Privacy coin trust crisis! ZEC plummets over 56% in a single day

Author: Zhou, ChainCatcher

On June 5, the leading privacy coin ZEC saw a maximum daily drop of over 56%, giving back nearly two months of gains, with its market value evaporating by about $5 billion at one point.

Data shows that the total liquidation volume of ZEC contracts across the network reached approximately $100 million within 24 hours, with long positions liquidating over $76 million, second only to BTC and ETH in liquidation amounts.

Image source: RootData

The trigger for this crash was a zero-knowledge proof vulnerability that had been lurking in Zcash's latest privacy transaction pool for four years, theoretically allowing attackers to infinitely forge ZEC under privacy protection without detection.

The good news is that the vulnerability was permanently fixed through a hard fork on June 3. The bad news is that due to the privacy features of the Orchard pool, no one can use cryptographic means to prove that this vulnerability was never exploited in the past four years, leading to market doubts about the integrity of ZEC's supply over the past four years.

Arthur Hayes, co-founder of BitMEX, announced he had liquidated all his ZEC holdings, and on-chain whales profited significantly from short positions, causing a noticeable loss of market confidence.

How the Vulnerability Occurred and Was Discovered

The Orchard pool is the third-generation privacy transaction layer launched by Zcash in May 2022. Due to insufficient constraints on an element in the circuit, attackers could write false inputs into the elliptic curve multiplication operation, yet still validate through the circuit, allowing them to infinitely generate forged ZEC within the pool. Due to Orchard's privacy design, this forgery would leave no detectable on-chain traces.

It is reported that independent security researcher Taylor Hornby discovered the vulnerability on May 29. In April of this year, the independent security organization Shielded Labs commissioned him to conduct a specialized security audit of the Zcash protocol, aiming to find potential vulnerabilities before attackers could exploit them.

On May 28, Anthropic released the Claude Opus 4.8 model. The next day, Hornby incorporated it into a customized AI audit framework to conduct targeted analysis on the Orchard circuit, pinpointing the vulnerability that same day and writing a complete exploit program in a local testing environment to verify the technical feasibility of infinite minting. That evening, he responsibly disclosed the issue to Zcash's open development laboratory ZODL.

Within hours of receiving the report, ZODL engineers confirmed the vulnerability and immediately initiated emergency procedures. In the early hours of June 2, Zcash pushed an emergency soft fork via Zebra 4.5.3, temporarily disabling all Orchard transactions. At 12:05 PM Beijing time on June 3, the mainnet completed the NU6.2 hard fork at block height 3,364,600, with the repaired circuit officially going live, permanently closing the vulnerability.

From discovery to the completion of the hard fork, it took about five days. The Zcash Foundation officially stated that this was the second time since Zcash's launch in 2016 that a protocol upgrade was triggered due to security issues, with no known exploits occurring during the process, and the network's total supply guard mechanism confirming that the total supply remained intact, with user privacy and Sapling, transparent transactions unaffected.

Image source: Claude

Doubts Remain After the Fix

Due to Orchard's privacy design, if attackers never transfer forged tokens to the transparent pool, no existing mechanism can detect anomalies on-chain. In other words, the conclusion of "total supply intact" is based on currently observable data rather than strict cryptographic proof. The vulnerability has existed since May 2022, and no one can rule out the possibility that it was exploited in the past four years.

Shielded Labs believes the likelihood of exploitation is low for three reasons: the fact that the vulnerability remained undiscovered for four years indicates a very high threshold; this was the result of a proactive audit rather than passive exposure; and the window for fixing after discovery was extremely short, giving attackers very limited time to exploit it. However, this statement itself indicates that the issue cannot be completely disproven.

To address this gap, Shielded Labs is exploring new network upgrade proposals with multiple developers, planning to deploy a new privacy pool and implement mandatory rotating door accounting reviews for all tokens migrating from Orchard, so that anyone can publicly verify the integrity of the supply. The specific plan is expected to be announced next week and will still need to go through community governance processes.

Crypto investor Simon Dedic pointed out that this incident reveals two simultaneous cognitive shifts: privacy is not always an advantage; it can also be a risk in protocol design; and the involvement of AI tools means that vulnerabilities of similar scale can be discovered at a lower threshold in the future, increasing the security audit pressure faced by the entire crypto industry.

On-chain analyst Haotian summarized the core issue of this incident as "not being able to clarify," meaning that even if Shielded Labs introduces a new rotating door audit plan, it can only prove that the current supply is less than the total amount entering the pool, still unable to cover potential historical hidden losses. He also pointed out that there is a natural contradiction between verifiable supply and privacy black boxes, which is a structural dilemma that ZEC cannot easily avoid.

Market Panic Concentrated Release

Although the technical crisis has passed, the market has not fully digested the true nature of the vulnerability.

This morning, Zcash founder Zooko Wilcox, Shielded Labs, and Taylor Hornby jointly released a detailed article, fully disclosing the exploitability of the vulnerability, the technical feasibility of infinite forging of ZEC, and the "inability to cryptographically prove that history was not exploited" due to the privacy features of Orchard, which truly ignited market panic.

On the same day, Arthur Hayes announced he had liquidated all his ZEC holdings, noting that the probability of malicious minting is extremely low, but cannot be formally ruled out at the cryptographic level. The value support of the privacy narrative requires "perfect security," not "high probability security." Hayes also stated that if subsequent assumptions are disproven, he does not rule out buying back at a lower price.

Hayes was previously one of the most well-known public supporters of ZEC, having listed it as his second-largest holding, and he even claimed that ZEC should reach 10% of BTC's price, stating that the current upward momentum "has a lot of room for growth." Now, however, he has publicly announced his exit, and the impact on market sentiment is self-evident.

With these two factors combined, ZEC's price quickly plummeted. According to on-chain analysts, when ZEC fell below $400, "1011 insider whale" Garrett Jin's three times leveraged ZEC short position opened at a price of $626.47, yielding profits of over ten million dollars.

However, some opinions suggest that this price crash was not entirely driven by the vulnerability. Crypto KOL Tuao Dashi pointed out that ZEC's previous upward trend already showed signs of significant capital involvement, and the vulnerability news may have merely provided an exit opportunity, with the massive influx of spot selling that day being the more direct price driver. He lamented that the "strong consensus blue-chip" with a market value of $12 billion evaporated $6 billion in a day, indicating that building consensus in the crypto space is difficult, while breaking it is easy, and repair is even longer.