ZIP: Unassigned
Title: Block Reward Allocation for Non-Direct Development Funding
Owners: Kris Nuttycombe <kris@nutty.land>
Jason McGee <aquietinvestor@gmail.com>
Original-Authors: Skylar Saveland <skylar@free2z.com>
Credits: Daira-Emma Hopwood
Jack Grigg
@Peacemonger (Zcash Forum)
Status: Draft
Category: Consensus
Created: 2024-07-03
License: MIT
Pull-Request: <https://github.com/zcash/zips/pull/866>
Terminology 
The key words "MUST", "REQUIRED", "MUST NOT", "SHOULD", and "MAY" in this document are to be interpreted as described in BCP 14 1 when, and only when, they appear in all capitals.
Abstract
This ZIP proposes several options for the allocation of a percentage of the Zcash block subsidy, post-November 2024 halving, to an in-protocol "lockbox." The "lockbox" will be a separate pool of issued funds tracked by the protocol, as described in ZIP 2001: Lockbox Funding Streams 4. No disbursement mechanism is currently defined for this "lockbox"; the Zcash community will need to decide upon and specify a suitable decentralized mechanism for permitting withdrawals from this lockbox in a future ZIP in order to make these funds available for funding grants to ecosystem participants.
The proposed lockbox addresses significant issues observed with ZIP 1014 3, such as regulatory risks, inefficiencies due to funding of organizations instead of projects, and centralization. While the exact disbursement mechanism for the lockbox funds is yet to be determined and will be addressed in a future ZIP, the goal is to employ a decentralized mechanism that ensures community involvement and efficient, project-specific funding. This approach is intended to potentially improve regulatory compliance, reduce inefficiencies, and enhance the decentralization of Zcash's funding structure.
Motivation
Starting at Zcash's second halving in November 2024, by default 100% of the block subsidies will be allocated to miners, and no further funds will be automatically allocated to any other entities. Consequently, unless the community takes action to approve new block-reward based funding, existing teams dedicated to development or outreach or furthering charitable, educational, or scientific purposes will likely need to seek other sources of funding; failure to obtain such funding would likely impair their ability to continue serving the Zcash ecosystem. Setting aside a portion of the block subsidy to fund development will help ensure that both existing teams and new contributors can obtain funding in the future.
It is important to balance the incentives for securing the consensus protocol through mining with funding crucial charitable, educational, and scientific activities like research, development, and outreach. Additionally, there is a need to continue to promote decentralization and the growth of independent development teams.
For these reasons, the Zcash Community wishes to establish a new Zcash Development Fund after the second halving in November 2024, with the intent to put in place a more decentralized mechanism for allocation of development funds. The alternatives presented here are intended to address the following:
- Regulatory Risks: The current model involves direct funding of US-based organizations, which can potentially attract regulatory scrutiny from entities such as the SEC, posing legal risks to the Zcash ecosystem.
- Funding Inefficiencies: The current model directly funds organizations rather than specific projects, leading to a potential mismatch between those organizations' development priorities and the priorities of the community. Furthermore, if organizations are guaranteed funds regardless of performance, there is little incentive to achieve key performance indicators (KPIs) or align with community sentiment. A future system that allocates resources directly to projects rather than organizations may help reduce inefficiencies and better align development efforts with community priorities.
- Centralization Concerns: The current model centralizes decision-making power within a few organizations, contradicting the decentralized ethos of blockchain technology. Traditional organizational structures with boards and executives introduce single points of failure and limit community involvement in funding decisions.
- Community Involvement: The current system provides minimal formal input from the community regarding what projects should be funded, leading to a misalignment between funded projects and community priorities.
- Moving Towards a Non-Direct Funding Model: There is strong community support for a non-direct Dev Fund funding model. Allocating funds to a Deferred Dev Fund Lockbox incentivizes the development of a decentralized mechanism for the disbursement of the locked funds.
By addressing these issues, this proposal aims to ensure sustainable, efficient, and decentralized funding for essential activities within the Zcash ecosystem.
Requirements
- In-Protocol Lockbox: The alternatives presented in this ZIP depend upon the Lockbox Funding Streams proposal 4.
- Regulatory Considerations: The allocation of funds should minimize regulatory risks by avoiding direct funding of specific organizations. The design should enable and encourage compliance with applicable laws and regulations to support the long-term sustainability of the funding model.
Non-requirements
The following considerations are explicitly deferred to future ZIPs and are not covered by this proposal:
- Disbursement Mechanism: The exact method for disbursing the accumulated funds from the lockbox is not defined in this ZIP. The design, implementation, and governance of the disbursement mechanism will be addressed in a future ZIP. This includes specifics on how funds will be allocated, the voting or decision-making process, and the structure of the decentralized mechanism (such as a DAO).
- Regulatory Compliance Details: The proposal outlines the potential to reduce regulatory risks by avoiding direct funding of US-based organizations, but it does not detail specific regulatory compliance strategies. Future ZIPs will need to address how the disbursement mechanism complies with applicable laws and regulations.
- Impact Assessment: The long-term impact of reallocating a portion of the block subsidy to the lockbox on the Zcash ecosystem, including its effect on miners, developers, and the broader community, is not analyzed in this ZIP. Subsequent proposals will need to evaluate the outcomes and make necessary adjustments based on real-world feedback and data.
Specification
The following alternatives all depend upon the Lockbox Funding Streams proposal 4 for storage of funds into a deferred value pool.
Some of the alternatives described below do not specify a termination height for the funding streams they propose. In these cases, the termination height is set to u32::MAX_VALUE. A future network upgrade that alters the maximum possible block height MUST also alter these termination heights.
Alternatives
Alternative 1: Lockbox For Decentralized Grants Allocation (perpetual 50% option)
Proposed by Skylar Saveland
- 50% of the block subsidy is to be distributed to the lockbox.
As of block height 2726400, and continuing until modified by a future ZIP, the complete set of funding streams will be:
| Stream | Numerator | Denominator | Start height | End height |
|---|---|---|---|---|
FS_DEFERRED |
50 | 100 | 2726400 | u32::MAX |
Motivations for Alternative 1
This alternative proposes allocating a significantly larger portion of the block subsidy to development funding than is currently allocated, aiming to establish a long-term source of funding for protocol improvements. The disbursement of these funds will be governed by a mechanism to be determined by the community in the future, ensuring that the funds are released under agreed-upon constraints to maintain availability for years to come.
The proposed lockbox funding model for Zcash's post-NU6 halving period allocates 50% of the block reward to a deferred reserve, or "lockbox," designated for future decentralized grants funding. This approach is designed to address several critical motivations:
- Regulatory Compliance:
- Reduction of Regulatory Risks: Direct funding to legal entities poses significant regulatory risks. Allocating funds to a decentralized lockbox mitigates these risks by avoiding direct funding of any specific organizations. This alternative represents the strongest regulatory posture, as it reduces the likelihood of legal challenges associated with funding centralized entities directly.
- Potential Minimization of KYC Requirements: The current funding mechanism involves 100% KYC for recipients, which can be detrimental to security, privacy, resilience, and participation. A sufficiently decentralized disbursement mechanism could reduce the need for recipients to undergo KYC with a controlling entity. This would preserve privacy and encourage broader participation from developers and contributors who value anonymity and privacy. By shifting from direct funding of specific legal entities to a decentralized funding model, we create a more secure, private, and resilient ecosystem. This potential future difference enhances the robustness of the Zcash network by fostering a diverse and engaged community without the constraints of centralized direct funding.
- Ensuring Sustainable Development Funding:
- Need for Continuous Funding: Zcash has numerous ongoing and future projects essential for its ecosystem's growth and security. Without a change, the expiration of the devfund will result in 100% of the block reward going to miners, jeopardizing funding for development. The proposed 50% lockbox allocation ensures that funds are directed towards sustaining and improving the Zcash ecosystem through a wide array of initiatives. These include protocol development, new features, security audits, legal support, marketing, ZSAs (Zcash Shielded Assets), stablecoins, programmability, transitioning to a modern Rust codebase, wallets, integrations with third-party services, improved node software, block explorers, supporting ambassadors, and educational initiatives like ZecHub.
- Balanced Incentives for Network and Protocol Security: While miners have been essential in providing network security through hashpower, allocating 100% of the block reward to mining alone overlooks the crucial need for development, innovation, and protocol security. By investing in these priorities, we enhance the long-term health and value of the protocol, which ultimately benefits miners. A well-maintained and innovative protocol increases the overall value of the network, making miners' rewards more valuable. This balanced approach aligns the interests of miners with the broader community, ensuring sustainable growth and security for Zcash.
- Efficiency, Accountability, and Decentralization:
- Reduction of Inefficiencies: Traditional funding models often involve significant corporate overhead and centralized decision-making, leading to inefficiencies. The prior model provided two 501(c)(3) organizations with constant funding for four years, which reduced accountability and allowed for potential misalignment with the community's evolving priorities. By funding projects directly rather than organizations, we can allocate resources more efficiently, ensuring that funds are used for tangible development rather than administrative costs. This approach minimizes the influence of corporate executives, whose decisions have sometimes failed to address critical issues promptly.
- Increased Accountability: A presumed grants-only mechanism, to be defined in a future ZIP, would necessitate continuous accountability and progress for continuous funding. Unlike the prior model, where organizations received guaranteed funding regardless of performance, a grants-based approach would require projects to demonstrate ongoing success and alignment with community goals to secure funding. This continuous evaluation fosters a more responsive and responsible allocation of resources, ensuring that funds are directed towards initiatives that provide the most value to the Zcash ecosystem. By increasing accountability, this model promotes a culture of excellence and innovation, driving sustained improvements and advancements in the protocol.
- Promotion of Decentralization: The proposed non-direct funding model stores deferred funds for future use, with the specifics of the disbursement mechanism to be determined by a future ZIP. This could allow the community to have a greater influence over funding decisions, aligning more closely with the ethos of the Zcash project. By decentralizing the allocation process, this approach has the potential to foster innovation and community involvement, ensuring that development priorities are more reflective of the community's needs and desires, promoting a more open, transparent, and resilient ecosystem.
- Incentives for Development and Collaboration:
- Creating a Strong Incentive to Implement the Disbursement Mechanism: Allocating 50% of the block reward to the lockbox indefinitely creates a powerful incentive for the community to work together to implement the disbursement mechanism without delay. Knowing that there is a substantial amount of funds available, stakeholders will be motivated to develop and agree on an effective, decentralized method for distributing these funds.
- Incentivizing Continuous Improvements: The accumulation of a large stored fortune within the lockbox incentivizes continuous improvements to the Zcash protocol and ecosystem. Developers, contributors, and community members will be driven to propose and execute projects that enhance the network, knowing that successful initiatives have the potential to receive funding. This model fosters a culture of ongoing innovation and development, ensuring that Zcash remains at the forefront of blockchain technology.
- Aligning Long-Term Interests: By tying a significant portion of the block reward to future decentralized grants funding, the model aligns the long-term interests of all stakeholders. Miners, developers, and community members alike have a vested interest in maintaining and improving the Zcash network, as the value and success of their efforts are directly linked to the availability and effective use of the lockbox funds. This alignment of incentives ensures that the collective efforts of the community are focused on the sustainable growth and advancement of the Zcash ecosystem.
Guidance on Future Requirements for Alternative 1
To support the motivations outlined, the following guidance is proposed for Alternative 1. Future ZIP(s) will define the disbursement mechanism. These are suggestions to achieve the outlined motivations and should be considered in those future ZIP(s). It is important to note that these are ideas and guidance, not hard, enforceable requirements:
- Cap on Grants: Grants should be capped to promote more granular accountability and incremental goal-setting. This approach ensures that projects are required to define their work, goals, milestones, KPIs, and achievements in smaller, more manageable increments. Even if a single project is utilizing significant funds quickly, the cap ensures that progress is continuously evaluated and approved based on tangible results and alignment with community priorities.
- Decentralized Disbursement Mechanism: The disbursement mechanism should be sufficiently decentralized to ensure the regulatory motivations are fulfilled. A decentralized mechanism could reduce the need for recipients to undergo KYC with a controlling party, preserving privacy and aligning with the ethos of the Zcash project.
- Governance and Accountability: The governance structure for the disbursement mechanism should be open and accountable, with decisions made through community consensus or decentralized voting processes to maintain trust and accountability. This approach will help ensure that the allocation of funds is fair and aligned with the community's evolving priorities.
- Periodic Review and Adjustment: There should be provisions for periodic review and adjustment of the funding mechanism to address any emerging issues or inefficiencies and to adapt to the evolving needs of the Zcash ecosystem. This could include the ability to add or remove participants as necessary. Regular assessments will help keep the funding model responsive and effective, ensuring it continues to meet the community's goals.
By addressing these motivations and providing this guidance, Alternative 1 aims to provide a robust, sustainable, and decentralized funding model that aligns with the principles and long-term goals of the Zcash community.
Alternative 2: Hybrid Deferred Dev Fund: Transitioning to a Non-Direct Funding Model
Proposed by Jason McGee, Peacemonger, GGuy
- 12% of the block subsidy is to be distributed to the lockbox.
- 8% of the block subsidy is to be distributed to the Financial Privacy Foundation (FPF), for the express use of the Zcash Community Grants Committee (ZCG) to fund independent teams in the Zcash ecosystem.
As of block height 2726400, and continuing for one year, the complete set of funding streams will be:
| Stream | Numerator | Denominator | Start height | End height |
|---|---|---|---|---|
FS_DEFERRED |
12 | 100 | 2726400 | 3146400 |
FS_FPF_ZCG |
8 | 100 | 2726400 | 3146400 |
Motivations for Alternative 2
- Limited Runway: ZCG does not have the financial runway that ECC/BP and ZF have. As such, allocating ongoing funding to ZCG will help ensure the Zcash ecosystem has an active grants program.
- Promoting Decentralization: Allocating a portion of the Dev Fund to Zcash Community Grants ensures small teams continue to receive funding to contribute to Zcash. Allowing the Dev Fund to expire, or putting 100% into a lockbox, would disproportionally impact grant recipients. This hybrid approach promotes decentralization and the growth of independent development teams.
- Mitigating Regulatory Risks: The Financial Privacy Foundation (FPF) is a non-profit organization incorporated and based in the Cayman Islands. By minimizing direct funding of US-based organizations, this proposal helps to reduce potential regulatory scrutiny and legal risks.
Alternative 3: Lockbox For Decentralized Grants Allocation (20% option)
Proposed by Kris Nuttycombe
- 20% of the block subsidy is to be distributed to the lockbox.
As of block height 2726400, and continuing for two years, the complete set of funding streams will be:
| Stream | Numerator | Denominator | Start height | End height |
|---|---|---|---|---|
FS_DEFERRED |
20 | 100 | 2726400 | 3566400 |
Motivations for Alternative 3
This alternative is presented as the simplest allocation of block rewards to a lockbox for future disbursement that is consistent with results of community polling.
Alternative 4: Masters Of The Universe?
Proposed by NoamChom (Zcash forum)
- 17% of the block subsidy is to be distributed to the lockbox.
- 8% of the block subsidy is to be distributed to the Financial Privacy Foundation (FPF), for the express use of the Zcash Community Grants Committee (ZCG) to fund independent teams in the Zcash ecosystem.
As of block height 2726400, and continuing for four years, the complete set of funding streams will be:
| Stream | Numerator | Denominator | Start height | End height |
|---|---|---|---|---|
FS_DEFERRED |
17 | 100 | 2726400 | 4406400 |
FS_FPF_ZCG |
8 | 100 | 2726400 | 4406400 |
Motivations for Alternative 4
This alternative proposes a slightly larger slice of the block subsidy than is currently allocated for development funding, in order to better provide for the needs of the Zcash community.
Revisitation Requirement for Alternative 4
The terms for this Alternative should be revisited by the Zcash ecosystem upon creation/ activation of a "non-direct funding model" (NDFM). At that completion of an NDFM which accessess the lockbox funds, this ZIP should be reconsidered (potentially terminated) by the Zcash ecosystem, to determine if its ongoing direct block subsidies are preferred for continuation. Discussions / solications / sentiment gathering from the Zcash ecosystem should be initiated ~6 months in advance of the presumed activation of a "non-direct funding model", such that the Zcash ecosystem preference can be expediently realized.
Requirements related to direct streams for the Financial Privacy Foundation
The following requirements apply to Alternative 2 and Alternative 4:
The stream allocated to Zcash Community Grants (ZCG) is intended to fund independent teams entering the Zcash ecosystem, to perform major ongoing development (or other work) for the public good of the Zcash ecosystem, to the extent that such teams are available and effective. The ZCG Committee is given the discretion to allocate funds not only to major grants, but also to a diverse range of projects that advance the usability, security, privacy, and adoption of Zcash, including community programs, dedicated resources, and other projects of varying sizes.
The funds SHALL be received and administered by the Financial Privacy Foundation (FPF). FPF MUST disburse them for grants and expenses reasonably related to the administration of the ZCG program, but subject to the following additional constraints:
- These funds MUST only be used to issue grants to external parties that are independent of FPF, and to pay for expenses reasonably related to the administration of the ZCG program. They MUST NOT be used by FPF for its internal operations and direct expenses not related to the administration of grants or the grants program.
- ZCG SHOULD support well-specified work proposed by the grantee, at reasonable market-rate costs. They can be of any duration or ongoing without a duration limit. Grants of indefinite duration SHOULD have semiannual review points for continuation of funding.
- Priority SHOULD be given to major grants that bolster teams with substantial (current or prospective) continual existence, and set them up for long-term success, subject to the usual grant award considerations (impact, ability, risks, team, cost-effectiveness, etc.). Priority SHOULD be given to major grants that support ecosystem growth, for example through mentorship, coaching, technical resources, creating entrepreneurial opportunities, etc. If one proposal substantially duplicates another’s plans, priority SHOULD be given to the originator of the plans.
- The ZCG committee SHOULD be restricted to funding projects that further the Zcash cryptocurrency and its ecosystem (which is more specific than furthering financial privacy in general) as permitted by FPF and any relevant jurisdictional requirements.
- ZCG awards are subject to approval by a five-seat ZCG Committee. The ZCG Committee SHALL be selected by the ZF’s Community Advisory Panel or a successor process (e.g. as established by FPF). Elections SHALL be staggered to ensure continuity within the Committee.
- The ZCG Committee’s funding decisions will be final, requiring no approval from the FPF Board, but are subject to veto if the FPF judges them to violate any relevant laws or other (current or future) obligations.
- ZCG Committee members SHALL have a one-year term and MAY sit for reelection. The ZCG Committee is subject to the same conflict of interest policy that governs the FPF Board of Directors (i.e. they MUST recuse themselves when voting on proposals where they have a financial interest). At most one person with association with the BP/ECC, at most one person with association with the ZF, and at most one person with association with FPF are allowed to sit on the ZCG Committee. “Association” here means: having a financial interest, full-time employment, being an officer, being a director, or having an immediate family relationship with any of the above. The ZF SHALL continue to operate the Community Advisory Panel and SHOULD work toward making it more representative and independent (more on that below). Similarly, FPF should also endeavor to establish its own means of collecting community sentiment for the purpose of administering ZCG elections.
- A portion of the ZCG Slice shall be allocated to a Discretionary Budget, which may be disbursed for expenses reasonably related to the administration of the ZCG program. The amount of funds allocated to the Discretionary Budget SHALL be decided by the ZF’s Community Advisory Panel or successor process. Any disbursement of funds from the Discretionary Budget MUST be approved by the ZCG Committee. Expenses related to the administration of the ZCG program include, without limitation the following:
- Paying third party vendors for services related to domain name registration, or the design, website hosting and administration of websites for the ZCG Committee.
- Paying independent consultants to develop requests for proposals that align with the ZCG program.
- Paying independent consultants for expert review of grant applications.
- Paying for sales and marketing services to promote the ZCG program.
- Paying third party consultants to undertake activities that support the purpose of the ZCG program.
- Reimbursement to members of the ZCG Committee for reasonable travel expenses, including transportation, hotel and meals allowance.
- A portion of the Discretionary Budget MAY be allocated to provide reasonable compensation to members of the ZCG Committee. Committee member compensation SHALL be limited to the hours needed to successfully perform their positions and MUST align with the scope and responsibilities of their roles. The allocation and distribution of compensation to committee members SHALL be administered by the FPF. The compensation rate and hours for committee members SHALL be determined by the ZF’s Community Advisory Panel or successor process.
- The ZCG Committee’s decisions relating to the allocation and disbursement of funds from the Discretionary Budget will be final, requiring no approval from the FPF Board, but are subject to veto if the FPF judges them to violate laws or FPF reporting requirements and other (current or future) obligations.
FPF SHALL recognize the ZCG slice of the Dev Fund as a Restricted Fund donation under the above constraints (suitably formalized), and keep separate accounting of its balance and usage under its Transparency and Accountability obligations defined below.
FPF SHALL strive to define target metrics and key performance indicators, and the ZCG Committee SHOULD utilize these in its funding decisions.
Furthering Decentralization
FPF SHALL conduct periodic reviews of the organizational structure, performance, and effectiveness of the ZCG program and committee, taking into consideration the input and recommendations of the ZCG Committee. As part of these periodic reviews, FPF MUST commit to exploring the possibility of transitioning ZCG into an independent organization if it is economically viable and it aligns with the interests of the Zcash ecosystem and prevailing community sentiment.
In any transition toward independence, priority SHALL be given to maintaining or enhancing the decentralization of the Zcash ecosystem. The newly formed independent organization MUST ensure that decision-making processes remain community-driven, transparent, and responsive to the evolving needs of the Zcash community and ecosystem. In order to promote geographic decentralization, the new organization SHOULD establish its domicile outside of the United States.
Transparency and Accountability
FPF MUST accept the following obligations in this section on behalf of ZCG:
- Publication of the ZCG Dashboard, providing a snapshot of ZCG’s current financials and any disbursements made to grantees.
- Bi-weekly meeting minutes documenting the decisions made by the ZCG committee on grants.
- Quarterly reports, detailing future plans, execution on previous plans, and finances (balances, and spending broken down by major categories).
- Annual detailed review of the organization performance and future plans.
- Annual financial report (IRS Form 990, or substantially similar information).
BP, ECC, ZF, FPF, ZCG and grant recipients MUST promptly disclose any security or privacy risks that may affect users of Zcash (by responsible disclosure under confidence to the pertinent developers, where applicable).
All substantial software whose development was funded by the Dev Fund SHOULD be released under an Open Source license (as defined by the Open Source Initiative 2), preferably the MIT license.
Enforcement
FPF MUST contractually commit to fulfill these obligations on behalf of ZCG, and the prescribed use of funds, such that substantial violation, not promptly remedied, will result in a modified version of Zcash node software that removes ZCG’s Dev Fund slice and allocates it to the Deferred Dev Fund lockbox.
References
| 1 | Information on BCP 14 — "RFC 2119: Key words for use in RFCs to Indicate Requirement Levels" and "RFC 8174: Ambiguity of Uppercase vs Lowercase in RFC 2119 Key Words" |
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| 2 | The Open Source Definition |
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| 3 | ZIP 1014: Dev Fund Proposal and Governance |
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| 4 | ZIP 2001: Lockbox Funding Streams |
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