Zcash Could Threaten Both Bitcoin and Ethereum. Here's How.

Many crypto investors try to assemble their portfolios based on getting exposure to different segments of the sector. Bitcoin (CRYPTO: BTC) is the go-to store-of-value pick, whereas Ethereum (CRYPTO: ETH) is appealing because it's where a large portion of the activity in decentralized finance (DeFi) happens, and Zcash (CRYPTO: ZEC) is one of the leaders in the privacy coin segment.

But Zcash's development roadmap is planning to blur the lines that define those categories in ways that could lead to it siphoning capital from both Bitcoin and Ethereum, assuming several of the project's unfinished technical bets pay off. Here's what Zcash is building, why it matters, and what needs to go right for it to threaten the two biggest cryptocurrencies.

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This privacy coin could create its own ecosystem

The concept of Zcash is that it offers holders a form of financial privacy by giving them the option to mask their transactions and wallet balances.

One of the most important things about Zcash is that it shares Bitcoin's defining supply constraint, which specifies a hard cap of 21 million coins, and features regular events called halvings that cut the reward in coins that the protocol's miners get for contributing their computing power to the network. In terms of scarcity, the two assets are, at least on paper, largely equivalent. Now, Zcash is aiming to build features that will skew the demand side of the equation in its favor.

Three overlapping upgrades could turn Zcash into something neither Bitcoin nor Ethereum offers.

First, there's an effort to bring private smart contract capabilities to Zcash. That would enable it to run on-chain programs that execute financial logic without revealing participants or amounts. An internal developer network test is live, though its production design remains unfinished, and it's unclear when it will launch.

Second, the planned Crosslink upgrade would add proof-of-stake (PoS), enabling staking yield for the first time. And finally, with the future implementation of Zcash Shielded Assets (ZSAs), the network could support stablecoins, tokenized assets, and other protocols inside the network's shielded (private) pools.

Combine all three of those new systems, and you'd get a chain capable of competing with Bitcoin as a store of value, as it would have the same scarcity characteristics, plus other in-demand features like private transactions and the ability to generate yield via staking. It would also be capable of challenging Ethereum's dominance in DeFi by offering smart contract programmability that's invisible to outsiders.

Ethereum hosts roughly 54% of total value locked (TVL) in DeFi, about $45 billion, and Zcash effectively hosts none. But the capital in the shielded pools, which is currently unable to generate any yield without sacrificing privacy by leaving the pool, would likely flood into a private DeFi ecosystem the moment one exists.

There's a long road ahead

Based on its roadmap, Zcash could probably threaten both Bitcoin and Ethereum. The questions are how much it could gain and over what time frame.

Zcash's market cap today is about $11 billion versus Bitcoin's $1.5 trillion and Ethereum's $260 billion. In other words, even if it siphons off relatively small portions of the capital otherwise destined for Bitcoin or Ethereum, the sheer size of those assets in comparison to Zcash means the upside for holders from here could be tremendous.

But don't count your profits just yet. Zcash is not in any way a safe investment even though it's positioned very favorably at the moment. There's plenty of execution risk here and also plenty of competitive risk from other major chains, including Ethereum, which has a few avenues to add some privacy features. Furthermore, it will likely take at least a couple of years for Zcash's network to have all of the important pieces launched and in good enough working order, and then probably a couple of years more to start attracting serious sums of capital, assuming that ever happens.

Thus, if you're willing to hold it for at least five years, and if you're able to stay cool in the face of the volatility that's sure to come, Zcash is worth owning in a small quantity. At the moment, it enjoys a very good balance of risk and reward, and even if it never becomes as large as Bitcoin or Ethereum, the growth ahead might still be enormous.

Alex Carchidi has positions in Bitcoin, Ethereum, and Zcash. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.