Executive Summary: Zcash NSM and Dynamic Fees Discussion

General
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Event: Shielded Labs Twitter/X Spaces
Topic: Network Sustainability Mechanism (NSM) and Dynamic Fees Proposals
Participants: Jason, Zooko, Nate, Mark (Shielded Labs team) and community members
Context: Held alongside Zcash governance sentiment polling (deadline: February 20th)

Note: AI generated. Expect mistakes.

Key Proposals

1. Network Sustainability Mechanism (NSM)

Problem: As block rewards decline over time, networks with a fixed supply cap (like Bitcoin’s 21 million) face a security budget crisis—fees alone may not sustain miner incentives.

Solution: A three-part mechanism allowing ZEC to be burned and recycled into future block rewards without exceeding the 21 million cap:

ZIP Function
ZIP 233 Voluntary burn mechanism for users/wallets to donate ZEC to the network
ZIP 234 Smooths issuance using an exponential curve (~4-year half-life) instead of discrete halvings
ZIP 235 Burns 60% of transaction fees automatically

Key Design Decision: The team chose smooth issuance over preserving halvings because attempts to combine recycling with a halving schedule proved too complex. Halvings can continue as a ceremonial celebration when issuance reaches half its previous rate.

Reception: Described as “uncontroversial” with ~70% support from engineers and unanimous support from ZecHub in prior polling.

2. Dynamic Fees (EIP-1559 Style)

Problem: The current static fee model can’t respond to demand spikes. During congestion or spam attacks, wallets fail with unhelpful error messages rather than giving users meaningful options.

Solution: A market-based fee mechanism with two tiers:

  • Standard Fee: Median fee from the previous 50 blocks—guarantees inclusion within ~50 blocks

  • Priority Fee: 10x standard fee for faster confirmation during congestion

Privacy Enhancement: Fees bucketed by powers of 10 (1,000 / 10,000 / 100,000 ZATs) reduces “fee entropy” from 3.76 bits to ~0.25 bits, making it harder to fingerprint users.

Design Advantages:

  • Simpler than EIP-1559 (no consensus state required)

  • Fees expected to drop to 20-50% of current levels under normal conditions

  • Compatible with future scaling solutions (Tachyon, block size increases)

Other Topics Discussed

Crosslink: A finality gadget adding proof-of-stake security to Zcash’s proof-of-work consensus (not in current polling, but considered part of Shielded Labs’ “Voltron” of complementary upgrades).

Block Size Increase: Community interest exists, but the team views it as orthogonal to dynamic fees. Concerns include increased trial decryption costs for wallet syncing. Tachyon may address scaling more fundamentally.

ZSA Compatibility: The NSM is designed to work seamlessly with future Zcash Shielded Assets—any ZSA minting fees could feed into the burn mechanism automatically.

Action Items for Community

  1. Vote by February 20th via coin holder voting (requires ZEC in a modern shielded wallet) or community panel participation

  2. Questions can be directed to the Zcash community forum or via Twitter/X

  3. Ten proposals total are being considered for the next network upgrade

Shielded Labs’ Position

The team emphasized urgency: “The best time to plant a tree is 30 years ago and the second best time is today.” They view these mechanisms as foundational to making Zcash “unstoppable private money” with a credible, sustainable 21 million supply cap—distinct from Bitcoin’s unresolved security budget problem.

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Listening to Nate’s motivation for NSM, something clicked.

He designed it thinking about ZSAs, layer 2s, and bridges. The problem he wanted to solve: how do you funnel value from ecosystem activity back into the base layer? Ethereum has this problem with L2s extracting value without feeding it back.

This connects directly to a conversation happening in the Zcash NU7 into a JAM service . @sourabhniyogi asked for “a tZEC and zUSD plan for Zcash rollup hosts that creates demand for ZEC outside the private transfers use case.”

NSM is that plan. Or at least the foundation for it.

If Zcash becomes a rollup host, ZSA minting fees, rollup activity, layer 2 fees can all burn into the NSM and strengthen ZEC security. Value flows back to the base layer instead of getting extracted.

Without NSM, Zcash as a rollup host has the same value leakage problem as Ethereum. With NSM, there’s a natural economic loop.

Nate built the infrastructure for a multi-chain Zcash before most of us were even thinking about it.

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AI wars have begun! Great talk everyone :student:

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Thanks to everyone who attended today’s X Spaces discussion!

Here are the links to the early Helios polls we ran in late 2024 to gauge general sentiment on the NSM. As I mentioned on the call, the sample size was small, but we received 20 responses from ZecHub, all of which supported the NSM, and 17 responses from the engineering community, with 12 in favor and 5 opposed.

There was also a coinholder poll where roughly 264,000 coins voted in favor of the NSM.

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