ECC announced in June a multi-month assessment of the interest in and requirements for Zcash Shielded Assets (ZSAs). The idea of leveraging Zcash’s shielding capabilities to support privacy for other asset holders is exciting, and we would love to see this happen.
As part of our due diligence, we embarked on sentiment gathering, market research and economic modeling to better understand the possibilities and tradeoffs of different approaches.
We determined there are a few options available to facilitate the creation and use of ZSAs. These are:
- An issuer model where a centralized or decentralized intermediary is required to issue and redeem the asset. For example, an intermediary might receive Bitcoin from a user and issue a shielded “wrapped” zBTC in return. Likewise, they would redeem native BTC to a user in exchange for zBTC.
- An interoperability model where assets can flow seamlessly between chains as tokens are minted and redeemed without the need for a centralized issuer.
- A programmable model where anyone can deploy smart contracts on the Zcash chain to create whatever asset-type they wish.
We researched an issuer-based model while keeping other models in mind. We believed the issuer model would be the quickest opportunity for ZSA realization, in light of the fact that two issuers (Ren and Wrapped) have already deployed tokenized ZEC on other chains and a third (THORChain) is currently gaining support for ZEC from the Nighthawk team.
In parallel, we commissioned George Mason University to study fee mechanisms and their tradeoffs for both ZSA users and ZEC holders, and we took into consideration various polling results and community sentiment.
Our research yielded a number of findings:
- The Zcash community is interested in supporting ZSAs.
- There are regulatory challenges to USD-based stablecoin issuance, both in requirements and issuer desire to support shielded versions of their assets.
- Some issuers have expressed interest in exploring ZSAs, but interest is either still tepid or not as much of a priority as other activities.
- Time is needed by the Zcash community to review and consider the economic implications, such as those shown in the GMU findings, as there could be significant impacts to ZEC holders.
Recently, QEDIT has expressed interest in developing ZSA capability, and we have been sharing information at their request. We are very excited about the potential for a skilled, independent development team to become active developers of the Zcash core protocol!
The Zcash community continues to attract top talent, and we’re excited to see others in the community lean in to build more than ECC could ever do on our own. We are entering a new era where much more will be built in parallel by multiple actors. We look forward to working alongside the community in these efforts.
Our conclusion is that the best path forward for ZSAs is still unclear, that cross-chain interoperability is likely to turn out to be a critical component of successful and usable ZSAs, and that ECC should commit to a roadmap that prioritizes interoperability, which may be necessary for ZSAs and other uses. More on our roadmap is available in a companion post.
The rest of this document includes a summary of the research we’ve completed.
Zcash community sentiment
The Zcash community has signaled strong support for adding ZSA capability to the core protocol. Though it received limited support as a priority in the ECC coin holder survey, it was strongly supported in the Zfnd ZCAP survey as top priority for what ought to be built next, and it was strongly supported in various social channels. A number of community members reached out to ECC directly to voice support and ideas for ZSAs for use with NFTs or stablecoins like Tether.
Potential ZSA issuer market assessment and requirements
We reached out to potential ZSA issuers and others that might have interest in participating in ZSA issuance and support. Our approach was to request a thirty minute meeting to gauge their interest, assess market opportunities and explore high level requirements. For those with initial interest, we provided a detailed primer on ZSAs and potential capabilities then scheduled a sixty minute call to explore technical requirements.
The following table summarizes the engagement and feedback to date:
|Circle (USDC)||Not interested in the near term. Might be open to revisiting later.||Circle provided a standard list of requirements that included security, stability, functionality, legal and compliance.||A zUSDC token must meet regulatory requirements that may be difficult or impossible to comply with, including perceived regulatory risk, the ability to freeze funds, and the ability to blacklist addresses. Most importantly, the Circle regulatory team is unwilling to consider ZSA support at the moment.|
|Maker (DAI)||Interested in seeing DAI on every chain.||Requires security review. No cross chain DAI smart contracts.||We have met, they have reviewed the primer, and there is interest in further discussion on detailed requirements. This is the most promising possibility of the issuers we’ve engaged with.|
|OpenSea||No expressed interest.||NA||We attempted to engage but had no meaningful dialogue.|
|Ren||Open to consideration. Questioned level of market interest.||Open||They expressed that there is some utility to shielding assets but expressed that ZSAs are likely not enough to bring over privacy-minded Ethereum community participants due to competing options, tribalism and switching cost. A shielded DEX might bring interest.|
|Tether||No response to repeated attempts.||NA||We made repeated attempts to reach out to Tether but did not receive a response. One community member suggested they might have concern with the possibility of hidden inflation.|
|Thesis||Expressed interest but lower priority near-term (Focused on Tally).||TBD||While Thesis has expressed interest in supporting wrapped Zcash assets and ZSAs, it has yet to surface as a priority.|
|Wrapped||No interest. Doesn’t see the market. Complex regulatory issues.||NA||Addresses must be whitelisted for anything considered to be a security. If custodial, the protocol must support minting, burning and blacklisting addresses and must be able to support a court order requiring that assets are frozen. They expressed concerns with compliance. A shielded DEX might be interesting.|
Over the summer, ECC engaged with a team from Computational Experimental Economics Laboratory (CEELab) at the Interdisciplinary Center for the Study of Economics (ICES) at George Mason University (GMU), led by Professor Kevin McCabe, to simulate and study the impact of various fee models for ZSAs.
This research explores the space of economic mechanisms for imposing fees on ZSA holders that are fair and consistent with those paid by ZEC holders. ECC has received an advanced draft of this research and will alert the community as soon as the full report is formally published.
The GMU team evaluated a number of possible economic models according to the following criteria:
- Does the mechanism impose costs on ZSA holders that are fair and consistent to current ZEC holders?
- Does the mechanism extend Zcash property rights on ZECs to ZSAs?
- Does the mechanism reduce the security concerns that emerge by adding ZSA support to the blockchain?
- Does the mechanism provide revenue to cover additional protocol costs and foundation revenues?
- How does the mechanism incentivize user trust in the blockchain and, subsequently, the transactions they make?
- How does the mechanism incentivize miner behavior?
The following models were evaluated:
- Computational-Cost Transaction Fees
- Shielded Hosting Fees
- Shielded Hosting Fees + Mandatory DEX Market Buys of ZEC
- Private Transaction-Volume-Proportional Fees
- Transparent Direct Transaction-Volume-Proportional Fees
- Scarce Active Asset Type Auctions
- Scarce Asset Type Creation Rate Auctions
- Supply-Proportional Issuance Bonds
The report concludes:
It is unclear if adding ZSA support will increase or decrease the value of the Zcash protocol… If ZSAs support is added, it will likely require additional support for distributed exchanges (DEXs) to allow users to trade securities. Indeed, one of the transaction fee mechanisms proposed would require minimal DEX support. Adding DEX support will add additional property rights to the system but may undermine user confidence in the consistency and implementation of these property rights. This will require a well-thought-out, user-involved, and user-incentivized testing phase, which is likely to be both time-consuming and costly.
While the report doesn’t recommend one mechanism over another, it provides good analysis and insight for the Zcash community to consider.