Zcash's NU7 Upgrade Goes Live, Recycling 60% of Fees to Fund Future Block Rewards

Zcash's NU7 network upgrade went live at block 3,543,405 early Friday, activating the Network Sustainability Mechanism (NSM), a change designed to help pay for the privacy coin's security as its block rewards shrink.

"NU7 has successfully activated on mainnet. A new era of Zcash is here," the project's official account tweeted.

"This is a huge milestone for Shielded Labs," Jason McGee of Shielded Labs, the Zcash development organization behind the mechanism, tweeted ahead of the activation.

The NSM tackles a problem Zcash inherited from Bitcoin: whether, as block subsidies decline with each halving, transaction fees alone will be enough to pay miners to secure the network. Under the mechanism, 60% of transaction fees will be removed from circulation and gradually reissued through future block rewards, while preserving the 21 million ZEC supply cap. Reissuance will begin in 2031, with the recycled funds spread along a smooth curve on top of the existing halving schedule.

The NSM was Shielded Labs' first project and builds on an idea that developer Nate Wilcox proposed years ago, originally called the Zcash Posterity Fund, McGee said. A separate proposal under consideration would require Zcash Community Grants to contribute 50,000 ZEC from its treasury to the NSM.

NU7 also brings other changes. It cuts Zcash's target time between blocks from 75 seconds to 25, the Zcash Foundation said, and retires Sprout, Zcash's original privacy pool from 2016, leaving coins worth about $16 million locked in the pool. Faster blocks raise the risk of orphan blocks, valid blocks that the network discards because another miner's block reached the rest of the network first. In a stress test of 80 nodes spread across 11 regions, with every block full of private transactions, developers of Zakura, which last month proposed a quantum privacy fix for shielded swaps, measured an orphan rate of 3.43% at 25-second blocks, compared with 1.57% at 75 seconds. They expect the live network's rate to stay under 1%, since real mining is far more concentrated and blocks far emptier.

NU7 also limits how much private transaction activity can fit into each block, reducing the data wallets must scan to find their payments, according to the upgrade specification.

Shielded Labs' original design would have replaced Zcash's halvings with a smooth issuance curve. Community panels supported that change, but coinholders did not, so an alternative design that kept the halvings was developed instead.

"We still think the original design was simpler and better, but we respect the process that led us here," McGee wrote. "It should be difficult to change the protocol, and the process should resist capture by any single organization, group, or influential individual."

Zcash's Dev Fund debate

The upgrade arrives as Zcash's community debates the future of Zcash Community Grants (ZCG) and its share of the Dev Fund, the slice of block rewards that pays for development.

The five organizations that coordinate Zcash's coinholder voting, Project Tachyon, Shielded Labs, Valar Group, the Zcash Foundation and ZODL, have set out an expedited timeline for proposals and polling, saying "tensions were high" and that a drawn-out debate risked "deepening divisions within the Zcash community."

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Proposals are due by November 8, with polls for coinholders and community panels running from November 16 to November 30. If rough consensus emerges, the groups will support a further network upgrade, NU 7.1, to implement it.