Thread by @reldev

Zcash Shielded Assets (ZSAs - aka UDAs) are an interesting concept and have several potential applications in Zcash. A key for us is to align with the community in the best interest of the mission and coin holders. This thread is meant to provide a bit more background.

One of our primary goals at ECC is to ensure that future network upgrades continue to meet our historic standards for safety and quality. In every Zcash network upgrade, we’ve always done security assessments, and scientific review in the case of new cryptography.

If there’s any potential change to Zcash economics, we feel strongly that an economic analysis should be done as well, prior to deployment. This is the primary reason we’ve engaged the team at GMU. To conduct a study of decentralized markets on the Zcash blockchain.

We’re excited to be working with Dr. McCabe and CeeLab to assist with this study which runs from June through August of this year. We plan to come up with an economic design that is consistent with the sustainability of Zcash and that has a positive impact on current economics.

We’re also working with our Scientific Advisory Group to help with this effort. Their collective experience spans multiple blockchains and they bring a wealth of experience and benefit to the Zcash project.

The group includes @vitalikbuterin, @gojomo, @zmanian, @ArthurB, and Mary Maller. More details can be found here: electriccoin.co/blog/industry-…

Looking at current Zcash economics, they’re pretty straightforward and inherited largely from Bitcoin, but it’s good to review the basics when considering making any sort of change that could have a potential impact.

ZEC-holders make Zcash more resistant to capture by paying for core support functions (mining, engineering, security, innovation, marketing, regulatory and government relations, customer support, business development, education, etc.). They pay for those functions with issuance.

We began ‘21 with ~ 10.5M ZEC in issuance. During the year, 1.3M ZEC will be issued representing an approximate 10.5% inflation rate. As Zcash is on the same emission curve as Bitcoin, this issuance will continue until a total supply of 21M ZEC is reached.

Given the cap, and since more ZEC will be in circulation each year, the inflation rate naturally decreases. For example, for the next three years inflation will be 11.1%, 10.0%, and 9.1%, and in 2025, it will be 4.2% after the next halvening.

Wondering what token economics are all about? Wikipedia defines a token economy as “a system of contingency management based on the systematic reinforcement of target behavior (and) based on the principles of operant conditioning and behavioral economics.”

Essentially where game theoretical economics meets game theory. 🙂 What type problems do we have to think about then, when adding additional assets to the Zcash blockchain? Primarily two things: the Free Rider problem and the Top Heavy problem.

The Free Rider problem is where the foreign asset reaps all the benefits of a network but doesn’t contribute to its core support functions. In the case of Zcash, this would be an asset that gets the same benefits as ZEC holders but doesn’t incur the same inflation rate.

The Top Heavy problem is where the foreign asset becomes more valuable or is more valuable than the native asset. Think Mastercoin / Omni and Tether and while conceptually different, Colored Coins from the earlier Bitcoin days had similar economic concerns.

To address these concerns, one train of thought is that fees “work pretty well” for Ethereum and should work for us so don’t worry about it, but fundamentally, Zcash and Ethereum are two different blockchains and have vastly different value propositions.

Ethereum provides a programmable blockchain with state stored using distributed ledger technology. Fees in Ethereum pay for the core value proposition of the blockchain through use of gas.

Zcash is a digital currency with strong privacy features. Fees in Zcash are currently minimal and a non-factor for the most part from a mining reward perspective.

In the case of ZSAs, while they have been referred to as ZRC-20s, they are not programmable assets, meaning there is no use within the Zcash blockchain other that the use cases afforded to the native ZEC token, namely store-of-value (SOV) and medium-of-exchange (MOE).

There’s a lot to consider, but we feel an economic mechanism specific to the Zcash value proposition and consistent with the costs ZEC holders pay for core support services could provide an economically positive benefit to the ecosystem.

We were the first team to productionize zero-knowledge proofs in software since zero-knowledge cryptography was conceived in the 1980s and we view this as just another type of challenge that requires careful thought and a methodical approach to get right.

We’re confident we’ll get there with everyone’s help: the community, the team at GMU, and our Scientific Advisory Group. 🙂