Is Zcash's geographic centralization a vulnerability?

Governance
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Warning, essay incoming…

With the ZCAP expanding and with votes coming up which will require input from the ZCAP and the wider Zcash community, I’ve been thinking about some areas that I think may need attention for Zcash soon.

We have Halo 2 on the immediate horizon and it looks like ZSAa (or whatever we call them) are a good candidate for the next major addition, both of which are very exciting.

But after listening to some of the governance discussions during Zcon2, something else is praying on my mind and I was hoping others would be able to allay my fears.

I’ve been reading a very interesting book by David Deutsch called The Beginning of Infinity which has a chapter called Choices which talks about the role of elections and more broadly about the democratic process that is well worth a read, I’ll include a quote from that book in a follow up post, but the spirit of this post speaks to the fact that the decision making process starts with ideas, and votes/elections are an imperfect way to decide which ideas to try next and which ideas have outlived their purpose.

During Zcon2, zooko mentioned the fact that Zcash is currently becoming more and more decentralized, but that it is also still heavily centralized in the USA.

The ideas I’m looking to explore here are in relation to how we can tackle that geographic centralization issue, or to determine if it is actually an issue in the first place.

Currently we have two institutions in Zcash, the Electric Coin Company (ECC) and the Zcash Foundation. We also now have Zcash Open Major Grants (ZOMG) which acts independently but is under the control of Zcash Foundation. ECC currently receives 7% of the block reward, Zcash Foundation receives 5% and ZOMG receives 8%, the remaining 80% goes to the miners.

So as things stand, the 20% of the block reward that goes to fund all development/regulatory outreach/support in the ecosystem is currently directed to two US based organisations.

Which brings me to my question, which is:

What happens if there is a concentrated attack on Zcash? In particular by the US government, i.e. do the US government, if they so wish, have the ability to freeze ECC and Zcash Foundation assets?

If the answer to that is yes, or maybe, then what can we do about it?

The immediate thing that springs to mind to me is that either ECC or Zcash Foundation operations could be moved to another jurisdiction, is that a possibility?

Another option would be to spin out ZOMG as it’s own entity, and give it additional capabilities to use it’s resources to provide emergency development funding to either of the other organisations or their employees to continue core developments if the need arises.

I know some will say that we have already voted on whether ZOMG should be it’s own entity or if it should be under Zcash Foundation control. I personally leaned towards Zcash Foundation control at the time and I think that was the right decision while ZOMG bootstrapped itself, but that won’t necessarily continue to be the correct approach in the future.

Anyway, I have an open mind but I thought this warranted at least some discussion. I’d like to hear others thoughts on this, is this something we should be worrying about at all?

And if it is, what can we do to mitigate these risks and make Zcash as resilient as possible in the future?..

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“An election does not play the same role in a rational society as consulting an oracle or a priest, or obeying orders from the king, did in earlier societies. The essence of democratic decision-making is not the choice made by the system at elections, but the ideas created between elections. And elections are merely one of the many institutions whose function is to allow such ideas to be created, tested, modified and rejected. The voters are not a fount of wisdom from which the right policies can be empirically ‘derived’. They are attempting, fallibly, to explain the world and thereby to improve it. They are, both individually and collectively, seeking the truth – or should be, if they are rational. And there is an objective truth of the matter. Problems are soluble. Society is not a zero-sum game: the civilization of the Enlightenment did not get where it is today by cleverly sharing out the wealth, votes or anything else that was in dispute when it began. It got here by creating ex nihilo. In particular, what voters are doing in elections is not synthesizing a decision of a superhuman being, ‘Society’. They are choosing which experiments are to be attempted next, and (principally) which are to be abandoned because there is no longer a good explanation for why they are best.”

  • David Deutsch in The Beginning of Infinity

So, what experiments should we be attempting next?

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I do agree but have questions. Can you provide an instance of the USG freezing the assets of a 501c3 w/o just cause? I’m not saying it hasn’t happened but a specific reference to a similar instance might help here. Where would it go in the world, outside ‘the reach’ and so forth, where its tax free and the same level of accountability with regards to handling of funds is enforced?

Oh and to be clear; a fourth entity that reiterates upon, instead of undoing, all the work that went into building the ZOMG.

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Great questions, and I’d like to hear answers if anyone has them. I’m not knowledgeable in this area, and at the moment I’m trying to inform myself to see if there could potentially be an issue here that needs to be considered. If what I am worried about is impossible that would be a great result.

With regards to examples of freezing assets, as I said, if anyone can provide any please do.

I have performed a quick Google search and see this (insecure/http) link talking about the ability to freeze charitable assets: Freezing Charitable Assets | WEXLER LAW GROUP, INC.

This is related to California and says “these proposed regulations would automatically freeze the assets as soon as a charity’s Federal or California tax exemption is revoked.”

And then i see this article talking about how tax exemption can be lost: https://nonprofitrisk.org/resources/articles/how-to-lose-your-501c3-tax-exempt-status-without-really-trying/

That article also says: “Each year, the IRS revokes the tax-exempt status of more than 100 501(c)(3) organizations.”

I’m not saying the above applies to Zcash, they are literally just the first results I saw in my 5 minute search!

w/o just cause is interesting, my guess is that if something like this were to materialize it would be framed as fully justified by the government due to some rule or regulation.

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To my understanding the ECC now being owned ny Bootstrap was to strengthen resiliency against capture so we might ask why they did that and not relocate and while it seems to be an edge case it is worth considering and so raises the second question of location and its comparable taxation and accountability enforcement i.e. where is as good as what we have now that doesn’t risk having it’s funds frozen unjustly by its local government?

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Key thing to keep in mind is the “Zcash the network” can run independent of either ZFND or ECC, or ZOMG institutions. It’s open source software and if for some reason there was a problem which resulted shutting down ECC and ZFND it would not stop the network. That’s why Zcash is considered decentralized; it’s 100% opt-in, ECC or ZFND can’t force people to run the software and they can’t force people not to run the software.

Would such an action FUD the market? Sure Would Exchanges de-list it if the government said so? Maybe. But ultimately it’s impossible for the government to “shut down” decentralized blockchains.

So if you can’t shut it down the question becomes how could Zcash survive (fund itself if it wanted to) in the case of ECC or ZFND disappearing tomorrow?

If they disappeared there would no longer be a Zcash Trademark holder to enforce which chain is Zcash. So then its simple: Fork and change the Dev fund addresses to different ones controled by a different entity. Get enough nodes/hashpower/exchanges to “agree” that the new chain is “Zcash” since the old Zcash chain is no longer maintained and the network carries on.

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Yes, only a consensus change could stop the dev fund payments but revocation of status, just or otherwise, would bar the legal continuance of granting effectively locking the funds and thats whats being stipulated.

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Unjustly revoking status of either the ZFND or Bootstrap would be grounds for legal recourse and that due process, the right to be heard and the possibility of overturning, is guaranteed by the Fourth Amendment and I would say the best argument against the ‘unjustly risk’. This fourth entity, unless they’re completely untouchable from the government of the country in which they reside (which also implies total sovereignty over their self governance) would do well to have something equivalent.

(Im not mad at you Covfefe, I’m just expressing my reservations, the idea merits attention :bulb:)

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Thanks for this additional context Shawn, and I’m fully on board with the fact that the network is decentralised, a lot of us are running nodes and the network would keep chugging away in the event that ECC and ZFND were incapacitated.

You mention the fact that if this hypothetical scenario were to occur, then that would FUD the market, exchanges could start delisting etc. And this is the point I’m essentially trying to make, i.e. is there anything that we could do to reduce the potential impact by making Zcash more resilient to events like this?

Or is this too low probability to worry about?

Or should we just acknowledge the potential issue, but agree that we will just be reactive if such an event happens rather than planning what our approach would be in advance.

You mention we could possibly fork and divert the Dev funds to a different entity, presumably if ECC and ZFND had both “disappeared”, it would have been due to interference from the US government, so presumably we wouldn’t want this new entity to be US based. In that case, what would this new entity need to look like? Are there other, currently crypto friendly jurisdictions? How would we decide where this entity should be incorporated?

I remember reading an article by Balaji (I think) a while back where he said that in the future we may have companies incorporated on the Blockchain where they don’t reside in any jurisdiction, I wonder could that be a possible option…

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Thanks Autotunafish, and I won’t be taking any comments in this thread personally so feel free to mention anything that may be relevant. I’m still not sure what my own position on this is!!

You mention if tax exemption status is “unjustly” revoked that there would be legal recourse and I fully agree with that, so maybe for the purposes of this thought experiment we say that there is a potential avenue to revoking the tax status of both entities by the government that is considered “just”, in that they can find or manipulate an existing loophole or introduce one…

As an aside from this, is revocation of tax status the main risk, are there other ways that a scenario like this could play out?

And also just to clarify, my earlier point was not to introduce a fourth entity, but to have ZOMG become its own separate legal entity outside of the US, so there would then be 3 separate entities across multiple jurisdictions, ECC, ZFND and ZOMG. I’m not sure if that really makes a difference to the discussion though.

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Im not arguing the possibility of exetenuating circumstances, anythings possible but that isn’t limited to US either so claiming inherent safety from theoretical persecution by simply changing locale is unfair.

Whats the advantage of repurposing the ZOMG vs having a newly created one modeled (closely anyways) like the ZOMG?
(The ZOMG was actived like 200 days ago and I wholeheartedly oppose it being changed at least in the short term)

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There are definitely situations where the US Government steps outside the rule of law or stretches the law beyond recognizability to achieve an outcome.

Wikileaks and the Snowden revelations are both examples in the tech and privacy space where it felt like all bets were off and it was impossible for even experienced insiders to predict what the US government would or would not do as part of its reaction. 9/11 was another (Guantanamo, etc).

At the very least I think we need to remember the risk of how fast things major ‘national security’ related events like these and how fast the reaction can be. Then on top of that there might be specific bad laws or agency level regulations in the works.

I don’t think there’s really any better jurisdiction to be in, especially since the US has a lot of clout with pretty much any other democracy when it cares to, but it might be best in one of the above scenarios for the funds to be secured by a committee of people living in a number of jurisdictions or a smart contract rather than an organization based in any one jurisdiction.

The US has done some terrible things in moments of crisis, so it’s probably a safe bet to build institutions whose workings depend directly on humans and values. That said, I think all of these newer approaches do have a greater risk of catastrophic failure do to other causes.

We might make ourselves resilient to the bad decisions of the US government only to get wiped out by a smart contract bug, some other human error, or some kind of internal political drama that’s hard to resolve without complex legal institutions.

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That sounds like the founders reward setup.

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Why wasn’t this brought up during the dev fund discussions? I’m curious to what specifically happened that makes this hypothesis now seems more imperative.

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And its ironic because during those discussions twas I who suggested a model that more closely mirrored the original, one of a comittee of trustees on the premise that it was known working model that through the discussions I agreed, and still do, that its inferior and yet here we are heh.
Dev Fund Proposal closing remarks shrug
So what happened that we feel differently now?