Everything you need to know about the Zcash halving

Reading Time: 4 minutes

Following the successful third halving of Bitcoin in May 2020, another major cryptocurrency, Zcash, is set to undergo the same process sometime in November. Many cryptocurrencies experience this historic event that usually affects a coin’s supply and, in extension, its price. For Zcash (ZEC), the event is scheduled to occur every four years, making the upcoming one the first for the privacy-oriented coin.

The highlight of the upcoming Zcash halving is the expiry of the Founder’s Reward, whose structure hasn’t sat well with the coin’s community. Hopefully, the halving will help counter the coin’s high inflation rate to meet the demand effectively.

Halving is a hot topic for any cryptocurrency, and Zcash isn’t an exception. What do you need to know about this event? Can an investor profit from it? How will it affect the Zcash blockchain and ecosystem? Let’s explore these aspects and different scenarios that may arise after the halving.

Zcash – The anonymous cryptocurrency

Zcash (ZEC) is a privacy-oriented cryptocurrency that was forked from Bitcoin and launched in 2016. Ranked 26th on Coinmarketcap, the proof-of-work protocol uses a ‘zero-knowledge’ cryptography system to execute transactions.

The Electric Coin Company is responsible for developing the coin’s science and protocol. However, there’s the Zcash Foundation, whose main roles include education and consumer protection.

Similar to Bitcoin, Zcash’s supply is capped to 21 million, and the coin is available on various exchanges. The use of zk-SNARKS technology by Zcash blockchain allows users to transact without revealing their identity.

For anonymity, nodes on the blockchain won’t need to share their hash rate with all the nodes in the network. However, zk-SNARKS consumes a lot of memory, but the blockchain’s Sapling network upgrade helped counter this challenge and allowed for scaling.

That said, a recent report revealed that Zcash users fail to utilize privacy features on the platform, making almost 98% of the transactions traceable. According to the report,

‘Even though cryptographically Zcash is very well-founded, the users behave in a way that does not take full advantage of the shielded pool, making them traceable. As each user in the shielded pool becomes linked to the transparent pool, the overall anonymity of the ZEC ecosystem reduces as the anonymity set shrinks drastically.

Zcash halving and reduction in the inflation rate

Zcash’s first halving event is expected to take place at a block of 1,046,400, where the mining rewards will be cut by 2. The current mining reward of 6.25 ZEC will be reduced by 50% to 3.125 ZEC. Zcash has an annualized inflation rate of 28%, which is the highest amongst all cryptocurrencies.

Compared to Bitcoin, whose current inflation rate is 1.4%, Zcash’s supply is inflated by about 28% each year. A tweet by economist Alex Kruger criticized the coin and termed its supply as ‘disproportionate.’

However, crypto enthusiasts anticipate that the halving will help reduce this rate as the mining rewards reduce. Connor Abendschein, a research analyst at Digital Assets Data, when commenting about the halving stated:

After the halving, the inflation rate will effectively get cut in half from its current level, so any concerns about the inflation rate should be alleviated or be considered a non-issue.

Expiry of Founder’s Reward

Upon launch, Zcash set up a reward allocation plan dubbed Founder’s Reward (FR) to fund Zcash development. According to the reward plan, 80% (5 ZEC) of the mining rewards would be given to miners, while 20% would be distributed among Electric Coin Company founders and investors.

The reward structure has faced a lot of criticism from the Zcash community. However, according to the design of the FR, it will expire in November, which is around the same time when the halving will occur.

After the expiry of the FR, a new community approved fund will be implemented. The Zcash community voted and approved a Zcash development fund where the consensus was that 80% of the rewards would still go to the miners, 7% to ECC, 5% to the Zcash Foundation while 8% will go to a grant program that will fund third party developers.

Zcash price outlook

There’s usually a lot of activity around a coin’s price prior and after a halving event. A good casing point is the last three halvings of Bitcoin, which have impacted positively on its price. In the first halving, Bitcoin was priced at $11 before the event, but one year later, the price was about $1038. Experts agree that halving events are usually price-bullish since a supply deficit is created, which pushes the prices up.

At the moment, ZEC is ranked 24th on Coinmarketcap with a price of around $72 and a 2020 all-time high of $87. However, crypto enthusiasts are optimistic that the price will surge following the halving if the trend with Bitcoin is anything to go by.

Abendschein added,

The upcoming halving could give Zcash the boost it needs to stay relevant in the high-cap ecosystem.

Will the halving affect Zcash mining?

Miners are a crucial component in the Zcash ecosystem. As the block reward reduces by two, the mining difficulty of ZEC will increase, which calls for the purchase of advanced mining equipment. Consequently, miners tend to own most of the ZEC and may offload it after the halving to ensure that they keep up with the increased hash rate. If that happens, the sell-off by miners may lead to lower prices in the short-run period after the halving.
Since miners on Zcash use a proof-of-work algorithm, the hash rate will likely go up following the halving. Upgrading one’s hardware as a miner will be vital in remaining profitable after the halving. At the moment, most miners depend on Bitmain’s Antminer Z11 and Antminer Z9 to mine. However, after the halving, they will be forced to upgrade to the more powerful Antminer Z15.

What next after the halving?

The Zcash ecosystem has been busy over the last few months with efforts to strengthen the network. The new reward program that will take effect around the time of halving in November will ensure that funds go into development programs for Zcash.

The platform is also zealous to resolve the challenges of shielded transactions that are usually computational heavy. The recently formed Zcash Alliance will help with the blockchain’s mission of interoperability, which will continue even after the halving.