Zcash Will Get a Gateway Into Ethereum's DeFi Ecosystem

When cryptocurrency fans gathered in Osaka, Japan, this week for the Devcon developer conference, the halls were filled with buzz about smaller projects seeking access to ethereum’s decentralized finance smorgasbord, especially loans and financial products, via interoperability.

“Connecting to other chains doesn’t seem to be an ethereum developer’s priority,” Summa co-founder James Prestwich told CoinDesk. “But other chains seem to want to connect to ethereum.”

For example, Josh Swihart, VP of marketing and business development at the Electric Coin Company (ECC), told CoinDesk that over the next six months the zcash community will develop a wrapped ZEC token that can be used on the ethereum blockchain. The privacy coin may one day become a conduit for private, automated loans and financial products.

This would be done through the same type of wrapped token the Cross-Chain Working Group, co-founded by Prestwich, is building to enable bitcoin usage on the ethereum blockchain. This precedent captured the imagination of many teams present at Devcon.

Eventually, interoperability might also be possible to lend zcash’s privacy features to smart contracts, shielding information about who participated in a contract and what precisely was executed.

The reasons why ECC is doing this are clear. According to DeFi Pulse, there’s currently more than $553 million worth of ethereum-based cryptocurrency locked up in DeFi applications. A source with knowledge of zcash exchange activity told CoinDesk the asset has seen modest traction in at least one U.S.-based exchange but is not increasing in popularity over the past year.

Shielded address transactions, the privacy coin’s most unique feature, are also rare. The zcash block explorer Zchain tallied only 271,356 shielded transactions out of 70,260,454 total transactions over the past month.

In order to boost zcash usage, the ECC is going to need to find popular use cases beyond speculative trading and simple, shielded transactions.

Swihart said the goal is now to turn zcash into a platform people can build on “for all of the DeFi applications,” adding:

“If you want to do lending, if you want to do DAOs [decentralized autonomous organizations], all of that stuff could be done with zcash as well. … Ultimately, we want zcash shielded [addresses] to be usable in ethereum smart contracts.”

However, as Prestwich pointed out, any cross-chain interoperability work would be temporary at this stage because it’s unclear how those plans would fit into the next version of ethereum, Eth 2. Plus, he said such cross-chain capabilities will still require years of research and development work.

On the other hand, ECC founder Zooko Wilcox is known to have a close personal relationship with ethereum creator Vitalik Buterin, bolstered by the latter’s longstanding interest in zk-SNARKs, the secret sauce behind zcash’s privacy features. So while this work may take time, adjacent and collaborative research is already underway.

As Buterin noted during a Devcon panel about interoperability between blockchains, the ethereum community also values privacy options even if it prioritizes usability. Since many fans are using ethereum to make custom machines, like blockchain-powered video games, they may also want privacy options for their niche tokens. Usually, such ERC20 tokens are all tallied with a public ledger, revealing the addresses of top holders via blockchain explorers.

Speaking to why decentralized app (dapp) creators might want shielded address and smart contract options, Zcash Foundation board member Ian Miers told CoinDesk:

"You don't want to be the kid at Chuck E. Cheese where everyone knows you have all the tokens.”

Image: Devcon interoperability panel, with Vitalik Buterin, Josh Swihart, Tendermint co-founder Jae Kwon and Ethereum Classic Labs cofounder Terry Culver, via Leigh Cuen for CoinDesk