash from one user to the next is included in the global replicated ledger for integrity (the recipient of the money can be sure that the payment has happened) and it’s part of the global consensus but it’s encrypted so no one else can learn of your behaviour by looking at the ledger except for authorised parties who you have given the decryption key to.
That encryption layer is Zero Knowledge Proof. How does it achieve the privacy objective here?
Zero Knowledge Proof is a new… well, it’s not that new. It was originally a scientific discovery in the 1980s. The people (pdf) who discovered it won the Turing Award (the highest honour for a computer scientist) for discovering the existence of Zero Knowledge Proofs. It wasn’t until a few years ago that scientists discovered methods of computing Zero Knowledge Proofs that were efficient enough that we could put them into blockchains.
With the Zero Knowledge Proof, you can prove the truth of some statement without revealing the statement. For example, you could use Zero Knowledge Proof instead of sending someone a scan of your driver’s licence over the internet, you could use a Zero Knowledge Proof which proves that there’s a document which is an official ID card and has my name on it and it shows that I’m licensed to drive and over 18 years old. But it doesn’t show any other fact such as my birth date, address and such. With Zero Knowledge Proof you can choose what facts you are going to prove the truth of and it doesn’t reveal anything else besides those facts. So, it’s a mind-boggling concept like a robot that can only tell the truth and everyone knows that if the robot gives you an answer, it must be true.
In Zcash, we use that since it became possible to make Zero Knowledge Proofs that were sufficiently compact to be put on a blockchain. In Zcash, I don’t have to reveal my actual account ID, I’ll just prove to you that there is a document which proves that I own one of the coins. You can post this to the Zcash blockchain and all of the miners and validators can verify the proof that you own the coin and you did not previously double spend it. (Editor’s note: Double spending is when the same digital coin is spent more than once because it’s been counterfeited.)
You can include a message with your payment like a purchase order number or a customer account number or something like that to explain to them why you’re sending them this money.
Therefore, they are willing to add your transaction to the blockchain. You give the recipient the decryption key and so they are able to see the transaction and they know how much the coin you gave them is worth. Also, you can include a message with your payment like a purchase order number or a customer account number or something like that to explain to them why you’re sending them this money. Or you could put a little note if you want. In fact, I know someone who has an encrypted love note on the Zcash blockchain.
Do you see the possibility of using Zero Knowledge Proof-based blockchains in countries like India – for example, India is talking about putting college certificates on the blockchain so that it can be easily verified.
That’s an interesting one. It’s an exciting moment because the science and the technology is pretty new and Zcash is the first time Zero Knowledge science has been applied in a viable manner even though the science has been discovered in the 1980s. Now that it has been proven to work, a lot of entrepreneurs around the world can think of other applications of Zero Knowledge Proofs. It’s interesting how many there are if you start thinking about it. For example, if you want to put college certificates on the blockchain, obviously you don’t want to post them publicly for anyone who touches the blockchain to see. It seems obvious to me.
Zero Knowledge proofs could potentially be one way to make that possible by posting encrypted forms of certificates to the blockchains and then you would be able to use it to prove facts about your certificates or some parts of your certificates without divulging private information to the wrong partners.
Zcash as a cryptocurrency can also be useful to people in India. Like Bitcoin, it is a thing you can buy and use to send money around the world. I would like to see people doing services like language translations, therapy, writing editing, art or something over the internet but clients should be able to pay them in Zcash instantly.
How do you pay someone with cryptocurrency when the money keeps fluctuating? Do you see this stabilising?
There are longer-term solutions that people may experiment with to hedge so that if the price of the coin changes you make sure roughly the same amount. Even in the short term, you can probably fix this just by agreeing in terms of Rupees or other value. Then, you use the coin as a medium of exchange. Imagine if you agreed to get paid a lakh a month and then on the day of your paycheque, you receive a certain amount of Zcash which is worth Rs 1 lakh that day and you could sell it the same day. That’s just a low tech solution. In the future, there may be technology or more sophisticated financial infrastructure that allows you to own cryptocurrency while being insulated from the price variation of the currency.
Are you seeing any interest from India for Zcash?
There’s a lot of interest from techies – engineers and computer programmers. But the Indian cryptocurrency exchanges that offer Bitcoin and Etherium don’t offer Zcash yet. All of your readers should open a support request with their crypto exchanges saying you want Zcash because privacy is good for society and helps protect and improve the prosperity of the whole economy. Just like the world wide web couldn’t have taken off for business if it hadn’t been upgraded from HTTP to HTTPS. (Editor’s note: HTTP is short for Hypertext Transfer Protocol which forms the bedrock of the Internet and HTTPS is Hypertext Transfer Protocol Secure, in which the data flow is encrypted thus making it more suitable for business use cases such as e-commerce.)
Is there a bubble in cryptocurrency or not? How do you see this play out in the next five years?
One question is: are there scams? There certainly are. There are fraudulent, irresponsible raising of money, Ponzi schemes and people should be wary of that. One of the big questions is does it make sense for money or something of value to be valued solely because of scarcity and social consensus? The surprising fact when Bitcoin came out is that a lot of people thought that Bitcoin could never retain value because it has no backing or underlying asset that guarantees its value. I think these people are really confused. The truth is no form of money has any backing or underlying asset that provides value.
Some people think that Bitcoin or Zcash must lose their value based on that argument but that’s not correct.
The next question is whether the fundamental technology works or not. We’re getting better and better demonstration that it does work and is valuable to people. As years pass by, it continues to survive all threats and attacks. It’s still early. It’s only been one year for Zcash and nine years for Bitcoins. It takes longer than that for such a radical idea to percolate through all the societies around the planet. We can expect it to continue to be more widely understood year after year.
What are the factors that need to come together for this to go mainstream? Right now it is used by people who understand technology and not so much for day-to-day transactions.
It already happened for the use of cryptocurrencies as a speculative investment in the last six months in South Korea and to a lesser extent in the United States. In South Korea, almost one-third of all working adults have bought cryptocurrency. That’s mainstream. However, it’s not mainstream as a method of exchange. To get to the next level, we’re going to have to solve the scalability problem and that’s an unsolved science challenge that many smart people in the cryptocurrency industry are working on.
In South Korea, almost one-third of all working adults have bought cryptocurrency. That’s mainstream.
Today, all of the cryptocurrencies including Bitcoin, Ethereum and Zcash have a very limited capacity. Bitcoin ran out of capacity where there wasn’t room for all the users. So, the ones who were willing and able to pay higher fees could use it. That same barrier is probably going to hit Etherium in 2018. The scientists are all working very hard to figure out how to expand the functionality to greater and greater numbers of people while maintaining the decentralisation properties that make it attractive in the first place. It might take years and it might be that we’re unable to solve it in 2018. It is far from certain if it’s possible at all and how we achieve it. That’s a huge challenge for the whole industry.
Do you see government regulations leading to slow adoption of cryptocurrencies? For instance, in the Budget session, India’s finance minister said cryptocurrencies aren’t legal tender.
Different countries have different regulatory regimes. It’s been interesting how in China the government has clamped down on cryptocurrencies and ban them. It will be interesting to see how much they are able to stamp it out versus how much it becomes underground but stays vibrant in China.
At the same time, other countries have taken different approaches. Some Asian countries like Japan, Singapore and South Korea seem to be attempting to perhaps regulate some of the risks but certainly not trying to eliminate the whole phenomenon. On the contrary, those countries impose detailed and consistent regulation that encourages a lot more of investment into the cryptocurrency infrastructure.
The US is a great example of regulation done well. Or at least it promises to be.
The US, it turns out, is quite positive about the promise of cryptocurrencies and regulators responsible for managing such things have been pretty consistent about simultaneously detecting and deterring scams and also encouraging the growth of the legitimate industry. The US is a great example of regulation done well. Or at least it promises to be. (Editor’s note: Earlier this month, the United States held a Senate hearing in which SEC Chairman Jay Clayton and Commodity Futures Trading Commission Chairman Christopher Giancarlo called for coordinated regulation of the industry. Here’s a brief overview of what went on at the hearing.)
Russia has a thriving scientific, technical, entrepreneurial ecosystem but the government seems confused or self-contradictory because different parts of the government has issued statements that contradict one another. That’s not a very good way to get any outcome.
Countries are going to observe the effects that other countries get when trying different policies. Some countries are going to benefit from the technology and the industry and also the financial industry itself. It’s going to be very profitable for governments and industries to have cryptocurrencies as a financial tool for their use. This will take several years to play out.
How do you see enterprises taking up solutions like these?
As far as I’m aware, all of the enterprise solutions of blockchain so far are still in a preliminary stage. It could be that’s just because iterating such complex and high-value systems take many years of careful effort or you could say pessimistically that blockchain is failing to satisfy their needs and it will eventually be abandoned. I don’t know which it is yet. I’ve been waiting for several years now to find out about the application of blockchain to enterprise use cases which gains traction and gets more and more users and makes more money.
The Zcash and JP Morgan partnership is making an enterprise blockchain technology which could be a leading candidate for the breakthrough that allows enterprises to use blockchain for real-world use cases.
What are the top priorities for Zcash this year?
First, we are going to upgrade the cryptography protocol of Zcash so all users will have to upgrade their software. The new software will have encryption which is 10 times more efficient from the first generation. We’re also supporting all users to continue using the network and more users joining. The important thing is to demonstrate that a decentralised open network can remain completely accessible and reliable even if it’s going through an upgrade.
Our second goal is to study and figure out the scaling problem so that we are able to onboard a billion more users in the future.
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Visuals: Rajesh Subramanian.
Disclosure: FactorDaily is owned by SourceCode Media, which counts Accel Partners, Blume Ventures and Vijay Shekhar Sharma among its investors. Accel Partners is an early investor in Flipkart. Vijay Shekhar Sharma is the founder of Paytm. None of FactorDaily’s investors have any influence on its reporting about India’s technology and startup ecosystem.