Grayscale Research Report: Financial Privacy in the AI Era – Why Shouldn't Zcash Be Ignored?

Written by: Michael Zhao, Grayscale Research

Compiled by: Luffy, Foresight News

Original title: Grayscale: Zcash, Financial Privacy in the AI Era

Privacy is not a niche add-on feature of currency, but a crucial component for its proper functioning. People don't want every transaction, account balance, and financial relationship to be publicly exposed. Physical cash possesses this attribute. Historically, financial systems relying on intermediaries (banks) have maintained a degree of actual confidentiality, restricting third parties from freely accessing financial records; of course, the possibility of information leakage still exists. Even law enforcement agencies typically need a court order to access personal financial data.

Technological change and social transformation put pressure on this system, often sparking public debate about financial privacy and new methods of protecting it. In the 1970s, the digitization of financial records and the enactment of the Bank Secrecy Act brought greater attention to financial privacy. Similarly, in the late 1990s and early 2000s, the widespread adoption of the internet and online banking, along with the Patriot Act, once again brought financial privacy into focus, driving the widespread use of encryption technologies, two-factor authentication, and other tools.

Chart 1: Technological changes may lead to greater concern about financial privacy

Grayscale Research believes we are on the eve of a third wave of public concern regarding financial privacy, triggered by factors including the widespread adoption of stablecoins and various blockchain applications, as well as the emergence of new financial surveillance methods driven by artificial intelligence. Multiple high-frequency indicators show that public attention to this issue is already rising.

Chart 2: Recent increased attention to financial privacy

Zcash emerged against this backdrop. A decentralized digital currency, Zcash's underlying logic is similar to Bitcoin, but it incorporates mature privacy mechanisms. Bitcoin achieved digital scarcity but failed to achieve digital privacy. Its transparency ensures auditability but sacrifices applications requiring confidentiality. If crypto users ultimately view private digital currencies as a demand independent of transparent digital assets, Zcash has the opportunity to capture that market share. ZEC's current market capitalization accounts for only about 0.4% of the total cryptocurrency market capitalization, which is undervalued considering its technological strength and the potential market for privacy digital currencies.

Privacy is becoming a separate product category.

On public blockchains, account balances, trading partners, and transaction history are permanently visible to the public. Even if users use anonymous addresses, their behavior can often be gradually pieced together and reconstructed through exchanges, trading partners, wallet activity, and on-chain analytics tools. In reality, the information leaked from public blockchains often exceeds users' expectations.

However, the vast majority of users require a certain level of financial privacy. Individuals do not want their account balances and spending records to be publicly disclosed by default; businesses want to keep supplier information, salary payments, treasury fund transfers, and customer transactions confidential; and institutions do not want their wallet structure and transaction patterns to be instantly mapped and tracked.

Therefore, the demand for privacy does not only come from groups that seek complete anonymity, but also from the widespread need for confidentiality in economic activities.

However, within the crypto industry, the privacy sector has long faced a major challenge: high difficulty in distribution and implementation. Strong privacy protections can create additional friction for exchange support, wallet integration, and market access. Therefore, privacy in the crypto field is not only a technical characteristic but also involves trade-offs and compromises at the commercial level.

Several implementation paths for on-chain privacy

Different encryption privacy systems require different types of information to be hidden. Some solutions simply make the flow of transactions on a transparent ledger more difficult to trace, while others directly hide key fields of transactions.

• Privacy solutions based on coin mixing: These operate on public blockchains like Bitcoin, such as CoinJoin, CashFusion (Bitcoin Cash), and PrivateSend (Dash). They only increase the difficulty of transaction tracing; the underlying ledger remains completely public.
• Confidential transaction systems, such as Litecoin MWEB, can hide transaction amounts and achieve infrastructure privacy, but they still fall short of systems that completely block transactions.
• Privacy-preset public blockchains: Monero is an example, which enables privacy by default and does not require users to manually select to enable it.
• Transaction shielding systems, exemplified by Zcash, verify the validity of transactions without exposing the sender, receiver, or transaction amount.

In the privacy space, Zcash occupies a unique position. It's a public blockchain with optional privacy, allowing transaction shielding to hide the sender, receiver, and amount at the transaction layer. This is fundamentally different from privacy add-ons built on top of transparent public blockchains.

Chart 3: Transaction privacy varies among different cryptocurrencies.

What is Zcash and how does it work?

Zcash is a public blockchain for peer-to-peer value transfer, with a total token supply capped at 21 million. It employs a Proof-of-Work (PoW) security model and shares many characteristics with Bitcoin. The core difference lies in the fact that users can choose to enable or disable transaction privacy, rather than having all transaction details pre-disclosed.

Zcash network supports two types of transactions:

• Public transactions: Fully visible on the blockchain, consistent with Bitcoin transfer logic.
• Transaction blocking: This feature allows for the verification of transaction legitimacy while preventing the disclosure of the sender, receiver, and transaction amount.

In short, Zcash enables transaction verification without being fully disclosed to the public.

Zcash utilizes zero-knowledge proof technology to build a shielded liquidity pool. As long as funds remain within this pool, on-chain information leakage is minimized. Zero-knowledge proofs are an advanced cryptographic technique that can be used in the blockchain field for both privacy protection and scalability.

Zcash also supports selective disclosure. By viewing the key, users can grant designated third parties access to view shielded transactions when necessary. Shielded transactions are not entirely black-box; they are kept confidential from the public while still allowing users controlled disclosure when needed.

Zcash's Development History: Old Protocol, New Chapter

Launched in 2016, Zcash is considered an established project by crypto industry standards and could easily be mistaken for a legacy of the previous cycle. However, from its inception, its goal has been more than just achieving privacy. The project's initial aim is to truly implement zero-knowledge cryptography in the digital cash system.

Its core concept was groundbreaking at the time: borrowing from Bitcoin's monetary model while enabling private transactions on a public blockchain. Zcash was among the first projects to bring privacy-preserving digital cash to the underlying public blockchain, rather than simply providing a wallet function with an additional privacy layer on top.

However, in the early stages, the technological vision outpaced the supporting product infrastructure. Early shielded trading incurred enormous computational costs, resulting in a user experience far inferior to open trading. Several major upgrades gradually improved this situation:

• Sapling (2018): Significantly reduces proof generation time and memory usage, making shielded transactions practically usable. Generating a shielded transaction takes only a few seconds and uses as little as 40MB of memory, directly driving up usage.
• Orchard / NU5 (2022): Upgraded the underlying cryptography, introduced the Orchard shielding protocol and Halo2, and the new shielding pool no longer requires trusted initialization settings.
• Ironwood (2026): Fixed the Orchard circuit vulnerability, built a brand new shielded pool, eliminated the theoretical risk of token counterfeiting, and ensured the integrity of token supply.
• Unified Address and Wallet Optimization: Simplifies the interaction process, allowing users to use both public and blocked payment addresses simultaneously without having to deal with multiple address formats.

Zcash aims to solve more than just the question of "whether privacy transfers are possible," but rather how to make privacy transfers available on a large scale and conveniently. Years of efforts to reduce friction in usage are finally beginning to show results.

The wallet layer is a crucial component. Zodl (formerly Zashi) is no longer positioned as just an asset storage tool, but as an interactive entry point with a priority shielded mode. The product has built-in NEAR Intents-based exchange and CrossPay cross-asset transfer functions, while also supporting cold storage of shielded balances.

The value of these features lies in reducing the number of steps users are forced to take outside the shielded fund pool. Whether it's depositing, making payments, or exchanging for other assets, it can all be done within a closed loop in an encrypted environment as much as possible.

Historically, Zcash's biggest bottleneck has never been whether privacy transaction technology is feasible, but whether users can remain secure throughout the entire transaction process.

The Zcash ecosystem infrastructure is also gradually improving. In April 2026, leading mining pool Foundry announced the launch of a US-based Zcash mining pool for institutional and listed company miners. This does not directly increase the number of users of the blocked wallet, but it represents the ecosystem maturing: more industrial-grade supporting facilities are being added, and institutions are gaining a better understanding of this public chain.

Furthermore, policy tweaks related to transaction fees and memory pools have alleviated network congestion caused by spam transactions and improved network stability under high load. While this isn't the core of Zcash's investment logic, it collectively propels the protocol from theoretical privacy to practical usability.

The next stage of Zcash's development depends on whether the protocol can evolve from "privacy is achievable" to "privacy can be implemented on a large scale." Key technological directions worth tracking include:

Tachyon: The most important scaling proposal, aiming to reduce the cost and synchronization burden of blocking transactions and solve the historical pain points of large-scale deployment.

Crosslink: Focuses on transaction finality and network reliability, without completely replacing the existing PoW, but strengthens settlement guarantees. From an investment perspective, Zcash's future depends not only on its privacy features, but also on the overall robustness and reliability of the network.

Asset blocking: Enables assets other than native ZEC to use the Zcash privacy system. If this feature is relaunched, the ability to block transactions will be expanded to more assets and applications.

How should the value of ZEC be measured?

As of July 2026, the overall crypto market has given extremely low valuations to privacy attributes.

Grayscale categorizes assets with "digital currency" uses into the "cryptocurrency sector." This sector currently includes 15 assets with a total market capitalization of $1.4 trillion, with Bitcoin accounting for approximately 90% of the share. ZEC currently has a market capitalization of approximately $8 billion, representing only 0.6% of the digital currency sector. If it could capture 5% of the market share in this sector, its market capitalization would increase ninefold.

Chart 4: ZEC's share of the total market capitalization in the money market is small, but growing.

ZEC's current market pricing reflects the mainstream assumption that privacy is a marginal need with a small audience, and therefore not worthy of a valuation premium. However, if the value of privacy is re-emphasized in an environment of increased surveillance, tighter compliance constraints, and frequent financial scrutiny, then a 0.6% market share is no longer a reasonable equilibrium level, but rather an option value that the market has not yet fully priced in.

Those bullish on Zcash argue that current market pricing presupposes a niche demand for privacy, but on-chain data has already proven its existence. As of July 20th, shielded transactions accounted for approximately 90% of total Zcash transactions, with about 4.2 million ZEC in the shielded pool, representing 25% of the total circulating supply—a record high. This demonstrates that privacy is not merely a narrative, but an observable reality on-chain behavior.

Chart 5: ZEC's shielding supply has reached an all-time high.

In other words, Zcash doesn't need the current explosive growth to support its potential upside; it simply needs the market to reassess the future value of privacy. Once investors believe that privacy should enjoy a reasonable premium in the cryptocurrency system, ZEC's current valuation will appear conservative. Currently, the market still views privacy as an add-on, rather than a core attribute of currency.

Risks and other considerations

Zcash's investment rationale is not only based on privacy needs, but also needs to consider historical cryptographic assumptions, future security risks, and the network's ability to maintain collaborative stability during major upgrades.

Regulatory risks

Zcash's regulatory risks lie not only in its privacy features but also in whether regulators and service providers recognize its selective disclosure mechanism as sufficient for compliance. Compared to privacy systems with no disclosure mechanisms, Zcash's ability to view the key provides a clearer compliance path. Full key viewing can be authorized to a designated party, allowing access to information on blocked transactions, the receiving address, amount, and remarks for ordinary blocked transfers. However, this disclosure is authorized and not pre-defined as fully traceable across the entire blockchain.

Global anti-money laundering rules and the EU's MiCA regulations continue to impose stringent requirements on virtual asset service providers, including customer due diligence, record keeping, reporting of suspicious transactions, and travel restrictions. While viewing the gold key can reduce, it cannot completely eliminate, the risk that exchanges and custodians may be unwilling to support blocked transactions for operational or policy reasons.

The legacy issue of trusted setup of fund pools

One of the major controversies in Zcash's history stemmed from the trusted initialization settings of the early Sprout and Sapling shielding protocols. Version NU5 introduced the Orchard and Halo proof systems, eliminating the need for trusted initialization in new Orchard pools. Additionally, a sanity vulnerability was discovered in the original Orchard circuitry in 2026, theoretically allowing for undetectable token forgery within the pool. The network upgrade NU6.2 fixed this circuitry issue; Ironwood (NU6.3) introduced a new, independent shielded pool, prohibiting new assets from entering the old Orchard pools. Funds transferred out of the old pools must pass through Zcash's verification and accounting mechanism, restoring the independent verifiability of the total circulating supply and significantly improving the cryptographic prospects.

The legacy issue is that the old funding pool still exists, and historical funds remain in it. This risk will gradually diminish over time, but it still needs to be considered when comparing the old and new versions of the protocol.

risks of quantum computing

Quantum computing is a long-term risk for most public blockchains, not unique to Zcash. Publicly traded funds and privately held funds will face different quantum threat paths due to the different cryptographic components exposed on-chain. Electric Coin Company, which has long been responsible for Zcash's development, has explicitly included quantum resistance in its roadmap, indicating that this is not purely a theoretical topic. However, for investment decisions, quantum risk is more of a long-term concern; in the near to medium term, product usability, ecosystem development, and market structure are more crucial.

Implementation risks

Zcash has relied on multiple major protocol upgrades to achieve improvements in availability, security, and scalability, but this has brought two types of execution risks. First, the roadmap goals are very challenging; Tachyon and Crosslink are heavyweight technical engineering projects, not simply parameter modifications. Second, network upgrades require collaboration among engineers, wallet developers, infrastructure service providers, and the entire ecosystem. Zcash's comprehensive improvement proposal process is an advantage, but the investment rationale still depends in part on the continued quality of development and delivery, and the collaboration among all parties.

Summarize

Privacy has always been a crucial characteristic that gives currency its practical value; it's just that we tend to forget this more easily in the digital age. Zcash was created to address the inherent flaw of public blockchains: transactions are easy to verify, but difficult to keep confidential. After years of technological refinement, it has become one of the most representative projects attempting to fill this gap.

Whether private digital currencies will grow into a mainstream sector or remain a niche market remains to be seen. However, based on current valuations, the market has hardly priced in the possibility of a significant increase in the future value of privacy.

For investors, the opportunity lies not in betting that Zcash will replace Bitcoin, but in the fact that the value of privacy digital currencies has not yet been fully recognized by the market.