Major Grants committee

Hi All. I am the same lex_node who developed ZIP 1007 (Enforce Development Fund Commitments with a Legal Charter), contributing under a new forum account.

I haven’t paid as much attention since then, since it looked like ZIP 1007 would not move forward, but I have been catching up in the last two weeks and I see many of the same concerns that drove that ZIP are cropping up again in the debate over governance of the MG-Fund slice of the DevFund block rewards.

I come at these issues from an interesting place, since I am expert in traditional corporate governance. I have advised boards of directors on how to handle the conflicts of interest that arise in M&A transactions and other complicated scenarios, and am acutely aware of the interplay of psychology, law and economics in these delicate situations.

The core issue in traditional governance is the SEPARATION OF OWNERSHIP AND CONTROL. In a public corporation, that means that the people who own the corporation (the stockholders at large) do not control it–they appoint fiduciaries who manage it on their behalf. There are various kinds of well-known issues that arise from this: conflicts of interest, monitoring problems, free rider problems, etc. A combination of mandatory law (statutes, common law precepts) and contract law (audit mechanisms etc.) step in to prevent the separation of ownership and control damaging the people who aren’t in control but have a vested interest in the enterprise.

I have analogized the holders of a protocol token to the holders of “shares of network equity” who are
positioned similarly, from a governance perspective, to the stockholders of a public corporation. The owners of the means of block production–the miners–can also be seen as holding a kind of network equity.

With that background in mind, I have some thoughts:

  • in the current proposed structure, ZEC holders and miners are essentially like donors to a nonprofit (this is true even with the slice that goes to ECC, which is for-profit): they are giving away money with the hope of a public benefit, but have no rights to enforce how those funds are used or even really to monitor those funds except to whatever extent the receiving entities choose to make disclosures
  • this is bad–ZEC holders and miners are agreeing to donate on certain terms, but have no legal, enforceable right to independently monitor that the terms are complied with or enforce them–all they have is a sort of soft power of moral suasion that can be exercised based on whatever information the ECC and ZF choose to report
  • therefore, at a high level, I would tend to agree with the views of @zooko, barbra, @RoyBatty and others who–if I am permitted to put my own personal and perhaps not completely accurate gloss on their comments–wish to treat the MG-Slice as being a fund held for the benefit of and spent in accordance with the will of ZEC holders and miners
  • assuming one takes that view, then the optimal result would be control of the MG Slice by a new organization of some kind that is solely accountable to ZEC holders and miners
  • OTOH, it has been fairly pointed out that there are many potential issues and inconveniences in setting up such an entity…while (as a corporate lawyer) I tend to think those are being somewhat exaggerated, on the other hand I do not think they are completely irrational either

Putting aside the issue of an independent entity for a moment, I tend to think the specifics of the ZF proposal are strange. In particular, excluding ECC representatives from the MG committee is probably one of the worst decisions possible. As noted, ZF already has a conflicts rule that would require committee members to recuse themselves from voting on proposals where they have a conflict of interest–that is already a tougher rule than members of the board of directors of a mega cap company like Apple Inc. have when voting, and I really have to question why that is not sufficient to mitigate any ECC representatives’ conflicts. Excluding a group of people who have some of the most skin in the game and the most competence to decide how grant money is spent as a class, because of the mere potential for conflicts of interest which they would have to recuse themselves from voting on anyway, is in my mind not only overkill for addressing conflicts of interest, but actually creates more conflicts of interest because, when combined with the other aspects of the proposal (ZF appoints members, funding must comply with ZF charter docs, etc.) essentially centralizes control of the MG-Slice under the ZF and makes it even less likely that ZEC holder views which differ in some way from the ZF will be represented.

Additionally, I still have the same concerns that drove ZIP 1007: namely, through what mechanism are all the SHOULDs and MUSTs and SHALLs in ZIP 1014 going to be enforced? ZIP 1014 is vague on this, but it is a critical–perhaps the most critical–question. The idea that it would be sufficient for the ZF and/or ECC to put into their charter documents some provisions about this is laughable to a corporate lawyer. Those can be amended at any time. Also, a contractual commitment like that is only as good as the counterparty’s ability to monitor performance–and here, ZEC holders and miners would be the counterparties and would be relying on the ZF’s and ECC’s voluntary reporting. They would also have massive collective action and other problems in seeking redress for any problems that they did end up uncovering. That is not good governance or accountability.

So, there must be a mechanism that gives ZEC holders (and potentially also miners, to the extent they should be viewed separately from holders) direct rights over the MG slice. There are only two ways to do that which I am aware of: (1) put the funds in control of a third entity that is essentially a fiduciary of ZEC holders (/miners); or (2) have the ZF and ECC enter into a contract (like the charter I had previously proposed) that enables ZEC holders (/miners) to legally enforce the relevant requirements.

I note the views of many in this forum that these “governance experiments” are too complex and time-consuming etc. I am not sure I agree, but recognize that there is a kind of “governance fatigue” effect kicking in, as well as a ticking clock. I therefore also would like to float a third possible mechanic, which does not provide ZEC holders with direct rights, but may at least mitigate some of the issues and potentials for conflict: ZF and the ECC would cooperate to found and fund an independent, quasi-regulatory authority that would independently monitor the ZF’s and ECC’s fulfillment of the MUSTs, SHOULDs and SHALLs in ZIP 1014.

This would be a different type of third entity than has been proposed to date–it would not control the spending of any funds, but it would have some funding and would have at least a moral (perhaps even legal, if we could figure the details out correctly) right to call out the ZF and ECC for any shenanigans and try to fix the situation on behalf of ZEC holders and miners. It would give the ZEC holders and miners a kind of ZCash-specific, private equivalent to the SEC, which would monitor the quality and accuracy of the two org’s disclosures, and would police their use of funds.

In any event, I do believe that there must be something, with as much teeth as reasonably possible under the circumstances, but with at least a few good sharp teeth, that holds the ZF and ECC accountable on behalf of the donors–ZEC holders and miners. I truly believe that if we get this right, ZCash will have the best and most decentralized governance of any blockchain.

9 Likes

Just to add some clarity about next steps, I’ve updated the Foundation’s original post: To be abundantly clear, we still need to reach consensus on the changes to this ZIP with the ECC per our 2-of-2 trademark agreement; the exact wording and changes to ZIP 1014 may be modified with additional input from them before we submit a PR. @zooko and I had our first conversation about the Foundation’s modifications, and we expect that to happen within the next two weeks.

Also, @lex_node, @avichal, @RoyBatty and others who have brought up the MG slice turning into a separate entity: as @Shawn and @madars have noted, this is something that was brought up in previous debates/discussions and the community sentiment clearly indicated that the Foundation should manage the slice. What isn’t clear, based on the poll, is how the selection process should work, and how limited the Foundation’s veto/control should be, as you and others bring up @avichal.

6 Likes

Welcome, Roy! I think your backstory is intriguing. Like Barbra (who is the person who made that point that you’re citing from up-thread), you claim to have relevant experience from related situations. Very cool! I hope you find the Zcash community and governance structure to be a pleasant new home. :slight_smile:

I have a clarifying question: is it the Zcash Foundation or the unnamed foundation from your mysterious past that you’re referring to here?

2 Likes

I’m pretty happy to see external people showing interest for the Major Grants Program and providing general ideas for governance, especially so if they have experience, it’s a very fruitful thing.

6 Likes

As a little bit of extra context to my rant, here is an article by a legal expert on nonprofits detailing how in general donors to nonprofits have no remedies if the nonprofit uses donated funds in a way differently from how the nonprofit ‘agreed’ to. I believe everyone here should keep this in mind: Disappointed donors can't count on getting their charitable money back

4 Likes

I just want to chime in on this. There are a lot of good ideas coming up here. It kind of feels like we’re getting a “positive feedback loop” on governance, where word is getting around that Zcash’s governance has good structure and real force, and that is attracting people who have experience at software, law, governance, etc. who see Zcash as potentially a place where their contributions can have leverage for good. That’s great!

I think this discussion is repeatedly getting confused by an ambiguity that I too was falling into previously, about whether we’re talking about a new legal entity, or we’re talking about different rules for a Zcash-Foundation-sponsored legal entity. I posted things about “an independent third party”, and then in subsequent conversation, I tried to clarify, and then again, and then again, that what I meant was honoring the intent of Question 3 on the second Community Advisory Panel:

  1. Do you believe the Foundation should have independent authority in determining Major Grants, or should there be a new Major Grant Review Committee as prescribed in this ZIP?

A. The Foundation should have independent authority in determining Major Grants
B. There should be a new Major Grant Review Committee with near-complete authority

Avichal did something similar, arguing for “a separate Major Grants organization”, and when Shawn pushed back, based on the results from the Community Advisory Panel, Avichal said that a separate legal entity is “an implementation detail” and that he is advocating for answer B on Question 3.

(Lex’s recent comments can be read as an expert opinion that implementation details matter, and that to an expert, they are not that hard to implement.)

I’d like to ask everyone to clarify and narrow the scope of the conversation by agreeing that the Community Advisory Panel results have already excluded standing up a new legal entity before NU4 activation. This is based on the fact that none of the proposals that had at least partial support in the first round of polling (Community Advisory Panel, forum, and spontaneous petitions from coin-holders) called for the creation of a new entity.

So, creating a new legal entity is off the table for NU4. But what is still on the table is: shall the MG’s governance be independent from the Foundation (even though the legal entity that holds the funds on behalf of the MG body will be the Foundation, at least at first). That was Question 3 on the second round of polling, which was a picture-perfect “split vote” in the Community Advisory Panel but a landslide in favor of an independent MG among the (highly controversial) petitions posted anonymously by coin-holders on the blockchain.

It is within the community’s power and its right to specify that the MG funding will go to the Foundation on conditions that guarantee independence of the MG governing body. Lex’s cautionary tales of non-profit shennanigans notwithstanding, I believe that the Foundation would act with utmost integrity to honor that commitment, at least as long as the current personnel of the Foundation are in place. The ECC would use our rights over the trademark and our zcashd source code to honor that mandate. Future improvements to governance, such as Lex’s intriguing suggestion to hire an existing third party to monitor our compliance with our own rules would use this mandate as a basis. I’m interested to find out if Lex agrees with any that!

So, by all means, let’s continue the discussion about whether the Major Grants should be governed independently, but with the common understanding — as Josh Cincinnati’s post today re-iterates — that we’ve all already agreed that at least for NU4 it will live within the Foundation’s legal entity.

(ICYMI, the ECC’s position is that the MG governance being independent is important for decentralization of power and for the stated purpose of drawing in new third-party developers to support Zcash, but that we’ll use our trademark rights and our zcashd source code to support a ZF-controlled third party if that is the community’s decision.)

12 Likes

I actually don’t understand how it’s possible for governance of the MG-slice to be independent from the ZF while the ZF holds the funds without setting up some new legal structure. “Entity” may not be a clear term–but something like a trust (the ZRF is a trustee and other person(s) are beneficiaries) could also work.

The core issue likely to come up is that the ZF has a particular mission, legal status and charter. It will thus likely take the position that any funds it manages have to be governed accordingly and that it has to have final say-so–like the proposed appointment/removal power and veto power–over the use of the MG funds. And even if it voluntarily adopted some policies to the contrary, it would have the right and power to change those at any time. The ZF is likely to say that even if it agreed to hold the MG funds in trust (with ZEC holders as beneficiaries) rather than considering to be donations to the ZF, that the same constraints would nevertheless apply to its activities as trustee because it is not authorized to do or support anything that is contrary to its nonprofit purpose.

Thus, it’s hard for me to see how true independence for the MG committee can be established without some legal engineering here. Otherwise, the MG funds are going to be treated as donations to the ZF and the ZF will ultimately have the power and right to treat them accordingly.

3 Likes

Uhmm :thinking: yeah thats right, they’re a charity and all they’re non-taxable income is a donation (thought we established this)

1 Like

Correct. That’s what the text of ZIP 1014 says (emphasis mine):

  1. Major Grants awards are subject to approval by a five-seat Major Grant Review Committee. The Major Grant Review Committee SHALL be selected by the ZF’s Community Panel. The Major Grant Review Committee’s funding decisions will be final, requiring no approval from the ZF Board, but are subject to veto if the Foundation judges them to violate the ZF’s operating documents or U.S. law.

ZF SHALL recognize the ZF-MG slice of the Dev Fund as a Restricted Fund donation under the above constraints (suitably formalized),

and what option 3B of the Helios Vote said:

  1. Do you believe the Foundation should have independent authority in determining Major Grants, or should there be a new Major Grant Review Committee as prescribed in this ZIP?

B. There should be a new Major Grant Review Committee with near-complete authority

The intent of ZIP 1014 is not true independence. Instead, it’s up to the community to hold the Zcash Foundation to ZIP 1014, (including only exercising veto per the outlined limits, assuming that option 3B is taken).

8 Likes

I was pointing out something very similar by saying:

Any comments?

Precisely my concern. I see various MUST statements in the ZIP and I am not aware of anyone having proposed mechanisms by which those requirements would be fulfilled.

Examples:

ECC MUST undertake a firm obligation to use the Dev Fund only in support of the Zcash cryptocurrency and its community…This obligation MUST be made irrevocable, e.g., within ECC’s corporate governance structure (i.e., its Operating Agreement) or contractual obligations.

ECC is a corporation run for the benefit of its stockholders. They / the board of directors they appoint can amend the corporate governance structure at any time without the permission of anyone else.

ZF MUST disburse them as “Major Grants”, within the framework of ZF’s grant program but subject to the following additional constraints: These funds MUST only be used to issue Major Grants to external parties that are independent of ZF. They MUST NOT be used by ZF for its internal operations and direct expenses. Major Grant Review Committee members SHALL have a one-year term and MAY sit for reelection. The Major Grant Review Committee is subject to the same conflict of interest policy that governs the ZF Board of Directors (i.e. they MUST recuse themselves when voting on proposals where they have a financial interest).

Again, no way of enforcing this. The ZF is governed by its members, which are the members of the board of directors. They can decide to do anything they want, and there is no clear right or remedy for ZEC holders or anyone else if the ZF does not obey these requirements.

The one potential I see for a legally binding commitment is referred to here:

ECC and ZF MUST contractually commit to each other to fulfill these conditions, and the prescribed use of funds, such that substantial violation, not promptly remedied, will permit the other party to issue a modified version of Zcash node software that removes the violating party’s Dev Fund slice, and use the Zcash trademark for this modified version. The slice’s funds will be reassigned to ZF-MG (whose integrity is legally protected by the Restricted Fund treatment).

So I suppose the idea is that the ECC and ZF will enter into such a contract and will police one another. To me, that is not as good as giving ZEC holders a direct right of action. However, I could see this working and being effective–perhaps similar to the TM-sharing agreement itself. I’d be interested in helping to draft and negotiate this agreement.

If the desire is to have the MG fund be as independent as possible, then it should also be a subject of this agreement and the ECC should have some ability to enforce whatever independence standards are supposed to be followed.

Update: Considering this dynamic, I would reiterate my prior concern that DQ’ing ECC representatives from the MG committee would be disastrous. If, as appears to be proposed, the sole party legally positioned to enforce the ZF’s commitments about how the MG-slice will be used is the ECC, then it is all the more important that ECC representatives be on that committee. I would therefore go in completely the opposite direction as the ZF’s latest proposal–I would argue that the ECC should have at least one GUARANTEED seat on the MG committee and can appoint whoever it wants to that seat, in its reasonable good faith discretion.

2 Likes

I think there should be 1 seat from the ECC, 1 from ZF and 3 independent seats.The 3 independent seats being elected by the community. This way it is decentralized, but the ECC and ZF would still have input since they have the most knowledge and expertise about Zcash.

5 Likes

this would be a great structure

4 Likes

A basic tenet of ZIP 1012/1014 is that ECC should be able to apply for Major Grants, with an expectation that it will initially do so if coin price necessitates it and other teams aren’t up and running yet, but eventually leave the MG slice to others:

The Dev Fund should maintain the existing teams and capabilities in the Zcash ecosystem, unless and until concrete opportunities arise to create even greater value for the Zcash ecosystem.

[…]

  1. Major Grants may be issued to ECC only if there are no other proposals to perform the specified work with similar capabilities, effectiveness and cost. (The intent is that eventually ECC will not receive Major Grants.)

This seems incompatible with having an ECC representative on the Major Grants committee.

This, and similar considerations, were discussed at great length prior to the first community poll, which chose the above structure.

5 Likes

Sorry, but I disagree. Your conflicts policy already requires a conflicted member not to vote on proposals where they have a conflict. The ECC rep could easily comply with that rule, while remaining active on the board for proposals in which they are not conflicted.

Boards of directors of public companies (a fortiori, private companies) routinely allow members with conflicts of interest to sit on the board, because of their valuable expertise. For years, Eric Schmidt of Google sat on Apple’s board, despite the abundant possibility for conflicts of interest. Delaware corporate law is less restrictive than the ZF’s policy, and even allows conflicted members to participate in discussions and vote upon proposals for which they have conflicts, provided that the conflict is disclosed.

Furthermore, if the logic of excluding ECC reps is applied consistently, many other potential members would be excluded. My guess is that most people who have the expertise and interest to be good members of the committee are imbricated into the ZCash ecosystem in a way that they could directly or indirectly benefit from MG grants at one time or another. If you are excluding ECC reps for that reason, you should also be excluding many others for the same reason.

Finally, if the only mechanism for holding the ZF accountable for the "MUST"s etc. in 1014 is a contract between the ECC and the ZF–which appears to me to clearly be the case according to the text of the ZIP–then the ECC cannot enforce its rights under that contract and thus hold the ZF accountable unless it is privy to everything that is happening on the MG committee. An enforcement right is nothing without access to the information needed to know when a breach claim should be raised.

4 Likes

<gets comfy, puts on my personal hat for a very long rant>

On the effectiveness of the ZF as a force for decentralizing Zcash

I’m the first to admit when we miss our goals, but to say the ZF has not had a measurable impact on decentralization in the Zcash ecosystem is entirely unfair. The ZF has disbursed tens of thousands of ZEC and awarded dozens of grants; some of those grants funded wallets that are now used across the ecosystem (instead of using software directly provided by the ECC). Thanks to the ZF the ECC no longer has unilateral control over the trademark, and we moved from 1-of-1 ECC governance to 2-of-2 multisig governance. The trust and the reputation the ZF has built in this community is a big part of what enabled a productive dev fund discussion to further decentralize Zcash — I daresay we wouldn’t even be having this discussion about decentralizing Zcash on this ZF-supported forum if the ZF hadn’t stewarded this process.

Before the ZF put any effort into a consensus-compatible node implementations, there’s been only a single company focused on a consensus-compatible Zcash node: the ECC. 100% of the network still runs on that node. The ZF having an in-house consensus-compatible node implementation is exactly the sort of decentralizing force that I think the community must fight for.

The ZF originally received pledged donations from the first dev fund/founders reward/whatever we want to call it. Initially those donations were meant to be 260,000 ZEC over 4 years (we’re getting less with everyone’s dilution to fund the ECC). The new dev fund would grant the ZF 262,500 ZEC over 4 years. If I’m doing my math correctly, that’s roughly 50 more ZEC (~$3000) a month in this new reward period, which I wouldn’t categorize as a shift from “no protocol level obligations” to “significant funding from the protocol.”

And the Foundation sought what it thought was minimally acceptable; out of all the proposals that had widespread community support in the first round of sentiment collection, the ZF put its weight behind the one that minimized the amount it was receiving and maximized the amount to third parties through Major Grants. (the possible reward amounts for the Foundation were 50%, 30%, and 25%).

On Conflicts

Edit thanks to point raised by @str4d:

The more I think about it, the more I find it strange (actually, bizarre) that some are exceptionally worried about the hypothetical conflict of ZF not distributing grants because the ZF’s in-house efforts may be threatened by competition. We don’t compete, we’re a nonprofit, everything we do is for the public good. To use the most obvious example: if someone makes a good case for Zcash node software that would be better or complimentary to the ZF’s Rust efforts, why wouldn’t we fund them? Doing so would still decentralize/further our mission and Zcash. If it proves out, our engineering team has plenty of other unsolved problems we could tackle, and we could still contribute upstream.

If you still don’t believe me: we literally just funded someone to work on zcashd — which is a competitor in this framing — to the tune of ~14% of this year’s Grants/Research budget.

Meanwhile, it’s a much more straightforward (and dangerous) conflict to have ECC representatives sit on a committee where they can choose to fund themselves instead of others.

If you want to talk about disentangling influence, it’s far more important to ensure the committee/resulting governance structure is completely free of ECC influence, since without restrictions the ECC can literally give themselves money instead of third parties.

On this and your thoughts about decentralization @avichal, the omission of ECC/focus on ZF are both gravely misplaced and again, strange to me. I don’t know why there’s a blind spot there, but I’m open to hearing your perspective on why the ECC does not merit the same focus.

We’re Blowing Up the Problem Space After Months Spent Reducing It

This thread has resulted in the resurfacing of ideas already discussed and polled, and while there are opportunities for that kind of discussion, I fear people are viewing a very limited ambiguity in the community sentiment poll as an opportunity to blow up the problem space.

I wish I could pin this to the top of the thread, in giant letters, with a blink tag. A great many ideas were suggested during the eight month+ discussion of various approaches, and they were discussed at length across many mediums. We should be focused on the sentiment poll results in ZIP-1014, which showed approval of two approaches! 54 out of 88 members approved of the Foundation having independent authority, while 54 of 88 members approved of the Major Grant Committee operating exactly as specified in ZIP-1014. (with the 20 person either/or overlap) As I posted earlier:

The next step is for the Foundation to reach consensus with the ECC on what that synthesis approach looks like, if not the exact PR the Foundation outlined. If it is close to the Foundation’s approach, then by all means, we should be discussing how the selection/election/term of individual Major Grant Review Committee members and that process. But if that discussion continues, I really think it would be broadly beneficial to constrain ourselves to ZIP-1014 and the limited ambiguity the second sentiment collection poll suggested (an ambiguity of approvals no less!) as we’ve converged there as a community.

13 Likes

(Speaking for myself.) Perhaps it is. How about bringing the deadline forward to the end of June 2021 (around the expected time of Zcon3)?

2 Likes

(Speaking for myself.)

I appreciate that this was a personal rant, but I have to push back on your “On Conflicts” section, specifically this statement:

This is completely unsupported by the text of ZIP 1014 (emphasis mine):

  1. Major Grant Review Committee members SHALL have a one-year term and MAY sit for reelection. The Major Grant Review Committee is subject to the same conflict of interest policy that governs the ZF Board of Directors (i.e. they MUST recuse themselves when voting on proposals where they have a financial interest). [Sentence preventing ECC from being on the committee that is removed for the purposes of this hypothetical.]

On the assumption that no one is proposing to remove the general conflict restriction, it is simply false that an ECC representative on the Major Grants committee could choose to fund ECC. At most, they could choose to not fund other proposals, in the hope that the funds get applied to another proposal from ECC. Putting aside the fact that ZEC is fungible (yay privacy!), I’d argue even that scenario is not possible, due to this additional restriction in the text of ZIP 1014 (which no one is proposing be removed):

  1. Major Grants may be issued to ECC only if there are no other proposals to perform the specified work with similar capabilities, effectiveness and cost. (The intent is that eventually ECC will not receive Major Grants.)

If there are two proposals (one from ECC) for the same specified work, then it’s obvious to everyone (and especially the other members of the MG committee) that ECC has a financial interest in the second proposal. The ECC representative would need to recuse themself from both proposals, ergo an ECC representative would only be able to vote on non-ECC proposals for work that ECC was not competing for.

I agree! Which makes most of the talk about ECC conflict moot, as the ambiguous answer in question ( :drum: :drum: :bell:) does not provide any scope for an ECC representative on the MG committee. But it also means being accurate about what ZIP 1014 states.

9 Likes

All fair points @str4d; I should have specified that the On Conflict section was directed at the ideas suggesting new bodies/process outside the framework of ZIP 1014.

With ZIP 1014 as written I agree that — at least to me — there are no conflict issues on either the ECC or ZF side.

8 Likes

Just to clarify (not speaking for Zancas), my position is just that committee members be compensated for time and expenses, not to incentivize them with additional stake in ZEC.

5 Likes