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.