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Zcash Price Analysis – Founder’s reward ceases after recent block reward halving

Following the first Zcash block reward halving, which occurred earlier this week, the ZEC founders' reward which was a part of every block mined was removed. The reward that accounted for 20% of the block reward was continually paid to early investors, funded coin development, and was used to promote the Zcash ecosystem.

Zcash (ZEC) is a privacy-oriented fork of the Bitcoin protocol, currently ranked 36th on the Brave New Coin market cap table. The market cap currently stands at US$651 million with US$234 million traded in the past 24 hours. The ZEC spot price is down 93% from the all-time high set in January 2018.


Watch a summary of this analysis on YouTube

A quick comparison between coins with privacy capabilities shows that ZEC is leading the total daily transaction volume by a wide margin. Other coins with privacy features include Monero (XMR), DASH (DASH), Zcash (ZEC), Grin (GRIN), and PIVX (PIVX). However, both XMR and GRIN obscure blockchain transaction values and addresses.

FA1

The ZEC protocol is based on Zerocoin, which was developed in 2013 and later turned into Zerocash, with a difficulty adjustment algorithm adopted from DigiShield v3. The ZEC cryptocurrency went live in 2016 and trading began in late October 2016.

The total ZEC supply will grow to a final number of 21 million, with a current annual inflation rate of about 12.5% (pink, chart below). The ZEC block reward halving occurred earlier this week reducing the block reward from 12.5 ZEC to 3.125 ZEC every 75 seconds. The ZEC inflation rate is among the highest of any cryptocurrency. In contrast, Bitcoin (BTC), DASH, XMR, GRIN, and PIVX annual inflation rates are 1.85%, 5.88%, 1.91%, 54%, and 3.97%, respectively.

FA2

Source: CoinMetrics

As opposed to the ICO model, ZEC uses a "Founders’ Reward" for funding development. The Reward, which will eventually account for 10% of all minted ZEC, was initially agreed to be distributed as follows; 5.72% for founders, employees, and advisors, 1.65% to initial investors, 1.44% donated to the ZEC Foundation from other members receiving the Reward, and 1.19% to the Electric Coin Company, formerly the Zcash Company. The Zcash Foundation also receives additional donations from members receiving the Reward. The Reward has ended after the block reward halving earlier this week.

In total, 20% of the mining rewards are distributed to founders or developers to promote the ZEC ecosystem. The ongoing incentive was designed to encourage a dedicated team to provide continual development for the project over several years.

According to a Q4 2019 transparency report, the Electric Coin Company (ECC) held approximately US$3.9 million in USD and ZEC, based on the December closing price of US$27.23. ECC’s holdings at the June ZEC price were approximately US$7.2 million in USD and ZEC.

The ECC is led by founder and CEO Zooko Wilcox. The company constitutes what is described as “the creators and stewards of the Zcash currency.” Notable advisors included Bitcoin developer Gavin Andresen, Ethereum founder Vitalik Buterin, and Arthur Breitman from Tezos. Roger Ver was also one of the Zcash Company’s initial investors. Earlier this year, Andresen formally announced his departure as a technical advisor for ZEC.

The Zcash Foundation was created in February 2017, and is an independently operated 501(c)(3) “dedicated to building Internet payment and privacy infrastructure for the public good, primarily serving the users of the Zcash protocol and blockchain.” Current foundation members include Andrew Miller, Peter Van Valkenburgh, Amber Baldet, Matthew Green, and Ian Miers. Green and Miers were both part of the original ZEC founding team. According to a Q2 2020 report, the Foundation holds 110,700 ZEC, 46.3 BTC, and US$4.3 million.

Last year, the ECC and Zcash Foundation had been at odds regarding the ZEC trademark. The ECC announced the donation of the ZEC trademark to the Zcash Foundation in November 2019, with no strings attached. Under this new agreement, both parties must agree on any network upgrade intended to create a new consensus protocol for ZEC. If the parties ever disagree, and the disagreement cannot be resolved before activation of the network upgrade, the chain splits and neither implementation, neither the new fork nor the existing fork, can be called Zcash.

The trademark resolution occurred in the setting of Wilcox asking for further developer funding through a dev fund, currently set to expire this year. After a community sentiment poll in November, among the community advisory panel, ZEC forum and coin holders, the winning proposals included a 20% dev fund and significant funding for the ECC and Foundation. In contrast, both DASH and DCR allocate 10% of the total respective block rewards to fund development and operations.

FA3

Source: ECC Blog

The Zcash Foundation implemented several improvements to the ZEC ecosystem in the past two years. In May 2019, Zepio, a privacy-focused wallet which sends shielded transactions by default, was released. In June 2019, a partnership with Parity Technologies to release a new software client, Zebra. Written in Rust, the open-source client is an alternative to zcashd and brings redundancy should zcashd fail. The client is also designed to detect problems related to the consensus mechanism and implementation-specific bugs. Ethereum (ETH) also has two clients, Parity and Geth, for similar reasons.

The Zcash Foundation also accepts grant proposals to fund privacy-oriented projects. In the future, the Major Grants Review Committee and a community advisory panel will also aid in approving applicants. In 2019, just over 1,000 ZEC, or US$40,000, was donated towards the Open Privacy Research Society, which promotes privacy-enhancing technologies. The non-profit group is currently working on Cwtch, a decentralized metadata-resistant messenger.

The ZEC protocol leverages zk-SNARKs, or Zero-Knowledge Succinct Non-Interactive Argument of Knowledge, which is based on zero-knowledge proofs. The protocol uses zk-SNARKs for optional privacy elements. ZEC addresses beginning with a "t" are transparent, and addresses that start with a "z" include privacy enhancements and are referred to as "shielded addresses."

FA4

The ZEC protocol underwent two upgrades in 2018, “Overwinter” on June 26th, and “Sapling” on October 29th. Both upgrades were enacted through hard forks, and both enhanced transaction efficiency and scalability for shielded addresses.

The Sapling upgrade has reduced the zk-SNARK proving time from 37 seconds to 2.3 seconds and introduced zc (legacy shielded) and zs (Sapling shielded) addresses. The shielded transaction count continues to represent a small fraction of total transactions, currently around 20% (blue line, chart below).

The shielded pool would be much larger if exchanges did not disable the optional privacy functionality when sending ZEC. In December 2017, programmer jeffq discovered that shielded transactions on ZEC can be linked to non-shielded transactions unless both the sender and receiver were part of the “shielded pool” of anonymous transactions.

FA5

Source: explorer.zcha.in/statistics

The ZEC project on Github has 26 repositories with 723 commits on the main repo in the past year (top chart, shown below). The Zcash Improvement Proposals repo (bottom chart, shown below) has also been fairly active over the past year. Both repos mainly consist of commits by developers Daira Hopwood and str4d. The ECC also has some nascent plans to build a new chain with sharding and privacy by default. This process would also involve a chain migration, which is similar to the pending migration from ETH 1.0 to ETH 2.0.

The “Blossom” upgrade, v2.1.0, went live in December 2019 and included; shortening the target block times from 150 seconds to 75 seconds, a mempool size limit to prevent denial of service attacks, and discontinued backward compatibility with Sprout proofs to decrease the attack surface of the ZEC Codebase. Zcashd v.2.1.1-1 was also released in February, which changed how nodes enforce timestamp requirements on block headers.

Zcash v3.0.0 was released in May bringing the “Heartwood” update, which allows mining to Sapling shielded addresses. Mainnet activation of Heartwood occurred at a block height of 903,000 in mid-July. Zcash v3.1.0, released earlier this year, deployed the following ZIPS; 207: Funding Streams, 211: Disabling Addition of New Value to the Sprout Value Pool, 212: Allow Recipient to Derive Sapling Ephemeral Secret from Note Plaintext, 214: Consensus rules for a Zcash Development Fund, 215: Explicitly Defining and Modifying Ed25519 Validation Rules.

The fifth major network upgrade, Zcash v4.0.0, was released earlier this year and supported the next upgrade, “Canopy”, which was added to the protocol earlier this week. The upgrade also finalizes the ZIPS released in v3.1.0.

Most coins use the developer community of Github where files are saved in folders called "repositories," or "repos," and changes to these files are recorded with "commits," which save a record of what changes were made, when, and by who. Although commits represent quantity and not necessarily quality, a higher number of commits can signify higher dev activity and interest.

FA6

Source: Github – zcash

FA7

Source: Github – zips

The total number of transactions per day on the network (red line, chart below) has continued to rise since January, breaching a one year high in August. Non-shielded transactions per day are, on average, down from levels seen in late 2018. Average transaction values (green fill, chart below) are currently US$4,000, up from an April 2018 low of US$62, and recently reached a new all-time high of nearly US$15,000. This calculation does not include values from shielded addresses and is an average calculation among transparent addresses.

FA8

Source: CoinMetrics

The average daily block size (line, chart below) continues to sit at or near all-time lows in Q3 2020. Block size is a measure of both chain usage and a chain’s ability to scale. Average transaction fees (fill, chart below) have declined since June 2018, and are currently US$0.014. The Sapling upgrade reduced memory costs by 100x, which in turn now makes these transactions cheaper to send.

[FA9

Source: CoinMetrics

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (green line, chart below) has decreased to 30 over the past few weeks. A clear uptrend in NVT suggests a coin is overvalued based on its economic activity and utility, which should be seen as a bearish price indicator. A downtrend in NVT suggests the opposite. The under 20% of shielded transactions on the chain are not included in this calculation, meaning the true NVT is likely slightly lower than the metric suggests.

Monthly active addresses (MAA) have declined substantially from the January 2018 high of 96,000 to the current 38,000 (red fill, chart below), now sitting at a multi-month high. This calculation only includes unshielded addresses and if the usage of shielded addresses increases, the number of transparent addresses may begin to decrease.

Active addresses are important to consider when determining the fundamental value of the network based on Metcalfe’s law. ZEC has fewer MAAs than BTC, ETH, DASH, Litecoin (LTC), DOGE (DOGE), Bitcoin Cash (BCH), and Ethereum Classic (ETC).

FA10

Source: CoinMetrics

The market cap divided by the realized cap (MVRV) is another crypto-native fundamental metric used to assess overbought or oversold conditions. Realized cap approximates the value paid for all coins in existence by summing the market value of coins at the time they last moved on the blockchain.

Historically, periods of an MVRV less than 0.4 have represented oversold conditions, whereas periods of an MVRV greater than 1.0 have represented overbought conditions. Of the MVRV levels above 1.5 since January 2017, all three have coincided with record highs in price. Currently, MVRV is 0.75 and slightly rising, suggesting bullish market conditions.

FA11

Source: CoinMetrics

ZEC uses the Equihash Proof of Work (PoW) algorithm, which was originally thought to be ASIC-resistant. However, Bitmain developed ASIC miners for the Equihash algorithm, which first went live on the network in May 2018, and shipped broadly in June 2018. Bitmain also recently released another ASIC, the first in 2020, which will likely push the hash rate higher over the next six months. All available Equihash ASICs are currently profitable at US$0.04 per KWh (below), even after the recent block reward halving.

FA12

Source: asicminervalue

In response to the rise in ASIC use on the chain, the ZF announced an initiative towards researching ASIC resistance on the chain and the ECC concluded that the “ultimate objective” is the broad inclusion of both hobbyists and professionals. The ZEC community voted and decided to discourage ASIC resistance as a priority and instead focus on currently unused PoW algorithms. Any future changes will need approval through the ZEC Improvement Proposal (ZIP) process.

Hash rate and difficulty increased rapidly since April 2019, continuing to set new all-time highs every few months. The use of ASICs to mine a cryptocurrency can mean the network potentially becomes much less decentralized over time as the hardware continually squeezes out miners with less hashing power. While constant PoW adjustments decrease ASIC use substantially, the process may also lead to a different type of centralization through the need for constant node upgrades.

FA13

Source: BitInfoCharts

Over the past month, the ZEC hash rate has been distributed between a few anonymous mining pools. Two public pools, Flypool and ViaBTC, share 12.5% of the total blocks mined. An unknown miner, t1YN48, accounts for 27.1% of total blocks mined. The large number of unknown pools may be related to the newly released Bitmain ASIC for the chain.

FA14

Source: beta.zcha.in/statistics/miners

Worldwide Google Trends data for the term "zcash" has remained flat since July 2018, with a slight uptick in June 2019 and recently in November. A slow rise in searches for "zcash" preceded the bull run in Q4 2017, likely signaling a large swath of new market participants at that time.

Google Trends data has been found to have some correlation with crypto prices. A 2015 study found a strong correlation between the Google Trends data and BTC price, while a 2017 study concluded that when the U.S. Google "bitcoin" searches increased dramatically, the spot BTC price dropped.

[FA15

FA16

Technical Analysis

ZEC continues to highly correlate with some of the USD crypto markets over the past few months but has lagged behind most of the high market cap coins. The possibility of bullish continuation can be evaluated using exponential moving averages, volume, the Ichimoku Cloud, and pitchforks. Further background information on the technical indicators discussed below can be found here.


Watch Josh’s YouTube Channel for how to use these Technical Analysis tools

On the daily chart for the ZEC/USD pair, the 50-day Exponential Moving Average (EMA) and the 200-day EMA crossed bullish on February 4th, only the third such cross since trading inception for the pair. This Golden Cross was short-lived, with a Death Cross on March 15th. On June 5th, these EMAs crossed bullish once again, leading to a 115% bull rally. Over the next few days, a Death Cross may occur, signaling bearish momentum once again.

Price remains above the Volume Profile of the Visible Range (horizontal bars, chart below) congestion node from US$47 to US$67, with minimal upside VPVR resistance until US$240. Yearly pivots also show horizontal resistance at US$96 and US$166 with a support pivot at US$56. If price fails to hold at or above the $50 zone, a revisit of the March lows, near $30, becomes increasingly likely.

Bitfinex open interest is 96% long (top panel, chart below), with longs increasing dramatically in mid-August. A significant price movement downwards will result in an exaggerated move as the long positions will begin to unwind. Additionally, there are no volume or RSI divergences at this time to suggest waning bearish momentum.

TA1

Turning to the Ichimoku Cloud, four metrics are used to indicate if a trend exists; the current price in relation to the Cloud, the color of the Cloud (red for bearish, green for bullish), the Tenkan (T) and Kijun (K) cross, and the Lagging Span. The best entry always occurs when most of the signals flip from bearish to bullish, or vice versa.

Daily cloud metrics, with doubled settings (20/60/120/30), for more accurate signals, are bearish; the spot price is below the Cloud, the Cloud is bearish, the TK cross is bearish, and the Lagging Span is below the Cloud and above the current spot price. The trend will remain bearish so long as the spot price remains below the Cloud, currently at US$77.

TA2

Lastly, on the ZEC/BTC pair, trend metrics suggest a bearish trend as price sits above the 200-day EMA and daily Cloud (not shown). Price also sits near the median of a multi-year bearish pitchfork with a Death Cross. Once the trend is defined, the spot price will continually attempt to return to the median line (yellow). Upside resistance for the pitchfork sits at 0.0091 BTC, which matches VPVR resistance in that zone. Strong volume support sits from 0.0043 BTC sats to 0.005 BTC sats. Bitfinex open interest is currently 97% long, and a bullish divergence on RSI suggestive of waning bearish momentum.

TA3

Conclusion

Controversy has surrounded ZEC thanks to the Founders’ Reward, which replaced a traditional ICO. The purpose of the Reward was to continually pay those who were early investors in ZEC, as well as fund coin development and promote the ZEC ecosystem. The Reward accounted for 20% of the block reward, up to a maximum of 2.1 million ZEC, and ended after the first block reward halving, which occurred earlier this week.

Based on community sentiment polling, a continued 20% block reward allocation towards ZEC development and ecosystem management will continue to occur past the halving later this year. Future protocol upgrades for ZEC potentially include changing the privacy mechanism to default and migrating the chain from Proof of Work to Proof of Stake.

Current block reward funding allocation includes; 7% for the main ZEC developer, the Electric Coin Company (ECC), 5% for the Zcash Foundation, which supports the ecosystem through indirect ZEC development, such as wallets and nodes, or privacy-oriented grant proposals, and 8% towards independent grant proposals. This is in contrast to other coins with developer funds, like Dash and Decred, which allocate 10% of the total block reward to a developer treasury.

On-chain statistics show a decline in non-shielded transactions per day and a rise in non-shielded active addresses over the past few weeks. Even with the integration of Sapling, shielded addresses are only being utilized by less than 20% of transactions. NVT and MVRV, both an inverse measure of on-chain economic activity, now sit in neutral territory, suggesting increased on-chain activity relative to the current market cap.

Technicals for both ZEC/USD and ZEC/BTC show a bearish trend as both pairs sit near or below their respective 200-day EMAs and far below daily Clouds. Downside support for ZEC/USD sits at US$50 based on a yearly pivot and VPVR. The ZEC/BTC pair continues to sit within a multi-year bearish pitchfork which will invalidate beyond 0.0091 BTC. Both pairs are ripe for a long squeeze on Bitfinex with open interest over 90% net long.


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