Hi all,
I wanted to share some caution around trading or speculating with chain-split or airdropped assets (often called “forks” although that term can mean other different things). This is obviously prompted by the impending Zcash / Ycash chain split, although nothing here is specific to this particular split.
I’m far from an expert on financial issues. If you want to learn from experts about this very topic, I recommend listening to What Grinds My Gears, episode 15: Fork Yourself. I still think my technical and security considerations are pretty good, though. I recommend seeking out other’s opinions, too.
This is my own personal post and isn’t an official ECC post, nor have I asked anyone at ECC to vet this. There are several FIXME comments where I’m soliciting more community scrutiny.
See all of my disclosures and caveats at the end.
Technical, Social, and Security Considerations
Key Management
Recommendation for Zcash/Ycash:
- If you trust a wallet or exchange that offers to support the ZEC/YEC split management for you, that will be the most user friendly experience.
- If you manage your own private keys, ensure after the split to move your ZEC to a new address created after the split before importing the secret key into Ycash software to claim the YEC. If you are using shielded funds, there’s a further privacy consideration below.
When a blockchain splits, there’s often not a lot of user-friendly support for users to manage the newly created asset. Therefore it is common for interested users to attempt to manage their own secret keys directly. This is a big topic and difficult skill, even for experienced users. If there is a wallet or exchange you trust to competently manage the new asset for you, using that is the simplest option.
When a blockchain splits, wallet and exchange software for the two subchains is likely to be developed by different parties with different motivations, competencies, and goals. Be extra cautious about using new software or services, even though it may look and behave similarly to the software or services you already rely on for the original asset.
If you are managing your own private keys in order to claim the new child asset (ex: YEC), I highly recommend avoiding exposing a secret key to any software on the new chain until the funds have been removed from that key on the parent chain. This way, any software bugs or malicious software cannot steal funds on the parent chain.
Notice that in the case of Zcash/Ycash even if you do this for shielded funds, you are still exposing the private history of the Zcash chain to the Ycash software. If this is a concern, move your shielded funds to a newly created shielded address on the Zcash blockchain prior to the split.
Naming Confusion
Recommendation for Zcash/Ycash: No action necessary because this issue doesn’t affect Zcash/Ycash.
When a blockchain split occurs, there can be ambiguity across exchange markets or in-person trades, about what the names or exchange ticker symbols for the child assets are.
In the case of Zcash/Ycash it is highly unlikely for this confusion to exist. Zcash and ZEC are used consistently to refer to Zcash. Ycash and YEC are the names the YcashFoundation advocates for and if any exchange or anyone else deviates from those names, that would deserve a lot of scrutiny. In case of any confusion around Zcash, the Electric Coin Company will exercise its legal rights with respect to the Zcash trademark to help resolve that confusion.
Replay Confusion and Attacks
Recommendation for Zcash/Ycash: No action necessary because this issue doesn’t affect Zcash/Ycash.
When blockchains split from a parent into two children, software that is poorly written might issue transactions that are valid on both child chains. This can cause users to mistakenly transfer one of the child assets when they intend to only transfer the other.
For Zcash and Ycash this is not an issue. In the first upgrade to Zcash, the Overwinter Upgrade, the zcash developers introduced a standardized replay protection mechanism that is forced upon all wallets. We did this specifically to protect users in the event of a chain split.
This means as a Zcash/Ycash user, you do not have to be concerned about this issue. If you are using a Zcash wallet or ZEC on an exchange after the chain split, you will be only transferring ZEC. If you use a Ycash software or YEC on an exchange, you will only be transferring YEC.
Mining Instability and Attacks
Recommendation for Zcash/Ycash: No action is probably necessary because this issue probably doesn’t affect Zcash/Ycash. Watch for any news of unexpected network safety / stability problems for both child chains.
Generally when a proof-of-work blockchain, such as Zcash splits, there is a potential for instability, uncertainty, or attacks related to mining.
In the case of the Zcash / Ycash split this potential should be minimized, because Ycash has altered the mining parameters such that different hardware will be used on the two systems.
FIXME: I am somewhat confident about this, but I may be incorrect. I will ask Ycash developers to verify or correct this assertion after I post this.
Zcash will continue to use the same mining parameters and the existing mining hardware will function without change during the split, whereas Ycash will require different mining equipment (and presumably GPUs will be the best devices there). Because of this, it’s less likely that miners will switch resources between the two systems due to changing expectations about price, ideological behavior, or another reason.
Privacy Considerations
Recommendation for Zcash/Ycash:
- If you use t-addrs, no action is necessary because there are no strong privacy protections for t-addrs already.
- If you use shielded addresses, consider the subtle privacy issue and my uncertain recommendation.
When blockchains split, any addresses, balances, and transactions which don’t have on-ledger privacy can be associated across the two child chains.
FIXME: I need to verify both the technical accuracy and the recommendation below:
For the Zcash / Ycash split specifically it is likely that the first transaction moving shielded funds on each child chain can be linked together, for each input note that existed prior to the split. The impact of this is hard to assess.
If this is a mild concern for you I recommend moving the funds on both subchains close together in time and soon after the split to other addresses you control. My reasoning is that it’s safer than waiting at which point you may send funds to a third party who may learn something about your behavior from the other chain.
I have moderately weak confidence in this recommendation! If it’s a strong concern, you may want to wait for a more thorough discussion or analysis from more privacy technology experts.
Other Concerns I’ve Missed
Recommendations: Use a variety of resources and news gathering to do your own research.
There may be other considerations I’m missing in terms of technical, social, or security issues. Think outside the box and look for more resources instead of only relying on this one post.
Financial Concerns
Uncertain Supply
When a chain splits, it’s unclear how much of the newly created asset will be available for trading on exchanges. It might be initially very low, for example if most users don’t care to access the new asset, if only low-actual-volume exchanges support the new asset, if most of the original asset is stored on exchanges or wallets which don’t support the new asset, or potentially other issues such as network stability/safety issues.
Furthermore, the supply of the new asset available for trading may suddenly sky rocket or receive “supply shocks” such as if a very large exchange suddenly offers to their users to withdraw the new asset.
Uncertain Demand
When a chain splits, typically the child chain is similar in most respects to the parent chain, but with much less adoption or infrastructure since it is a new network. If there is not a very strong distinguishing feature (or perhaps a significant flaw only present in the parent), or future speculative potential, and there is also a much smaller network effect, it’s unclear where buyer demand would come from.
In a highly liquid exchange market for an asset there is a lot of information about demand, but because a new asset coming from a chain split hasn’t yet developed that depth of information, it’s much harder to objectively gauge demand.
Uncertain Liquidity
Given the uncertainty of demand and the technical hurdles, it’s likely that initially around a split there won’t be significant exchange market support. This makes it more difficult for those who do wish to trade to find matching offers, and it very likely to be difficult to trade large portions initially.
Price Uncertainty
Given low liquidity, supply, and demand, any price information will probably be highly unreliable.
A perfect example is the initial ZEC price at launch, where the supply was extremely small (fractions of a single ZEC) and exchange volume thus extremely low. With no liquidity, the prices reported for trading were not reliable measurements of the value.
Asymmetric Information
The combined impact of uncertain supply, demand, low liquidity, and uncertain price all provide substantial barriers to effectively trading a newly forked asset.
Furthermore, the fact that these economic indicators are unreliable publicly suggest it’s possible there will be some actors with more access to privileged information about the market who also have the ability and incentive to trade off of that to their advantage.
Disclosures and Caveats
- You are responsible for your own choices in how to manage ZEC or YEC. These are permissionless systems and with freedom comes responsibility.
- I do not have a background in finance or trading markets. Everything I’ve learned casually since my interest in Bitcoin was first piqued.
- This isn’t investment advice, and I intend to simply share information without making any financial recommendations. My only advice or recommendation is not to risk more of your wealth than you can lose.
- Obviously the timing of this post is related to the impending Ycash split. Nothing in this post is specific to Ycash. However, since it’s the first chain-split off of Zcash, I felt obligated to share what I can in the interest of Zcash (and soon-to-be Ycash) users.
- Also, some of the concepts here imply malicious behavior such as malicious software or questionable trading strategies. I want to stress that I am not aware of any malicious behavior on the part of Ycash or Zcash developers. However, sometimes these malicious behaviors are possible with no involvement or cooperation of the protocol developers or miners, so users should be aware and know how to protect themselves.
Regards,
Nathan