Beware of Zano

At the end of an excellent interview on the Dark Horse podcast, Aaron Day pumped ZANO hard.

"Are you staking Zano?" I would have asked a bit rudely. The question needs to be asked of any vocal fan of this trendy crypto. Let me lay out why Zano has opened itself to possible corruption.

What is Zano?

Zano (ZANO) got street cred from the start due to the fact that it was created by Andrey Sabelnikov, the brains behind monero (XMR). Zano (ZANO) was created in 2019. It is a cryptocurrency similar to monero (XMR). Zano has some cool new features which may or may not prove to be helpful in the long run. I heard an interview with Mr. Sabelnikov, and I believe that he earnestly views Zano as the sum of everything he has learned about cryptocurrency since 2013. Nevertheless, all is not rosy. I think he made a strategic blunder.

Zano's flaw

Zano has a big weakness. It mixes two features which should never be mixed.

• Initial Insider Allocation (='pre-mine')
• Proof-of-stake

If that's pizza and pineapple, then let's add hot sauce to it:

• Stakers remain hidden

Initial Insider Allocation

Why is this so bad? To answer this, we need to go back a step. We need to go over the notion of an Initial Insider Allocation.

An Initial Insider Allocation, colloquially called a 'pre-mine', means that some insiders are gifted some of the crypto at the launch. Cryptocurrency is software, so this means that the gift costs nothing. One literally writes some lines of code. These lines of code can lead to millions of dollars, once the cryptocurrency hits the open market. Satoshi Nakamoto did not do it this way. Neither did Charlie Lee. They spent electricity like all the other plebs 'mining' the crypto.

If the Initial Insider Allocation sounds scammy, it's because it is.

The Zano founders even admit that some of the 'premine' was spent on marketing.¹ Marketing... as in paying influencers like Aaron Day or Roger Ver?²

So, am I calling Sabelnikov and his crew scam-artists? Not necessarily. There's an argument that an Initial Insider Allocation is the only way to go nowadays. Things are not the same as when Satoshi launched bitcoin (BTC). There is not a bunch of great, amateur software developers falling over themselves to help. The devs going gung-ho at the start of a project usually leave after a few months; not because they want to, but because they need to. They cannot keep working for pennies. An Intitial Insider Allocation is a way of getting skin in the game. It's a way of tiding the devs over until substantial money comes in.

I push for the old, idealistic way. I'm just saying there's a counter-argument.

Anyway, the big flaw comes when you add in a proof-of-stake scheme.

Proof-of-stake

Imagine yourself at a poker table. Everybody has to put up a kind of bond. At the end of the night, you'll get the bond back, unless you cheat. There are cameras everywhere and it would be foolish to risk your bond. That's how proof-of-stake works. In order to have a chance to make the transactions of a certain cryptocurrency official by being a validator, the would-be validator must put up a confiscable amount of that certain cryptocurreny: the 'stake'.

'Staking' is lucrative. There usually aren't too many validators. We're talking maybe a few dozen; probably less. Validating a block, i.e. the latest batch of transactions, earns the validator good money. Proof-of-stake protocols throw in lots of funky bonuses.

The unsavory mix

Where do the validators get their crypto to put up the bond? Chances are, they got their stash in the Initial Insider Allocation. Money for nothing!

I'm not claiming that Aaron Day got some of this initial allocation of Zano. I don't know. The question needs to be asked. If he did get, say, half a million ZANO, and now he's staking that at a 10% return per year, that's a nice little scheme for him. Why wouldn't he pump ZANO to a few hundred thousand listeners?

Here's where we pour hot sauce on the pizza. With Zano, transactions are obscured. One cannot look at a Zano transaction and tie it to any other transaction. This is a privacy-feature. Privacy is the trendiest topic in cryptocurrency now, and with good reason. The EU has begun looking into crypto transactions in a way that they don't even with fiat money. That's beside the point for now. The point is that, if Mr. Day replied to my slightly rude question, and said "no, I'm not staking Zano," there would be no way that we could prove this statement to be true or false. Zano's auditability is even harder than monero's.

Aaron Day might be pumping ZANO just because he loves the project. We can never know.

Conclusion

Zano has got itself into a pickle. At the moment, nobody seems to care. You should. Accusations of scammy insider investing will be hanging around Zano like a bad smell. In my opinion, the team behind Zano made a big blunder by having a proof-of-stake protocol. They have proof-of-work too, and should have kept it at that. I am aware that there are big security risks to proof-of-work for low-market-share cryptos nowadays. Sabelnikov is smart enough. He could have come up with another statagem.