Dev Fund Proposal: 20% to a 2-of-3 multisig with community-involved governance

Community Collaborations protocol
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Dev Fund Proposal: 20% to a 2-of-3 multisig with community-involved governance
Background: Placeholder Considerations: Resources, Governance, and Legitimacy in NU4
Advocate: @mlphresearch

Attention!

Click here for the most up to date version of this proposal on Github. The original below will be kept unchanged for comparison but the one on Github will always be the official latest version.

Terminology

The key words “MUST”, “MUST NOT”, “SHOULD”, “SHOULD NOT”, and “MAY” in this post are to be interpreted as described in RFC 2119 [1], both in terms of the technical specification and governance rules of the Zcash Development Fund.

The terms below are to be interpreted as follows:

  • Mining refers to the action of processing transactions, including in a Proof-of-Stake or Proof-of-Work/Proof-of-Stake hybrid system, in case Zcash switches to either.

  • Mining software refers to pool software, local mining software, or staking software.

  • Mining rewards or block rewards refer to both transaction fees and coinbase rewards, i.e. the newly issued ZEC associated with block generation.

  • Network Upgrade refers to any planned change or set of changes to the Zcash software, introduced as part of the standard Network Upgrade Pipeline [2] or otherwise.

  • Zcash Development Fund refers to a transparent address controlled jointly by the Electric Coin Company, the Zcash Foundation, and a Third Entity to be determined. It is used to hold funds intended for research, development, maintenance, and other types of technical work directly connected to the various software implementations of the Zcash protocol, as well as non-technical initiatives (including design, marketing, events, regulatory outreach, education, governance, and any other form of business or community development) that contribute to the long-term success of the Zcash network. In the context of this proposal, 20% of Zcash coinbase rewards between 2020 and 2024 halvings are automatically directed to the Zcash Development Fund, but this does not exclude other funding mechanisms, both during and after the aforementioned period.

  • Applicant refers to any individual, group, or entity that seeks funding from the Zcash Development Fund.

  • Recipient refers to any individual, group, or entity that receives funding from the Zcash Development Fund.

Abstract

This proposal puts forward the creation of the Zcash Development Fund and describes its financing mechanism and fundamental rules of governance.

Motivation

In October 2020, the Zcash network is scheduled to undergo its first block reward halving and fourth Network Upgrade (NU4). According to the current protocol specification, this is also when the 20% of newly issued ZEC included in the block reward known as the Founders’ Reward (FR) expires so that all subsequent rewards can be claimed exclusively by miners.

Currently, the two organizations leading the development and maintenance of Zcash - the Electric Coin Company (ECC) and the Zcash Foundation (ZF) - are either directly or indirectly financially dependent on the FR. Once the FR funds run out and respective balance sheets are depleted, both organizations would have to secure alternative sources of funding to continue supporting Zcash. The same holds for any other group or entity that contributes or plans to contribute work beneficial for Zcash.

To address this issue, the current proposal - originally described and discussed on the Zcash Forum [3] - puts forward the creation of the Zcash Development Fund and describes its initial financing mechanism and fundamental rules of governance. The purpose of the latter is to effectively direct the Zcash Development Fund toward its intended purpose as described in the Rationale section of this proposal, and to establish proper norms of accountability and transparency for its Recipients.

The implementation of this proposal would automatically direct 20% of newly issued ZEC in the coinbase rewards between the first (year 2020, at block height 840,000) and second (year 2024, at block height 1,680,000) halving to the Zcash Development Fund. This allocation amounts to 1.05 million, or 5%, of fully diluted ZEC. Combined with the FR of 2.1 million, or 10%, of fully diluted ZEC, this amounts to 3.15 million, or 15%, of fully diluted ZEC.

There are two crucial differences between the FR and the Zcash Development Fund. First, the Zcash Development Fund would be directed exclusively toward technical and non-technical initiatives that contribute to the success of Zcash. And second, to ensure proper accountability and transparency, the handling of the funds in the Zcash Development Fund would be subject to much more explicit and inclusive rules of governance, as laid out in the Requirements section of this proposal.

Out of Scope

This proposal does not address the following closely related issues:

  • Details of the decision-making process for supporting or rejecting this or other relevant proposals by the ECC, the ZF, or other Zcash stakeholders. That said, the authors of this proposal maintain that any decision by the ECC and the ZF on the issue described in the Motivation section above MUST be preceded by at least the following procedures for measuring community sentiment, listed in the August 6, 2019 statement by the ZF [4]:

    • Reviving the Community Advisory Panel with an opportunity for new members of the Zcash community to join. The Panel is expected to vote on all proposals that meet the basic ZIP draft requirements [5];

    • Miner signalling whereby mining pools can signal their support of specific proposals using their ability to embed arbitrary messages in the mined blocks.

    Methods for measuring community sentiment MAY also include Zcash Forum user signalling limited to accounts created before a certain date. Ideally, all ZEC holders would also be able to signal their support of specific proposals but, given current technical limitations, this may not be feasible. The outcome of the two procedures listed above, as well as any other that end up getting implemented for the same purpose, SHOULD play a central role in determining the official position of both the ECC and the ZF on the issue described in the Motivation section of this proposal.

  • Question of whether the ECC should reorganize itself into a non-profit, as suggested by the ZF in their August 6, 2019 statement. [4] The current proposal neither prescribes nor excludes the option of the ECC becoming a non-profit. The authors consider the basic governance rules of the Zcash Development Fund outlined in the Requirements section below sufficient to ensure transparency and accountability, regardless of whether the Applicant is a for-profit or a non-profit entity. According to the current proposal, funding from the Zcash Development Fund would be available to both for- and non-profit entities, thereby allowing for maximal flexibility in terms of the types of activities that can be funded.

Rationale

The rationale behind this proposal is as follows:

  • To guarantee sufficient financial resources for research, development, maintenance, and other types of technical work directly connected to the various software implementations of the Zcash protocol by world-class cryptographers and engineers, as well as non-technical initiatives (including design, marketing, events, regulatory outreach, education, governance, and any other form of business or community development) that contribute to the long-term success of the Zcash network. Funding such activities constitutes the intended purpose of the Zcash Development Fund;

  • To ensure that funding for both technical and non-technical work on Zcash stays sufficiently independent from external entities (investors, donors, private companies, etc.) who could end up acquiring a disproportionately large influence over the network and its development, or jeopardize the sustainability of funding necessary for the success and stability of Zcash;

  • To establish the fundamental rules of governance and accountability regarding the use of funds in the Zcash Development Fund;

  • To increase the level of decentralization and community involvement in Zcash governance and resource allocation;

  • To encourage transparency and cooperation among different Zcash stakeholders and strengthen the community’s governance capabilities moving forward.

Requirements

Funding mechanism of the Zcash Development Fund:

  • This feature MUST be hard-coded so that 20% of newly issued ZEC in the mining rewards associated with block generation are automatically directed to the transparent address of the Zcash Development Fund;

  • The previous requirement MUST be met between the first (year 2020, at block height 840,000) and second (year 2024, at block height 1,680,000) halving. With the second halving, depending on future governance decisions, the development of Zcash MAY continue with a funding model based on coinbase or mining rewards, or revert back to a system whereby all block rewards go to miners;

  • The two previous requirements MUST hold regardless of the Network Upgrades or changes to mining or mining software introduced prior to second halving;

  • The initially hard-coded transparent address of the Zcash Development Fund MUST be changed only in case of a security issue that could result in the loss of funds associated with this address. In such a case, the ECC, the ZF, and/or the Third Entity described below MUST take all possible steps necessary to avoid any loss of funds and ensure that the Zcash Development Fund remains intact and available for its intended purpose as described in the Rationale section of this proposal. Any such change MUST NOT result in a situation whereby the requirements described in this proposal can no longer be met;

  • The Zcash Development Fund MAY outlive the duration of its initial funding mechanism, either through a substantial appreciation in the price of ZEC, or by switching to alternative funding sources after the second halving in 2024.

Governance rules of the Zcash Development Fund:

  • Funds accruing to the Zcash Development Fund MUST be used only for their intended purpose as defined in the Rationale section of this proposal;

  • The transparent address of the Zcash Development Fund MUST be jointly controlled by the ECC, the ZF, and a third independent entity (“Third Entity”) still to be determined, and all transfers from the Zcash Development Fund MUST be officially and publicly confirmed by a majority decision among the ECC, the ZF, and the Third Entity (“2-of-3 multisig”). As such, each funding decision MUST be put on an officially documented vote which MUST NOT pass unless at least 2 of the 3 entities involved vote approvingly;

  • Prior to any movement of funds from the Zcash Development Fund, the ZF and the ECC MUST coordinate to establish the Third Entity that will be involved in the governance of the Zcash Development Fund. The process of determining the exact initial composition and rules of governance of the Third Entity MUST involve the Zcash community at large, similar to the process around the issue described in the Motivation section of this proposal;

  • The governance rules of the Third Entity MUST include the following:

    • All decision-making and other governing processes of the Third Entity MUST be independent of the ECC and the ZF, and MUST include measures that are necessary to avoid conflicts of interest in relation to the ECC and the ZF;

    • At creation, the Third Entity MUST include at least 5 individuals with independent previous affiliations, each having a single vote in decisions relating to the Zcash Development Fund. All such decisions MUST have majority support within the Third Entity to be approved;

    • Once the Third Entity is established, it MAY decide to change its rules of governance, but any such change MUST be preceded by the involvement of the Zcash community at large, similar to the process around the issue described in the Motivation section of this proposal;

    • Once the Third Entity is established as a self-governing body, it SHOULD evolve toward a system whereby ZEC holders have a direct role in determining the votes of the Third Entity in Zcash Development Fund funding decisions, as well as decisions relating to the governance of the Third Entity itself;

    • Just as the ECC and the ZF, the Third Entity MAY apply for funding from the Zcash Development Fund, should its governing body deem doing so appropriate.

  • Prior to any movement of funds from the Zcash Development Fund, the ECC, the ZF, and the Third Entity MUST specify, approve, and make public the final rules on applying for and receiving funding from the Zcash Development Fund, including the details of the decision-making process for approving or rejecting funding requests. These rules MUST apply equally to all Applicants, including the ECC, the ZF, and the Third Entity, and MUST include the following:

    • Funding from the Zcash Development Fund MUST be available not only to the ECC, the ZF, and the Third Entity but also to other individuals, groups, or entities that have made or have a proven ability to make useful technical and/or non-technical contributions to Zcash as described in the Rationale section of this proposal;

    • To receive funding from the Zcash Development Fund, all Applicants MUST follow the rules described in this proposal and in final detail by the ECC, the ZF, and the Third Entity;

    • As part of their application, all Applicants MUST make public an overview of the activities and associated costs for which they are seeking funds for;

    • Each funding decision MUST be preceded by a community review period of reasonable length during which all Zcash stakeholders - should they wish to do so - can familiarize themselves with the Applicant’s request and ask for clarifying questions, make suggestions, or raise objections;

    • In case of an overwhelming opposition among the broader Zcash community to approving a particular Applicant’s request, the ECC, the ZF, and the Third Entity SHOULD NOT approve it before considering ways to address the concerns raised by the community and change the funding request accordingly;

    • Each funding decision MUST be accompanied by a joint public statement by the ECC, the ZF, and the Third Entity (appropriately numbered and/or titled for easy referencing) which MUST include the final outcome of the relevant vote, as well as the votes of the three entities involved. As part of this statement, each of the three entities MUST provide an explicit justification for why the Applicant’s funding request was approved or rejected by the respective organization;

    • Zcash Development Fund votes and the accompanying justifications described in the previous point MUST be archived and kept publicly available by the ZF so that all current and future Zcash stakeholders can review the history of voting and resource allocation of the Zcash Development Fund;

    • The ECC, the ZF, and the Third Entity MAY approve funding requests on a rolling basis, but at a minimum a vote MUST take place every 6 months that includes all funding requests that have been submitted since the previous vote and meet the requirements set by this proposal and in final detail by the ECC, the ZF, and the Third Entity;

    • Recipients MUST publicize regular (at least every quarter) progress updates on their activities funded from the Zcash Development Fund. In the case of short-term work (up to 3-5 months), a single progress report upon the completion of the project is sufficient. Default reporting requirements MUST be specified by the ECC, the ZF, and the Third Entity prior to any movement of funds from the Zcash Development Fund and additional requirements MAY be introduced on an ad hoc basis;

    • Depending on the nature of the request, and especially the length of the funding period, funds MAY be disbursed in increments, based on concrete deliverables or various adoption and/or performance metrics.

  • Any decision to change the governance of the Zcash Development Fund as described in this proposal and in final detail by the ECC, the ZF, and the Third Entity, MUST involve the Zcash community at large, similar to the process around the issue described in the Motivation section of this proposal;

  • All transfers from the Zcash Development Fund MUST be in full accordance with the requirements described in this proposal, and the official mission and values of the ZF. [6]

Issues & Discussion

Main objections:

  • This proposal is not in accordance with the current protocol specification and the initial promise of the creators of Zcash, according to which 100% of coinbase rewards will go to miners after the first halving. The main counter-argument that motivates the current proposal concerns the need to guarantee stable and sufficient funding for world-class cryptographers, engineers, and other professionals to continue contributing their time and effort to Zcash;

  • Possible objections concerning the various parameters of the Zcash Development Fund funding mechanism described in this proposal;

  • Possible objections concerning the governance rules of the Zcash Development Fund described in this proposal and in final detail by the ECC, the ZF, and the Third Entity.

References

[1] Key words for use in RFCs to Indicate Requirement Levels

[2] The Zcash Network Upgrade Pipeline

[3] Placeholder Considerations: Resources, Governance, and Legitimacy in NU4

[4] Zcash Foundation Guidance on Dev Fund Proposals

[5] Zcash Improvement Proposal 0 (ZIP0)

[6] About the Zcash Foundation

Attention!

Click here for the most up to date version of this proposal on Github. The original below will be kept unchanged for comparison but the one on Github will always be the official latest version.

13 Likes
2

Really good work, especially the governance part, voting and transparency part. Realy well done. Congratulations for making a superb detailed proposal.

7 Likes
3

I like this proposal. Only worry is broader crypto community will have the opportunity to throw some shade because proposal is coming from a VC. Regardless of that, whichever proposal gets most consensus, should get adopted.

2 Likes
6

The overall amount of the Development Fund is of particular importance, however this proposal doesn’t discuss it at all.
How were the 20% of the coinbase reward calculated and on what data is the calculation based on?

1 Like
7

think the “3rd entity” part is interesting.

1 Like
8

I think its great - really like the emphasis on transparency & governance.

Looking forward to hearing what josh thinks & how it fits with ECC going non-profit. Gets pretty close to that IMHO.

1 Like
9

I like this proposal’s attempt to increase decentralization. However, the way it sets up the incentive, control of the whole Dev Fund is essentially put in the hand of the majority of a “Third Entity” committee that is yet be determined. So this proposal really says is: let’s find a committee of outsiders who will have effectively ultimate control over the whole Dev Fund. Let me elaborate:

  1. The proposal does not set a specific split of funds between ECC vs. Zfnd. The coins can go either way, by 2-out-of-3 decision. Thus, ECC and Zfnd compete for the same funds, and each is incentivized to block and deny the others’ funding request. But each of Zfnd or ECC could take coins for itself from the Dev Fund with approval by the Third Entity. Thus, in terms of cold short-term economic incentives (ignoring good intents and effect on coin price), the Third Entity is the only one with true power.

  2. In particular, either of Zfnd or ECC, in collusion with a majority of the Third Entity committee, could usurp the whole Dev Fund. The other party is powerless. The usupring party is even explicitly allowed to give the colluding Third Entity a share of the spoils; they just need to agree on a plausible excuse.

  3. This structure disincentivizes keeping reserves. Both ECC and Zfnd would know that any coins left unused in the Dev Fund may be requested and received by the other party. This incentivizes imprudent spending of funds, or even busywork on nonessential tasks. Cryptocurrencies’ volatility makes a large reserve very desirable, but this only works if the parties affecting the building of reserve know it cannot be usurped by others.

  4. It is unclear how the Third Entity committee can be effectively formed, to mitigate all of the above. Its members, effectively entrusted with potentially hundreds of millions of dollars, must exhibit a rare combination of financial acumen, technical expertise, familiarity with the Zcash ecosystem, moral character, and mission-alignment. Moreover, they must be independent of ECC and Zfnd (including, presumably: shareholders, employees, advisors, contractors, students and other associates). All of this, under an apparently informal arrangement with little recourse to law if things go awry.

These are grave concerns that must be answered for the proposal to be viable.

(Disclosure: I’m a founding scientist of ECC and a technical advisor to Zfnd. This is my personal opinion.)

11 Likes
10

…

This implies that none of the proposal made so far are viable.

11

@mika, some proposals do set a split, for example Dev Fund Proposal: 20% split between the ECC and the Foundation (which I believe means 10%+10%). Others have opt-in mechanisms which do not preordane the division, but also do not put the division at the effective discretion of the recipients; they thus avoid the incentives problem discussed here.

4 Likes
12

BTW, I’d like to commend Placeholder for their very detailed and superbly-written proposal. My reservations aside, having this level of analysis and precision is highly valuable to the discussion.

5 Likes
13

What if instead of one Third Entity, there are three? So five total, including ECC and ZF. Require 4-of-5 multisig, and suddenly it’s much harder to capture the decision-making process.

It might be ideal to have three entities focused on Zcash, and two from the larger ecosystem.

Keep and Summa’s Cross-Chain Working Group might be a good candidate: Summa and Keep Partner on Cross-Chain Working Group | by Laura Wallendal | Keep Network

The Tezos Foundation also comes to mind.

2 Likes
14

Just thinking out loud, can one of the party be the miner?

2 Likes
15

I really like this idea, especially for situations where ZF and ECC might disagree. How would Third Entity be built? A director who then chooses members?

1 Like
16

I second the concerns listed above by @tromer. I fear that in practice two groups could collude to have unlimited control over the dev fund. This is exactly what is happening now with EOS block producers because they implemented a system that rewards collusion.

I strongly urge the Zcash community to learn from the mistakes of other blockchains. The zec community would be better served by having two or more completely independent dev fund streams, so that there is no single point of failure.

4 Likes
17

I fear that in practice two groups could collude to have unlimited control over the dev fund. so this proposal not the best at this point. Besides, the most important is that the 20% is too high. Based on these discussions below, I personally believe that the dev-fund should be less than 10%, and 8% is more than enough, which is better for the development of the community. is there any agree with me?

[Moderation edit by @daira for a serious error of fact: the amount received by ECC over the last 3 years is not even close to USD $250m. See the transparency report linked at Electric Coin Company Q2 2019 Transparency Report - Electric Coin Company .]

but @zooko said that:

2 Likes
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Welcome to the Zcash Community Forum, and thanks for weighing in here!

19

I think you’re not taking into account the 2020 halving. If, hypothetically, 20% of new issuance were split equally between the ECC and Foundation between October 2020 and October 2024, that would be the same rate of funding to ECC as 5% of new issuance would have been between October 2016 and October 2020.

3 Likes
20

I agree with @tromer’s reservations. It may seem as though 2-of-3 governance is somehow more decentralised than 2-of-2, but actually it has some significant weaknesses.

Disclosure of interest: I work for and have options in ECC, and I am an FR recipient up to October 2020.

3 Likes
21

If that’s the problem than changing from 2-of-3 to 3-of-3 should fix such issue, that would be my personal favourite anyway. Either absolute consensus or nothing.

22

That’s an interesting point of course, an valid argument but i think there are as well a bunch of valid arguments for this and i personally like the idea that the 3rd entity should have no direct affilations with the ECC/ZF and should be choosen from the community, which could be an interesting mix of VC’s, mining pools, forum members, miners, etc.

This would lead automaticly to way more transparency, accountability, more discussion around given targets, more community inolvement etc.

The counter argument to your argument could be that currently in the foundation there are 4 founding scientists of the ECC engaged in various positions and i personally don’t exclude that some more founders or employees from the ECC are shifting at some point to the ZF. Someone could argue here that ECC shareholders (founding scientists are shareholders of the ECC to my knowledge) have allready a very big influence in the ZF.

Another argument in my opinion is that the price/trade-off for a consensus change should be exactly a 3rd entity that has a say, voting and veto power. I know, the ECC and ZF are used by now to use the funds as they desire, but with a new dev fund this should be no longer the case.