Crypto Privacy Part 2: Zcash vs. Monero

In the first few years of Bitcoin’s existence, one of the features that attracted the most attention from early advocates was the ability to make private transactions.

Bitcoin’s Privacy Woes

In a financial system where banks, businesses and government authorities heavily monitor consumer purchases, the ability for one to vanish from the radar of these intrusive entities and freely buy and sell goods is highly appealing.

Bitcoin promised to not only serve as a peer to peer electronic cash system, but also a tool to fight against censorship and increase financial autonomy through decentralization and privacy. However, it’s become clear over the years that the pioneer cryptocurrency isn’t actually as private as many had hoped.

For more information on the details of this, check out BTCManager’s Crypto Privacy opener on the subject.

The nature of its public blockchain is such that transactions are easily traceable to the source, making it possible for individual addresses to be blacklisted from transacting with crypto exchanges, merchants, or governments.

Regardless of whether one believes that tracking purchases is necessary for law enforcement to prevent terrorism, money laundering or other criminal activity, the fact remains that Bitcoin as a medium of exchange has failed to deliver a solution for allowing people to make transactions privately.

Enter Monero and Zcash, two privacy-focused cryptocurrencies that emerged in 2014 and 2016 to occupy the space where Bitcoin seemed to fall short. Monero and Zcash both seek to obfuscate all three parts of a standard cryptocurrency transaction: the sender’s address, the receiver’s address, and the amount being sent.

Monero History

Monero was first developed in 2014 by a Bitcoin forum user known by his handle thankful_for_today. The project was initially called BitMonero and was forked from the Bytecoin codebase.

The project was poorly received in the beginning and updates were neglected before being picked up by a new development team who renamed the project to Monero. Today Monero’s development is lead by Riccardo Spagni, otherwise known as fluffypony.

Monero uses a Proof-of-Work (PoW) consensus protocol and a hashing algorithm called CryptoNight; an application layer protocol that provides full anonymity within a payment network.

The Monero blockchain achieves anonymity for all three parts of the cryptocurrency transaction by using ring signatures, Ring CT, and stealth addresses.

Ring Signatures:

Ring Signatures are a function that disguises the address of a sender by enabling multiple parties to sign the transactions. The numerous signatures make it harder to determine who the original signer was.

Ring CT (Ring Confidential Transactions):

Ring CT is a feature that obfuscates the transaction value of funds being transferred, while simultaneously making it possible for the transacting parties to acknowledge the amount being transferred, and for the network to confirm the validity of the transaction (a detailed explanation of the process is explained further here).

Stealth Addresses:

With stealth addresses, senders create a one-time address that is based on the recipient’s address. This allows only the sender and receiver to determine where the Monero was sent.

Monero’s Monetary Policy

Monero’s current circulating supply is 16,861,063 XMR at time of press. Their market cap is $905 million, which ranks them as #13 on CoinMarketCap.

What differentiates Monero from other cryptocurrencies is that it will continue to produce 0.3 XMR tokens per minute even after the cryptocurrency has reached its total supply of 18.4 million XMR by May 31, 2022.

This continuous supply of XMR tokens is expected to continue forever, giving Monero a steady inflation rate of about 0.92 percent per year (this rate is expected to slowly decrease each year).

The reason for implementing this inflation policy is to secure continued interest in mining new XMR tokens once the maximum supply of 18.4 million XMR tokens is produced. With a steadily increasing inflation rate, miners will continue to be incentivized to mine new XMR tokens without having too much concern that those tokens will be worth less than they were a year ago (due to the slowly increasing inflation rate).

Zcash History

Zcash was launched on October 28, 2016, as an offshoot of the Zerocoin protocol. This protocol ultimately became the Zcash cryptocurrency, which rebranded to Electric Coin Company’s and is run by CEO Zooko Wilcox-O’Hearn.

Zcash uses a type of zero-knowledge proof called zk-SNARK to make transactions anonymous. Zk-SNARK is a type of zero-knowledge proof that has been upgraded to allow no interaction to be required between two parties for the transaction to occur.

A unique trait about Zcash is its unique addresses. Addresses that begin with a ”t” (called t-addrs) are transparent addresses like Bitcoin. Addresses that begin with “z” (called z-addrs) are anonymous or “shielded.”

Today, just about 4.9 percent of transactions are shielded.

(Source: Zchain)

When funds are sent from a t-addr to a z-addr, you can see the ZEC leaving the t-addr, but then its destination address is hidden.

(Source: Zcash Blog)

Zcash Monetary Policy

Zcash has a circulating supply of 6,109,831 ZEC and a total supply of 21 million ZEC. Their market cap is $335,905,465, which ranks ZEC at #21 on the market cap list.

Ten percent of Zcash’s 21 million coins are allocated to founders and developers over a set timeline that ends in 2021.

Like Monero, Zcash is also expected to produce more coins after reaching its maximum supply. As of January 2019, their inflation rate was 0.11 percent per day, which is close to $400,000 per day in ZEC.

This is significantly higher than Monero’s inflation rate of 0.92 percent per year. The projects CEO Zooko has stated, however, that the company intends to reduce the inflation rate.

Comparisons

From a technical standpoint, Zcash and Monero approach private transactions in different ways. With Monero, all XMR addresses are visible, yet it can’t be determined who owns which address or how much money is being sent. On the other hand, Zcash’s shielded transactions hide all information.

Also, Zcash transactions are only anonymous when the addresses start with a z, and only 4.9 percent of Zcash transactions are anonymous, while Monero transactions are always anonymous.

This distinction has arguably played a significant role in the adoption of both currencies. Zcash currently has more partnerships with wallets and other businesses due to their ability to make transactions with their t addresses. With Monero, the privacy aspect is not optional, which makes it difficult for companies that implement KYC policies.

Monero beats Zcash when it comes to total privacy, a larger developer community, and a more balanced inflation model. However, Zcash makes privacy optional, which means it can be used across more wallets and is faster and cheaper because of the transparency of their blockchain.

Regardless of which cryptocurrency is “better,” both coins currently serve as a superior privacy solution to Bitcoin. Each empowers users everywhere to experience more freedom in their purchase choices without being monitored by governments, businesses or financial institutions.