By: Ryan Donnelly (@thegoatlist)

The original article can be found on Ryan’s Blog

“Please note that while I’m certain that none of my tens of followers around the globe would be foolish enough to treat anything I say as investment advice, this is not investment advice. This is an introduction to a fascinating piece of technology that I’m excited about.”

Introduction

This week was historic for Bitcoin. Elon Musk, the most important entrepreneur of our lifetime, officially backed the most important invention in the history of money. 

He’d danced around with the idea in the past, and had some fun promoting his favorite cryptocurrency, Dogecoin, but on Monday Tesla announced it was moving $1.5 Billion in cash reserves into Bitcoin. That’s roughly 10% of Tesla’s cash on hand.

People often compare Bitcoin with the Internet, noting that following the progress of cryptocurrencies today is similar to following the progress of the Internet in the 90s. I think Monday, February 8, 2021 might feel like the turn of the 21st century for crypto in hindsight. We still have trouble explaining what this technology we’ve stumbled upon is and what it will do for us, but it is completely clear that it is here and here to stay.

One of the most exciting things about studying cryptocurrencies is learning about the myriad other ways that Bitcoin’s mind-bending concept of achieving distributed consensus can be applied. Bitcoin is a protocol that allows for a peer to peer exchange of value, but if we’re headed towards a truly global, borderless, and individually sovereign world, other protocols will need to be built (and are being built/have been built) designed specifically for other types of applications needed to power our new system. Much like the Internet needed TCP/IP but also HTTP and SMTP, the future will need not just Bitcoin, but other protocols as well.

This is where things can get tricky, as there are thousands of “altcoins” (anything other than Bitcoin) out there in cryptoland, and many of them are scams or simply will fail. So extra caution is required when studying or especially investing in any protocol other than Bitcoin. But to give an example of how the technology used to invent Bitcoin can be applied elsewhere, Ethereum, the second largest cryptocurrency in terms of market capitalization, is a more general purpose protocol that allows for the creation of decentralized applications, most of which thus far have been financial but could be related to other industries as well. Basically, almost any financial service you can imagine that today is done through the analog system (lending, exchanging, derivatives, stocks) can now be written into computer code and executed peer to peer, without any third party involvement, just like in Bitcoin. For more on this, check out this great introductory conversation about Ethereum and crypto in general with the project’s founder (and potential alien life force), Vitalik Buterin.

But let’s take a step back here - what is the point of all of this? Why do we need it?

One answer is that a peer to peer marketplace that is truly global is greatly advantageous for commerce in general. Want proof? Try sending money to Albania, or better yet, try drawing up a financial contract to do business with someone in Albania (it doesn’t have to be Albania). It makes sense that if we can do these things globally and instantaneously, we will.

But if improving things is the only goal, can’t we just take this technology and plug it into our existing infrastructure? Why is it important that it’s separate? Why is it important that it’s peer to peer? That’s a great question, and I would answer it in two parts.

First, it’s actually going to be easier to create a new financial system than to fix the current one. A few weeks ago, I wrote an article about how “Companies Are Biological Organisms,” and I think the same principles in that article, especially the last paragraph, apply here:

“A company goes from having a small team full of irreplaceable, incredibly dynamic employees early on until they hit a point where every employee must be replaceable in order for the organism to grow and scale. This isn’t a bad thing, and these companies aren’t evil. It’s just the nature of the process. The organism must grow as large as possible and sustain as long as possible, until bureaucracy slows progress to a point where entrepreneurs diagnose new problems, and the next generation is born.”

“Bureaucracy” is the word from that paragraph that I think rings true in this context. What do you think will happen first? Our existing financial infrastructure, incentivized in many ways not to embrace change, will innovate and create the decentralized world described above, or that it will be a distributed group of nimble entrepreneurs, incentivized financially beyond their wildest dreams? Never bet against the Internet.

Secondly, and most importantly, the peer to peer nature of cryptocurrencies is critical to remove the extent to which individuals are reliant on outside institutions on a day to day basis. Here in the United States, that’s a very important concept, but in a global context still a bit of a nicety. We’d prefer if Facebook didn’t sell our data. We’d prefer if Robinhood didn’t sell our data. We’d prefer if the NSA didn’t have full access to our nudes. Decentralization will be important to us, but ask a Venezuelan, an Argentinian, a Nigerian, or people from hundreds of other countries around the globe what the opportunity to unplug from their existing financial system and into one born on the Internet, completely decentralized, and verifiably trustworthy might mean for their family and the future of politics in their country, and you’ll hear about a lot more than convenience.

In short, cryptocurrencies are one of the greatest inventions in human history. Bitcoin is the tip of the spear, but other protocols will be created to complete this system that will allow for levels of commerce, individual sovereignty, freedom, and privacy the likes of which human beings have simply never been able to achieve before Satoshi Nakamoto’s white paper was released to a cryptography mailing list on October 31, 2008. Privacy is where Zcash comes in.

Zcash

One of the big misconceptions about Bitcoin that amazingly continues to circulate in the media is that it is an anonymous new currency used by criminals. Bitcoin is not at all anonymous. In fact, if you were looking to poke a hole in Bitcoin’s utility, privacy would be one of the best places to start. Every Bitcoin transaction is recorded on a public ledger, or logfile. The transactions are pseudonymous (from one address to another), but not completely anonymous. And there are companies, like Chainalysis, that literally specialize in studying blockchains and reporting on these public transactions. And guess who their biggest customer is? The United States government. Intelligence officers have jokingly referred to Bitcoin as “criminal futures” due to the transparency of the network.

This is a problem, and something that Satoshi was well aware of. Privacy is a fundamental human right, and so it is critical that we incorporate it into this new decentralized world. Satoshi would’ve loved to do that (he/she/they/it discussed the problem on early Bitcoin forums), but there was no way to create the trust necessary to run Bitcoin without the transactions being recorded on the public log. The cryptography simply didn’t exist. Until October 28, 2016, when Zooko Wilcox and his team released Zcash.

Zcash is actually a relatively simple cryptocurrency protocol to explain from a high (very high) level, because in many ways it is just like Bitcoin. It is a protocol that allows for a peer to peer exchange of value, and the economics are the same as in Bitcoin (only 21 million ever mined). The major difference is privacy. Transactions don’t have to be private (you can make transparent ones if you’d like) but you have the option to send transactions through Zcash’s “shielded pool,” where the transaction is still posted on a public blockchain, but the sender, recipient, and transaction amount remain hidden.

How? A combination of groundbreaking cryptography and zero-knowledge proofs that didn’t exist before roughly 2014. A zero-knowledge proof is basically a way to prove to someone that you have something, without giving them any information other than the fact that you have it. This is incredibly complicated stuff, so if you’d like to do more research and not just take it as fact from a guy that likes to write about sports and his Australian shepherd in his free time, you can learn about the technology from the founder himself in this great podcast with Anthony Pompliano.

Again, let’s take a step back here. Other than this being a cool magic trick, why is Zcash important?

It is important because again, privacy is a fundamental human right. Freedom of speech, association, and assembly are made abundantly clear in the US Constitution. With cryptocurrencies, we’ve turned computer code into money, and computer code is another version of speech, so, as Naval Ravikant says, essentially we’ve turned money into speech. If we don’t have the option to have completely private money, we don’t have freedom of speech. It’s as simple as that.

Let’s give some real world use cases. Let’s say that regardless of the opinion of the United States government, you believe that the work being done by Julian Assange and Wikileaks is important. Or let’s say that, despite the opinion of the social media mob, you believe that Donald Trump was a better option for President than Joe Biden. Would you really want your donation to these causes to be recorded on a public ledger, stamped into history forever and viewable by anyone who cared to look? You might not mind, but how many people would be afraid to donate (and thus speak their mind) if they did not have the option to do so privately? Let’s leave the cozy US and take things up a notch. Let’s say that your country is run by a dictator capable of raiding your home and confiscating your assets in the middle of the night. Would you risk a donation to the opposition on an open ledger?

Why Zcash

If you’re familiar with cryptocurrencies, you probably already know that Zcash is not the only protocol related to privacy. Orchid and Monero are two projects that are fascinating to me that deserve a lot of attention, but Zcash is the one that I have the most personal conviction about. Why? Because I’ve been studying the cryptocurrency tea leaves for a few years now, and all signs seem to lead towards this protocol being the most critical to succeed in this incredibly important aspect of our lives.

This space is incredibly difficult to wrap your head around. I’d wager that the number of people qualified to truly understand the cryptography, distributed systems architecture, and source code associated with cryptocurrency protocols is maybe in the tens of thousands, globally. I don’t think it’s in the hundreds of thousands, and certainly not the millions. So at some point, after researching everything we can, us plebs lean on others to some extent for direction and understanding. It was easier to bet on Bitcoin when Jack Dorsey first talked about it. It was even easier last year when Paul Tudor Jones, Stanley Druckenmiller, and Bill Miller started talking about it. It’s easier than ever now that Elon Musk has joined the team. To achieve a network effect, you need to have something special. But you also need the network.

Here are some people in the cryptocurrency space that I respect that have continued, in my time studying the space, to point to Zcash:

• Vitalik Buterin, in the interview linked above, when asked about other people to follow in the space for those getting started, gives one name - “Zooko from Zcash”

• Naval Ravikant, Founder of AngelList, investor in Twitter and Uber and general crypto god, tweeted a month ago - “ Learn about privacy coins” and when asked for a follow up said “I recommend Zcash and Monero” (it should be noted that Naval is an investor in Zcash)

• Balaji Srinivasan, former General Partner at Andreessen Horowitz and one of the people most often credited with introducing cryptocurrency to Silicon Valley, wrote a brilliant piece last week about “Why India Should Buy Bitcoin” - in it, he writes that Bitcoin led to the “creation of remarkably valuable technologies, like Ethereum and Zcash.”

• Tyler and Cameron Winklevoss, famous for their early adoption of Bitcoin and the founders of Gemini, have both expressed their support for the project. Tyler tweeted on January 1st that “ZEC is easily the most underrated crypto right now” and Gemini supports shielded Zcash withdrawals, which are critical for mainstream adoption

• Ryan Selkis, founder of Messari (the Bloomberg of the crypto world) is a public supporter of Zcash. If you’d like to dive deeper into his take on Zcash as well as the general public’s, this Twitter thread is incredibly helpful.

Finally, it’s obviously important when studying any technology to understand the background and intentions of it’s founder or founders. You’re looking for someone brilliant, but also someone with integrity. Zcash was created by a group of amazing engineers, but the project is led by Zooko Wilcox, who is possibly the most genuine and likable person I’ve stumbled upon while studying the space. He’s been working on cryptocurrency, believe it or not, his entire career, starting out as a junior engineer at DigiCash, one of the precursors that explored some of the ideas that eventually made Bitcoin possible. He’s not only technically impressive, but also inspiring to listen to when he talks about the importance of privacy. If Zooko is faking it, then Daniel Day Lewis has competition for the greatest method actor on the planet.

Criticisms

Ok, we get it - Zcash is a brilliant and critically important innovation. But the world isn’t all sunshine and rainbows. Surely there must be criticisms, right? Here are the four main arguments I’ve continually heard against Zcash in my ~year of keeping an eye on the project, and why I mostly choose to ignore them…

1. ZCash’s “shielded pool” isn’t truly private yet - This one makes sense to me, but I ignore it because it sounds like a short term problem. What the critics are saying is that if there are 100 Zcash users, and 99 of them use public transactions, and only 1 of them private transactions, then you know who’s doing the transactions in the shielded pool. Zcash is obviously on a much larger scale than this already, but some believe that because of the separation of the pools, figuring out the current users in the Zcash shielded pool is just like a very difficult sudoku puzzle. Difficult, but not impossible. However, when the number of users reaches a certain point, the sudoku puzzle does become impossible, and that is why I’m not concerned in the long term.

2. Governments will shut down private cryptocurrencies - This is another fair argument that I think is worth talking about but is ultimately another short term problem. We’re going to watch governments try to figure out how they should work with cryptocurrencies over the next ten years. That might result in some occasionally misguided regulation, but ultimately it is my belief that in the end freedom and cryptography will win, just like they did with the Internet. As Dr. Ian Malcolm would say, life, uh, finds a way. And this is actually an area where I believe Zcash has an advantage over the other “privacy coins,” because they’ve been very open to working with regulators to help explain why this technology is important. They’re criticized for this by some in the crypto world (big no-no to work with traditional folk in any way according to the revolutionaries), but I believe that this is the correct approach because privacy isn't only important on the individual level. Do you think that Apple, or the US Government for that matter, wants their transactions recorded on a public ledger?

3. Zcash is a “test net” for Bitcoin  - Every Bitcoin believer is concerned with privacy, and Bitcoin’s core developers do have privacy upgrades on their roadmap, particularly with the “lightning network,” so some have speculated that Zcash, while interesting, will ultimately be a project that works out the kinks and discovers the best privacy solutions that will eventually be added to Bitcoin. What I believe those speculators are missing is that the Bitcoin developers have been famously careful in implementing any additional development features to Bitcoin, which is a very good thing. If you’re building a protocol that is digital gold, built for everyone in the world, then you want that protocol to move at a meticulous, glacial pace. From everything I’ve gathered, the changes necessary to add the kind of privacy features offered by Zcash would be akin to creating an entirely new Bitcoin blockchain, something the developers are very unlikely to ever even consider. I think it’s difficult for some to wrap their heads around the idea of using multiple cryptocurrencies because it makes sense that there should just be one, but I believe there will be a time when changing out of Bitcoin and into Zcash directly on your mobile device will be just as easy as jumping out of Instagram and into Twitter, or navigating different cards in your Apple wallet. A world where Bitcoin is digital gold, the protocol used as a store of value and the standard against which every other protocol is measured, with Zcash being one option to allow for completely private day to day transactions makes a lot of sense to me.

4. Adoption has been slow, and investors are frustrated - The meme of the Zcash investor in the crypto world is that of a guy sitting on the sidelines while all of his friends get filthy rich. It is not uncommon for tokens in the Decentralized Finance space to grow by 5x in a day. Zcash on the other hand, after exploding in value upon initial release, crashed along with everything else after the 2017 bubble and has completely failed to gain any serious momentum since. As I said at the beginning of this article, this is not investment advice, but if I were to put my investor hat on for a moment, when I hear “sure, the technology is groundbreaking, but adoption has yet to take off and investors have yet to see any returns,” that is literally music to my Warren Buffet ears. Zcash is currently #49 among cryptocurrency tokens in terms of market capitalization, so I do believe it is wildly undervalued given its potential impact. I believe that adoption has been slow because people are still wrapping their heads around Bitcoin. It’s kind of like when the iPhone came out, and there was no immediate demand for an app like Signal.

Conclusion

There are other criticisms, particularly from other protocol communities who are competing to solve the privacy problem, but I’m really not concerned with any of that. All I care about is finding the best technology to address the fundamental human right of privacy in this explosive and game-changing new industry, and figuring out how I can support it. 

In short, Zcash is a protocol that I believe has the potential to be critical to the future of cryptocurrencies by offering the kind of privacy that every human being deserves. There are other important privacy protocols (this is not zero sum), but Zcash is the one I have the most personal conviction about based on my own research and the opinions of folks in the space that I respect and frankly who have been right time and time again. The known here is the incredible technology. The unknown is whether the protocol will see a significant network effect like we’ve seen in Bitcoin and Ethereum. Predicting network effects is nearly impossible, but from everything I’ve learned and my genuine belief in the purpose of their mission, I’m betting on Zooko and the team at Zcash.

P.S. - I’m sure that I missed a lot of important details. If you’d like to get in touch and correct me on something or share a different perspective, please shoot me a note at thegoatlist28@gmail.com

Go Zcash!