Disclaimer: The views expressed here are my own and do not necessarily reflect the views of my employer, ECC. Also, all of this is intended for education and dialogue – none of this is financial advice.
Introduction
The purpose of this post, and the ones I plan to follow-on with, are to provide my perspective on the state of the Zcash project, challenges and roadblocks, as well as thoughts on various paths forward. I intend to be forthright and candid with the perspective and opinions I express.
For those that don’t know me, I currently work as the SVP of Growth for the Electric Coin Company, creators and supporters of Zcash. I joined the company in March of 2018 and have been either directly responsible for, or led the team that included alliances, global regulatory relations, US policy, product strategy, product marketing, growth, and digital.
Prior to ECC, I was the CEO and an owner at Aspenware (exit to Aspen Skiing Company and Alterra), the SVP of Global Marketing for VC-backed K2 (exit to Francisco Partners), a global practice principle for the Interlink Group (exits to EMC and TPG), and co-founder and VP of software development for 3t Systems. I cut my teeth as a C++ and COBOL developer, building customer care and billing systems for telecom providers. My interest in privacy protections came mid-career, after building intelligence and surveillance systems for government and commercial use, and then witnessing the implications.
Based on my history at ECC and prior experience, I have unique insight into various happenings and implications that don’t always make it out into the public. Even if the opinions I express here are not shared by everyone, I hope the community finds them informative and useful. Please bear in mind that the opinions expressed here are mine alone. Any errors and oversights, are my errors and oversights.
Topics I might explore over time include the state of Zcash user adoption, development, governance, access and support, liquidity, regulation and policy, off-chain digital trends, and potential considerations as we the community determine our collective path forward.
This first post focuses on the state of adoption through the lens of on-chain activity.
State of ZEC Adoption
For many of us, the conclusions reached in this post have been intuited and often discussed. What I hope to do here, is provide data to support these intuitions and set a baseline for future discussion and measurement of progress.
ZEC has a constrained supply of 21M and an inflation schedule that mirrors Bitcoin. As such, the price of ZEC is the cleanest indicator of market adoption. If more people are using ZEC more often, the price will naturally go up as demand increases. If more people are storing ZEC for future use, the price will naturally go up as the available supply decreases.
Let’s look at the history of price as well as the underlying primary use cases (outside of speculation): store of value and medium of exchange.
The following chart shows the daily closing price of ZEC in US Dollars since the beginning of 2017.
Source: CoinMetrics
The price is somewhat correlated to the broader crypto market, where price drops during crypto bear markets, and then tends to rise with the rest of the market. No surprise there.
I believe the price relative to Bitcoin (BTC) is a better signal for ZEC market sentiment, especially given the current overlap of use cases and Zcash as a “better Bitcoin” thanks to its privacy option, encrypted memo and pace of innovation.
The following chart shows the closing price of ZEC relative to BTC since the beginning of 2017.
Source: CoinMetrics
From this graph, we clearly see that the ZEC price trend has been down since mid 2017. All of us multi-year zodlers are familiar with this trend. There are factors that play a part, such as the relative rate of inflation during the same time period and first mover advantage, but the signal is clear. To date, the Zcash ecosystem isn’t delivering sufficient value to meaningfully affect this trend. The world may wake up to the need for crypto privacy tomorrow, and there are hopeful signs that it may, but it hasn’t yet.
Or perhaps this is mostly just relative speculative interest, and not tied to any meaningful utility for either project. Let’s examine a couple other data points related to ZEC’s use cases to see if we can gain more clarity on market demand.
The case for ZEC as a private store of value might be correlated with how much ZEC is being socked away into shielded addresses. Are people really using it for that?
The following graph shows total number of ZEC stored in shielded addresses.
Source: CoinMetrics
This graph is clearly up and to the right, with ZEC holders adding to their shielded stash. It’s an important graphic, as users are increasingly comfortable stacking zats in the Zcash shielded pools. What it doesn’t tell us is how many people or organizations are shielded ZEC holders, simply that more ZEC is being shielded. It is a reasonable assumption that many ZEC holders have been moving funds from transparent to shielded addresses over time, but due to Zcash’s privacy, we can’t know. It does seem that for some, Zcash is increasingly trusted as a private store of value, and yet, this doesn’t appear to have significantly impacted new ZEC demand.
Let’s look at other on-chain activities to confirm that assumption. The number of ZEC active addresses (transparent only) might give us some information about the growth and health of the network. Metcalf’s law states that the value of a given network is proportional to the square of the connected users (n2). If we see an incremental growth in connected users, we expect to see an exponential increase in “value” as demand increases.
The following graph shows the number of active transparent ZEC addresses since 2017, smoothed with a 7 day average.
Source: CoinMetrics
Again, we see performance wane in the bear markets and increase during the bull markets, an apparent indicator of high sensitivity to short-term speculation. Note that the spike of active addresses in November of 2022 is likely correlated with the recent sand-blasting attack, demonstrating that a motivated single user can skew these metrics.
That said, if new users are consistently coming in, I would expect to see an ever increasing number of active addresses. I would also expect to see an ever increasing number of active addresses if the “medium of exchange” or payments use case for ZEC was taking off.
Let’s now look to see if the number of zodlers is increasing. Again, due to the use of shielded addresses, it’s impossible to know for sure, but I expect there would be some correlation between activities in the transparent and shielded pools.
Here is a graph of the number of active transparent addresses holding at least .01 ZEC (blue), .1 ZEC (red), 1 ZEC (green) and 10 ZEC (purple), smoothed with a 14 day average.
Source: CoinMetrics
Growth in the number of addresses with smaller balances (.01 - 1 ZEC) were growing exponentially until 2018, and then began to drop around the time when GPU mining was no longer a profitable option because ASICs miners were coming online. In my opinion, that was a tipping point as many Zcash enthusiasts around the world lost the ability to easily obtain ZEC without using an exchange.
Let’s look at larger zodlers. The following graph of the number of active transparent addresses holding at least 100 ZEC (red), 1,000 ZEC (green), 10,000 ZEC (blue), smoothed with a 14 day average.
Source: CoinMetrics
We have continued to see moderate growth in addresses with larger balances (over 100 ZEC), even during the bear markets. The larger zodlers have diamond hands and stacking more!
While I am encouraged by the increase in addresses holding over 100 ZEC, the continual decline in addresses with smaller balances is concerning to me. I suspect that new users start small and then gradually increase their holdings over time. We aren’t seeing that trend here, and so it’s no surprise to me that we aren’t seeing the exponential growth of market value.
For comparison, here is a graph of the number of active Bitcoin addresses holding at least .01 BTC (blue), .1 BTC (red), and 1 BTC (green), smoothed with a 14 day average.
Source: CoinMetrics
For Bitcoin, the number of active addresses with smaller balances (.01 - .1 BTC) are growing at a healthy clip as compared with ZEC, even through all the volatility.
Let’s now look at usage by way of transaction volume. The following graph shows the number of ZEC transactions over time. The blue line represents the total number of all transaction types including both shielded and transparent, the green is the number of fully shielded transactions, and the red represents transactions where either the sender or receiver is shielded.
Source: CoinMetrics
The 2020 bump in shielded use occurred shortly after miners were able to mine to a shielded coinbase. The July 2022 spike corresponded to the sand-blasting attack.
Here is the same graph, but for Bitcoin.
Source: CoinMetrics
As with the total transaction volume of ZEC, the Bitcoin transaction volume has been relatively flat until recently. This spike in volume can be attributed to the creation of Ordinals (Bitcoin based NFTs), which represents a new Bitcoin use case beyond store of value or medium of exchange. However, this activity did not appear to drive the growth of new active addresses, which has ranged between 800,000 to a million since October of 2021. It appeared to drive on-chain activity but not necessarily new Bitcoin users as of yet.
What can we conclude about all this?
It may be the case that there is a core group of ZEC believers that continue to add to their shielded stack, but the value of the network continues to trend in the wrong direction as compared with Bitcoin. No new active users exchanging value, no network effects. No network effects, no exponential increase in value.
While the private store of value use case is needed and sticky, it does not appear to have driven new-user adoption. In order to get to n2 value growth, it is likely peer-to-peer exchanges of value, or payments, will be the driver. This makes logical sense, as the peer-to-peer transfer of ZEC inherently leads to these desired network effects.
Of course there may be new use cases, such as ZSAs, that are able to spur net new growth. But as seen with Bitcoin Ordinals, it’s important to assess the type of activity it fuels and the net demand for the ZEC asset itself.
It’s my opinion that this kind of information should be used by the community to determine development focus and funding across two vectors: tooling and specific use case development.
As for tooling, funding p2p payments utility/adoption, payments infrastructure, wallets and cross-chain interop with world-class UX, will likely yield much better adoption growth than, say, hardware wallets (which I desperately want) or non-payments related tech. We should think full stack, as those building payments infrastructure need a protocol and SDKs that are well documented and highly functional.
As for specific use case development, that’s a topic for another day.
It seems perfectly logical to me that we should focus on, explore and fund the best means to maximize the use of ZEC for private value exchange if we want to see a near-term increase in new user adoption.
Thanks for reading.
