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In December, the Zcash founder resigned from his languishing privacy-centric blockchain. Now he’s back working with a Swiss-based entity trying to fix it from the outside.
By Steven Ehrlich, Forbes Staff
In the fantastical world of crypto, there is a certain amount of veneration afforded to its pioneers. The elusive Satoshi Nakamoto, founder of bitcoin, has achieved mythical status as the industry’s progenitor. Ethereum founder and wunderkind Vitalik Buterin is feted as the intellectual leader of his $283 billion market cap blockchain and conscience for much of the industry. Cardano founder Charles Hoskinson is a cult leader for fans of his ethereum clone blockchain, now valued at $11.5 billion by crypto investors.
Boulder, Colorado-based computer scientist Zooko Wilcox, the 50-year-old founder of privacy blockchain Zcash, is often counted among crypto’s founding fathers. Wilcox, who worked with Satoshi Nakamoto to create Bitcoin, founded his blockchain in 2016. Unlike Bitcoin, which is completely open for anyone to see, his network lets users hide their crypto transactions from the prying eyes of authoritarian governments, banks, and everyone in between.
It might then be surprising to find out that the executive director of the very foundation supporting Wilcox’s creation stormed a Barcelona stage a year ago during his keynote speech to a room full of Zcash’s developers. “If you are going to lie about us, I’m going to step up,”said Zcash Foundation director Jack Gavigan.
The awkward scene exposed a giant rift in privacy coin Zcash’s leadership. While it aims to be decentralized and outside the reach of authorities, key backers, such as its own Zcash Foundation and the Electric Coin Company, which direct development on the blockchain and receive funding from it, are registered in the US and are subject to US laws. During his speech, Wilcox raised this touchy subject – triggering to many of the crypto zealots who make up Zcash’s tiny user base. It means that Zcash must abide by basic things — like the U.S. Treasury’s sanctions list.
One thing is clear: Eight years in, few people actually use Zcash. The protocol earns about $30 a day in fees and processes just 3 transactions a minute. Its total fee revenue of 2023 was only $14,367. Additionally, while tokens such as bitcoin and a prominent derivatives such as bitcoin cash are up 250% and 211% since the market bottom in November 2022, Zcash is still down 18%. And this is after the token surged 64% in June. At its peak in 2021, Zcash had a market capitalization of $3.5 billion today it trades for less than $500 million.
It’s not alone in its struggles. As Forbes pointed out in March, numerous billion dollar crypto zombies roam the digital landscape. Blockchain zombie, Monero, another privacy coin developed in 2014 has a $2.7 billion market cap but like Zcash almost no one uses it – or pays fees.
In December 2023, Wilcox resigned as CEO of the Electric Coin Company. “In the long run, I don’t think this conflation of Zcash with me personally is healthy for me or Zcash,” said Wilcox in his resignation letter.
Now, eight months later, Wilcox has revealed to Forbes that he will join a Swiss-based non-profit called Shielded Labs (SL) to re-engage in the Zcash community as an outsider, and overhaul its operating structure. He already has the backing of Ethereum founder, Vitalik Buterin. Says Buterin, stressing how important he thinks privacy is in digital asset flows, “For something as important as Zcash, its entire future can’t be subject to the results of a small group of people having ego fights with each other.”
Vitalik Buterin is straight with Wilcox about Zcash’s flaws. “From an outside perspective, it is a more centralized ecosystem than Ethereum,” says Buterin, referring to the fact that two entities are effectively calling all the shots.
Most of the privacy coin’s problems stem from the fact that 20% of the rewards of each block mined on its “proof of work” blockchain gets funneled back mostly to the two entities, Zcash Foundation and ECC. From 2016 to 2020, this feature alone generated nearly $5 million in Zcash tokens per year to Wilcox, who was running ECC. This unusual self-funding distribution mechanism has fueled ZF and ECC and effectively given them duopoly control of Zcash.
In most proof-of-work blockchains, like Bitcoin, miners keep 100% of the new bitcoin rewards created when they add a block of transactions to the network. Today, that is worth 3.125 tokens or about $174,000 in bitcoin every ten minutes. In Zcash’s case, the same 3.125 tokens get created with a new block every 75 seconds, good for about $116,244 per day at current Zcash prices. However, with Zcash 20% gets siphoned off to fund operations for the two organizations, plus a grants program called Zcash Community Grants (ZCG), which the ZF administers.
This hard-coded funding mechanism is critical in an ecosystem with little outside venture funding. The downside is it lacks venture capital support. Another problem is that Zcash miners are known to quickly trade out of the token in exchange for more established ones such as bitcoin. “Mining pools are very transparent about the fact that they don’t necessarily care about Zcash,” says Jason McGee, former hedge fund operations manager and founder of Shielded Labs, a Swiss based non-profit recently formed to promote Zcash development. “They’re pretty much dumping on the market and diversifying into Bitcoin or USD.”
McGee and Josh Swihart the new CEO of Electric Coin Company believe that Zcash Foundation has squandered its self-funding. “I was unhappy with the ZF’s inability to deliver anything,” says Swihart, “After the first six years of receiving millions of dollars in funding, they mostly delivered Zcon events [conferences].” Gavigan and another ZF board member did not respond to Forbes’ questions about the foundation’s support of Zcash.
McGee, whose real last name Stramaglia, is a Zcash diehard. He first became a fan of Zcash in 2017, impressed by its ability to let people control their privacy on a blockchain, unlike Bitcoin. In 2018, McGee made a big investment in the token and then started to get more involved in its online community. One of his first initiatives was to persuade Zcash Foundation to be more transparent about how it used its funds. “I identified ZF's failure to comply with their transparency obligations under Zcash Improvement Protocol 1014, which you can think of as a Zcash constitution,” says McGee. “I led this initiative to get them to produce the quarterly reports again and spearheaded several other governance initiatives to improve the grants program.”
Dissatisfied with Zcash’s progress, Los Angeles-based McGee formed Shielded Labs in 2023 and registered it in Switzerland due to the country’s reputation for protecting privacy. The non-profit company received about $200,000 in initial funding from an undisclosed backer with the goal of funding future Zcash development.
Detached from the blockchain he created and nourished, Wilcox began noticing Shielded Labs and its independently funded efforts to improve Zcash in early 2024. He contacted McGee, and the two formulated a plan for the iconic Zcash founder to join the fledgling non profit. “Since Shielded Labs is not the recipient of any of the dev fund, this gets us off the hook of this mandate that I've been living under for eight years,”says Wilcox referring to his tenure at ECC.
Today, Shielded Labs is looking to raise the modest sum of $1.1 million. So far, crypto billionaire twins Cameron and Tyler Winklevoss have signed on. “Zcash allows you to take back control of your money and your privacy. Shielded Labs is helping advance the Zcash mission, and I'm excited to support its impactful work,” says Cameron via email.
With Zooko Wilcox leading the charge, Shielded Labs’ intervention couldn't come at a more critical time for Zcash. In July, network participants held a series of community polls, where respondents overwhelmingly voted to stop sending 20% of block rewards to Zash Foundation and Electric Coin Company as of late Novermber, when Zcash’s next halving is set to occur. In crypto the vote amounted to a boardroom coup. Like Bitcoin, Zcash reduces the number of new tokens created with each block every four years. In the future, 20% of the block reward allocation will be split between grants for Zcash developers and an escrow account, known as a lockbox, for future use.
Set somewhat adrift, ZF and ECC will now be forced to subsist on the funding left in their treasuries plus any other funds they can raise independently. According to the most recent ZF transparency report, Q4 2023, the Zcash Foundation had $9.2 million remaining. ECC has about the same in its treasury. Of the two Zcash backers, ECC is embracing Wilcox and Shielded Labs proposed changes. Gavigan’s Zcash Foundation refused to talk to Forbes.
“Historically, the user experience for Zcash has been really poor,” says ECC’s Swihart. “ You have early adopters who are quite comfortable with technology, but for most normal people worldwide, it's just not accessible.” Swihart wants future development to move away from the “bottom of the stack”, where Zcash’s coders have largely focused, to a full-stack model with easier-to-use wallets to hold and send assets.
Additionally, there is a growing movement to shift Zcash away from its current proof-of-work setup to a proof-of-stake consensus mechanism, or perhaps a hybrid of the two. This would replace miners running expensive and energy hungry machines to process transactions with a model dependent on user nodes, known as validators. With staking, validators would post zcash as collateral for the same opportunities to earn rewards in the form of zcash tokens. Ethereum went to proof of stake in 2022. “[Staking] ensures that the chain continues to have security even in an environment where there's going to be lower fees, and there's going to be lower issuance,” says Buterin. It would also likely create more alignment between validators and Zcash because stakers would be less likely to sell their earnings immediately.
Consensus mechanism aside, the big question facing Zcash and others is whether there is enough demand for privacy coins in the first place. Users value convenience over privacy. It’s one reason why most have shrugged off privacy breaches and concerns on mega tech platforms like Facebook or TikTok. “The bulk of the financial value of many of these blockchains comes from average people that want to trade cats and dogs,” says Buterin. “Privacy, in general, is definitely the sort of thing that never really succeeds.”
Currently most Zcash users focus on trading rather than private transactions. The blockchain offers users a choice between absolute privacy, shielded transactions, and more transparent ones similar to Bitcoin. There are 16.3 million zcash tokens in circulation today. Of that supply, just 1.48 million, or 9%, are in shielded pools, meaning that they can be used in private transactions. The number has grown over the years, but it remains small in terms of the overall supply.
In the end, Zcash is unlikely ever to approach Bitcoin, Ethereum, or popular stablecoins regarding usage, even as it remains an essential tool for segments of the global population that must protect their wealth at all costs.
Fervent as ever, Wilcox likes to tell the story of a Syrian refugee who participated in the country’s pro-democracy protests early in the last decade. “He found out that he was on the enemies list of the government, they seized his bank accounts, and he had to flee. He used zcash to protect his wealth. He talked to me years later and said,” You Americans don't understand what Zcash means. Zcash is a way to have the rights of an American without being an American.”