ECC's owners to donate ECC to the community

Hello friends. You may recall this discussion we’ve had about converting to a non-profit.

Today we’re announcing that a majority of ECC’s owners have indicated they support donating ECC, effective before Canopy!

Here’s the full blog post. Please read it!

Ask us all your questions. This has taken a lot of work (my comments in that earlier post turned out to be right), and now we are making a huge step in unifying ECC with the community in support of our shared mission!

I want to express — again — my profound gratitude to the owners of ECC, both for believing in Zcash when nobody else did, helping create it, and now generously donating ECC to push the mission to the next level.

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Is this an existing nonprofit entity? What’s the full name or EIN?

What is the purpose of the nonprofit? Does it focus entirely on Zcash?

What will prevent Bootstrap from spending the dev funds on other items related to Bootstrap’s mission, for example something other than Zcash?

Who are or will be the directors and board members?

Why not have the dev funds continue to go to the ECC? For tax reasons mostly or something else?

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[Edit by @daira to point out a minor inaccuracy in the article: Zcash Foundation is a U.S. 501©3; a quote in the article incorrectly refers to it as a “non-U.S.” foundation.]

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Great news. Well done.

Can you clear up this though please.

Who gets the 7% from 1014. Is bootstrap obligated to any of this?

Is the ECC going to submit an amendment to 1014 we can talk about and vote on?

because im sure if you just replace ECC with bootstrap it should be fine, but anything else might get messy.

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I’m planning to post an amendment proposal to 1014 that does this

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A thought experiment: Why wasn’t the ECC a nonprofit to begin with?

I think there are at least two important reasons:

  1. Selling equity to fund development. The ECC sold equity to investors in order to fund the initial development of Zcash. The form of the equity was: (1) ownership interest in the Zerocoin Electric Coin Company LLC (formed in Delaware); and (2) interest in a portion of Founders Reward. (See ECC Blog Post: “Continued Funding and Transparency” (Sept. 23, 2016).) Under both Delaware law and IRS regulations, nonprofits cannot sell equity.
  2. ZEC-based compensation. For these first four years, a portion of the compensation of at least some ECC executives and a portion of the compensation of at least some ECC employees has been denominated in ZEC. Meaning, a portion of the compensation was defined in terms of ZEC. By using the term denominated, I am distinguishing between how the compensation amount is defined and how the compensation is ultimately paid out. For the purposes of this discussion, if the compensation is defined in terms of USD, it matters little whether the compensation is then paid out in USD, ZEC (at market value at the time of the payment), or Pokemon Cards (at market value at the time of the payment). What matters is the unit that the compensation amount is defined in. Regardless of the desirability of “skin in the game” as an economic incentive, nonprofit executives and employees cannot be compensated with equity or profit-sharing. And in my opinion, ZEC-denominated compensation is akin to either equity or profit-sharing, as evidenced by some advocating for such compensation precisely because it provides “skin in the game”.

So, being a for profit-entity during these past four years enabled the ECC to (1) sell equity to fund development and; (2) denominate a portion of executive and employee compensation in ZEC.

Now let’s take a look at the new structure.

While the ECC is still a for-profit entity, it will be funded in part by ZEC paid to it by the new nonprofit, Bootstrap Project. These transactions between Boostrap Project and the ECC are subject to IRS rules regarding nonprofit expenditures. Under those rules, I assert that Bootstrap cannot denominate payments to the ECC in terms of ZEC.

For example, let’s say Bootstrap Project desires to contract with the ECC to have the ECC implement Zcash network upgrades for the next four years. The contract could be denominated in terms of USD ($3 million per year for the next four years, paid out at the beginning of each year) but it could not be denominated in ZEC (40,000 ZEC per year for the next four years, paid out at the beginning of each year).

Note that under the $3 million per year USD-denominated contract, the payment could be made each year in ZEC (at the current market value of ZEC at the time of the payment). And once received, the ECC could, as a for-profit entity, still denominate a portion of executive and employee compensation in terms of ZEC. But the ECC as a whole cannot be compensated by Bootstrap Project in ZEC-denominated terms because doing so is akin to an equity grant or profit sharing and thus impermissible under the IRS regulations governing nonprofits.

Admittedly, I have never practiced law in this particular area, but for those of you who doubt my analysis, I will leave you with a final thought experiment: Let’s say the Zcash Foundation created a fully-owned for-profit subsidiary and moved all of its engineers into that subsidiary. Do you think the Zcash Foundation could then just funnel all of its ZEC allocated to it under the new dev fund to the subsidiary (regardless of the current market value of the ZEC) and then have the subsidiary denominate the salaries of those same engineers in ZEC all the sudden? I think the answer is no, because it would be an end run around the regulations prohibiting nonprofits from providing equity-based or profit-sharing-based compensation to both its employees and independent contractors.

Bottom line: Under this new structure, I don’t think the ECC as a whole can have their work compensated by Bootstrap Project in ZEC-denominated terms without seriously jeopardizing the nonprofit status of Bootstrap Project (and hence seriously jeopardizing the tax-free status of the income the Bootstrap Project receives from the block rewards).

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(ZIP Editor hat, not speaking for ECC.)

ZIP 1014 says that the “ECC slice” of the dev fund “will flow to ECC”, but it doesn’t specify the details of how. ZIP 214 says that “ECC SHALL generate the addresses for the FS_ECC funding stream, which on Mainnet corresponds to the ECC slice”. My reading of that is that, as far as the current wording of these ZIPs is concerned, ECC is free to arrange with Bootstrap that the funds will flow via Bootstrap. That is subject to the recommendation: “Each party SHOULD take account of operational security issues associated with potential compromise of the associated spending keys.” and to other requirements governing the ECC slice in ZIP 1014.

That said, tidying up the wording to take into account this change might be useful.

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This is really interesting and exciting!

I’m curious if there were any objections to this, and what the objections were. I imagine it’d be hard to share details like this publicly, but I wonder if there are any known trade-offs when making this decision and what those are.

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Great question.

The transition’s upsides are well summarized in ECC’s aforementioned blog post and Zooko preceding forum post, and I basically concur with these. I would say that ECC has already been acting as a non-profit for a long time, by putting its public-goods mission at the forefront and using its money accordingly (subject to its pre-existing obligations, of course). ECC’s shareholders have proven stalwart supporters of this public-goods view (as evidenced, e.g., by their agreement to a substantial “dilution” of their own interests in order to sustain ECC through the financial rough patch in 2019). Formalizing the nonprofit status makes this de facto reality much easier to communicate to newcomers. It solves the risk of tax attrition on the Dev Fund, helps implement the ZIP 1014 commitments, and makes the operational formalities easier.

The two significant isssues that came up in the discussions are:

Sustaintability

By default, post-halving ECC is completely dependent on the Dev Fund stream and its cushion of reserves. No one knows how ECC will continue paying salaries when the Dev Fund ends in 2024. Depending on the ZEC coin price, the Dev Fund and reserve may not even suffice to fund ECC until 2024 without cuts.

One way to address this is by seeking new revenue sources and for-profit activities, that are consistent with ECC’s mission but are not necessarily public goods or even within the mission. ECC technical expertise and position as an ecosystem nexus could be monetized in various reasonable ways, which may reshuffle its priorities and perhaps even divert resources from the core mission in the short term, but enable sustainability in the long term.

A nonprofit structure discourages this, both in mindset and in corporate+tax realities. It’s not impossible to do anyway, and the hybrid structure helps (as demonstrated by Mozilla Foundation+Corporation), but it’s very difficult (as demonstrated by same).

Mooring

At present, control of ECC is grounded in its shareholders (technically: “partners”, since ECC is an LLC partnership). ECC’s management and Board of Directors operate under fiduciary duty to these partners. Those partners are well-aligned to ECC’s mission (see above) and moreover, many of these are experts in cryptocurrencies, cryptography and the fintech ecosystem. They thus provided a crucial “mooring” function to ECC’s strategy and execution. This consisted, for example, of nominating ECC’s board, and providing assorted inputs over time based on deep knowledge of the area and ECC’s performance.

As a nonprofit, Bootstrap will dissociate from those partners, and become fully controlled by its self-perpetuating Board of Directors. It is thus of paramount importance that this Board of Directors will embody the same values and have effective access to the same expertise. The latter, especially, is a tall ask!

With ECC’s current Board serving as Bootstrap’s initial board, we would have this continuity and trustworthiness as a basis. Still, the Board must indeed expand to encompass the additional perspectives that would otherwise be lost, as well as to increase its diversity (a longstanding sore point). Many of the partners want to see this happening before they let loose their baby, and I believe ECC’s current board is hard at work on it.

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As mentioned, here’s a proposed update to ZIP 1014 that names Bootstrap as the parent org of ECC, and uses consistent language to describe how both orgs would receive dev fund slices as donations:

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