ZIP 1006: Development Fund of 10% to a 2-of-3 Multisig with Community-Involved Third Entity

ZIP: 1006
Title: Development Fund of 10% to a 2-of-3 Multisig with Community-Involved Third Entity
Owners: James Todaro <james@blocktown.capital>
        Joseph Todaro <joseph@blocktown.capital>
Credits: Mario Laul
         Chris Burniske
Status: Obsolete
Category: Consensus Process
Created: 2019-08-31
License: MIT
Discussions-To: <https://forum.zcashcommunity.com/t/blocktown-development-fund-proposal-10-to-a-2-of-3-multisig-with-community-involved-third-entity/34782>

Terminology

The key words “MUST”, “SHOULD”, “SHOULD NOT”, and “MAY” in this document are to be interpreted as described in BCP 14 1 when, and only when, they appear in all capitals.

The additional terms below are to be interpreted as follows:

Mining: The actions of processing transactions, which include processing transactions in a Proof-of-Stake or Proof-of-Work/Proof-of-Stake hybrid system, in the event Zcash implements either at a future date.
Mining software: Pool software, local mining software or staking software.
Mining rewards / Block rewards: Network transaction fees and/or coinbase rewards (e.g. newly issued ZEC associated with block generation).
Network Upgrade: Any consensus rule change to the Zcash protocol, introduced as part of the standard Zcash Network Upgrade Pipeline 9 or otherwise.
Founder’s Reward: The 20% ZEC from mined blocks allocated to the Electric Coin Company (ECC), Zcash Foundation (ZF), employees, investors and/or other entities prior to the expected first halving in October 2020.
Zcash Development Fund: Transparent address(es) controlled jointly by the Electric Coin Company, Zcash Foundation, and a “Third Entity”. The fund is intended for research, development, maintenance, and other technical work directly connected to the Zcash protocol, as well as non-technical initiatives (including design, marketing, events, regulatory outreach, education, governance, and any other form of business or community development) that contribute to the long-term success of the Zcash network. In the context of this proposal, the Zcash Development Fund consists of 10% of newly issued ZEC from block rewards between the first and second halvings of the Zcash network.
Applicant: Any individual, group, or entity that seeks funding from the Zcash Development Fund.
Recipient: Any individual, group, or entity that receives funding from the Zcash Development Fund.

Abstract

This proposal puts forward the financing mechanism and fundamental rules of governance for the creation of a Zcash Development Fund.

Specification

Funding mechanism of the Zcash Development Fund

This funding mechanism MUST be hard-coded so that 10% of newly issued ZEC from block rewards are automatically directed to the transparent address(es) of the Zcash Development Fund.
The above requirement MUST be met between the first halving and second halving. Upon the second halving, future governance decisions MAY result in a further decrease of the Zcash Development Fund to 5% of newly issued ZEC from block rewards, or alternatively MAY result in another percent allocation which includes the possibility of a system whereby 100% of block rewards go to miners.
The two aforementioned requirements above MUST remain regardless of any additional Network Upgrades or changes to mining or mining software prior to the second halving.
The Zcash Development Fund MAY outlive the period of its initial funding mechanism, either through the appreciation in the price of ZEC, or from alternative funding sources upon the second halving in 2024.
The hard-coded transparent address(es) of the Zcash Development Fund MAY be periodically rotated for operational security purposes to decrease the risk of any potential loss of funds associated with the address(es). The ECC, ZF, and/or “Third Entity” described below SHOULD take any possible precautions within the confines of this Specification section to avoid loss of funds.

Governance of the Zcash Development Fund

Funds allocated to the Zcash Development Fund MUST be used only for their intended purpose as defined in the following Rationale section of this proposal.
The transparent address(es) of the Zcash Development Fund MUST be jointly controlled by the ECC, ZF, and Third Entity, and all funds transferred from the Zcash Development Fund MUST be publicly confirmed in an official manner by a majority decision among the ECC, ZF, and Third Entity–commonly referred to as “2-of-3 multisig”. That is, funding decisions MUST be put to an officially documented vote which MUST NOT pass unless at least 2 of the 3 entities above vote approvingly.
Prior to any movement of funds from the Zcash Development Fund, the ZF and ECC MUST coordinate with each other and the community to establish the Third Entity that will be involved in governance of the Zcash Development Fund. The process of determining the exact initial composition and rules of governance of the Third Entity MUST involve the Zcash community at large in a process similar to that outlined in the section "How the Foundation will select a particular proposal" in the ZF’s August 6, 2019 statement 2.

The governance rules of the Third Entity MUST include the following:

All decision-making and other governing processes of the Third Entity MUST be independent of the ECC and ZF, and MUST include measures that are necessary to avoid conflicts of interest in relation to the ECC and ZF.
At creation, the Third Entity MUST include an uneven number of at least 5 individuals with independent previous affiliations, each having a single vote. All such decisions MUST have majority support within the Third Entity to result in an overall approving vote by the Third Entity.
Once the Third Entity is established, it MAY decide to change its rules of governance (e.g. simple majority versus supermajority rules), but any such change MUST be preceded by the involvement of the Zcash community at large, similar to the process outlined in the ZF’s August 6, 2019 statement 2.
Once the Third Entity is established as a self-governing body, it SHOULD evolve toward a system whereby ZEC holders have a direct role in determining votes and internal governance of the Third Entity.
The Third Entity MAY apply for funding from the Zcash Development Fund, if deemed appropriate by its governing body. This would be subject to a majority vote by the ECC, ZF and Third Entity.

Prior to any transfer of funds from the Zcash Development Fund, the ECC, ZF, and Third Entity MUST specify, approve, and make public the final rules on applying for and receiving funding from the Zcash Development Fund, including the details of the decision-making process for approving or rejecting funding requests. These rules MUST apply equally to all Applicants, including the ECC, ZF, and Third Entity, and MUST include the following:

Funding from the Zcash Development Fund MUST be available to not only the ECC, ZF, and Third Entity but also to other individuals, groups, or entities that could make technical and/or non-technical contributions to Zcash as described in the Rationale section of this proposal.
To receive funding from the Zcash Development Fund, all Applicants MUST follow the rules described in the Specification section of this proposal and in final detail by the ECC, ZF, and Third Entity.
As part of an application, each Applicant MUST produce a public overview of the activities and projected costs for which they are seeking funds.
Each funding decision MUST be preceded by a community review period of reasonable length to be determined by the ECC, ZF and Third Entity in which Zcash stakeholders and community members can familiarize themselves with the Applicant’s request and make suggestions, or raise objections.
In situations of overwhelming opposition from Zcash stakeholders and community members to requests from Applicants, the ECC, ZF, and Third Entity SHOULD NOT approve the request before striving to address stakeholders and community concerns, and modifying the request, if appropriate, to assuage concerns.
Each funding decision MUST be accompanied by an easily referenced joint public statement by the ECC, ZF, and Third Entity, which MUST include the final tally of the relevant vote, as well as the votes of the three involved entities. As part of this statement, each of the three entities MUST provide explicit justification for its respective vote.
The ZF MUST ensure that all Zcash Development Fund votes and the accompanying justifications described previously remain archived and easily accessible online by Zcash community members, stakeholders and the general public.
The ECC, ZF, and Third Entity MAY approve funding requests on a rolling basis, but all funding requests MUST be revisited and voted on at a minimum of every 6 months to receive renewed approval.
Recipients MUST publicize at minimum quarterly progress updates on their activities funded from the Zcash Development Fund. In the case of short-term assignments (less than 6 months), a single report upon completion of the project is sufficient. Standard reporting requirements MUST be specified by the ECC, ZF, and Third Entity prior to any approved requests from the Zcash Development Fund and additional requirements MAY be introduced as needed.
Depending on the nature of each request, funds MAY be disbursed in a single payment or incrementally, subject to objective milestones and/or other performance metrics.

Any decision to alter the governance of the Zcash Development Fund as described in this proposal and in final detail by the ECC, ZF, and Third Entity MUST involve the Zcash community at large, similar to the process outlined in the ZF’s August 6, 2019 statement 2. All transfers from the Zcash Development Fund MUST be in full accordance with the requirements described in this proposal.

Issues not addressed in this proposal/Out-of-Scope

Details of the decision-making process for supporting or rejecting this or other relevant proposals by the ECC, ZF, and/or other Zcash stakeholders. We do maintain, however, that any decision by the ECC and/or the ZF on the issue described in the Motivation section below SHOULD be preceded by the procedures for measuring community sentiment as outlined in the ZF’s August 6, 2019 statement 2.
Additional methods for measuring community sentiment MAY include a way for ZEC holders to signal their support of specific proposals.
The matter of whether the ECC should reorganize itself into a non-profit or remain for-profit, as addressed by the ZF in their August 6, 2019 statement 2. The current proposal is neutral on this matter, and funding from the Development Fund would be available for non-profit and/or for-profit entities. We consider the governance rules of the Development Fund outlined in this Specification section adequate for transparency and accountability.

Motivation

The Zcash network is scheduled to undergo its first halving in October 2020, per current protocol specifications. At the time of the first halving, the codebase dictates that the Founder’s Reward, which consists of 20% of the ZEC from every block reward, will be terminated. Without codebase modification, for example in the upcoming NU4 Network Upgrade, 100% of block rewards would be claimed by miners after the first halving.

The two organizations presently leading development and maintenance of the Zcash network receive funds from the Founder’s Reward. These organizations, the ECC and ZF, have recently requested a source of funding after the first halving in order to continue operations for the foreseeable future. The source of funds could theoretically be from either a modification to the codebase dictating a Zcash Development Fund from block rewards or, alternatively, from external sources. The ECC has indicated though that it would “wind down or pivot” rather than accept funding from any sources that would give “special interests” control over the ECC 3.

Based on the ECC’s demands, the block reward appears to be the most agreeable source of resources for a Zcash Development Fund.

This proposal, originally published in the Zcash Community Forum on August 14, 2019 4 and formalized further in a blog post on August 23, 2019 5, outlines the funding mechanism and governance of such a Zcash Development Fund. Herein, we propose a feature of NU4 whereby 10% of the ZEC from every new block reward between the first halving and second halving would be directly deposited in a Zcash Development Fund.

For the period between the launch of the Zcash network in 2016 and the first halving, there has been a centralized 20% fee known as the Founder’s Reward taken from the block reward. Other active ZIP drafts advocate a Zcash Development Fund of 20% allocation from the block reward after the first halving. We believe that a cumulative eight years of centralized fees from the block reward at the identical rate of 20% would ultimately result in a narrow community that accepts the likelihood of a perpetual 20% fee on the Zcash network.

With a Zcash Development Fund that is only 10% of the block reward, a precedent will be set that a large centralized fund is not indefinite and will decrease faster than simply the rate of block reward halvings. Although this proposal specifically addresses the period between the first and second halving, this proposed feature may set a precedent whereby the percent fee from block rewards allocated to a Zcash Development Fund continually decreases every halving, e.g. 20% (FR) from 2016-2020, 10% from 2020-2024, 5% from 2024-2028, 2.5% from 2028-2032 (effectively quartering the ZEC allocated to a development fund every four years). We believe that this social contract could restore the community’s faith in the decentralization of Zcash as the network incentives align more closely with that of Bitcoin’s over time. Alternatively, it is not unreasonable for the Zcash governance system to elect a 0% allocation for the Zcash Development Fund upon the second halving. For a more detailed exploration regarding the selection of 10%, please review the blog post ‘Proposal for 10% Dev Fund in Zcash 2020 Network Upgrade’ 6.

Of note, we are not suggesting or implying that the funding from the Founder’s Reward and a Zcash Development Fund would be managed in a similar way or have similar directives. The Zcash Development Fund feature that we propose for NU4 does not allocate any funds to former angel investors, VCs or vested employees. Furthermore, the Zcash Development Fund would be subject to more explicit and transparent rules of governance, as outlined in the Specification section of this proposal.

Rationale

The rationale behind this proposal is as follows:

To provide financial resources for research, development, and any other technical work connected to software upgrades/maintenance of the Zcash protocol, as well as non-technical initiatives including marketing, design, events, regulatory outreach, education, governance, and any other form of business that contribute to the success of the Zcash network.
To increase decentralization and network security of the Zcash network.
To increase decentralization through greater community involvement in Zcash governance and resource allocation.
To establish basic rules of governance and accountability regarding the deployment of funds in the Zcash Development Fund.
To encourage transparency and cooperation among Zcash stakeholders and strengthen the community’s governance capabilities moving forward.

Discussion

Recognized objections to this proposal include:

This proposal is not in accordance with the current Zcash protocol, which is programmed to allocate 100% of the coinbase to miners upon the first halving in 2020. However, at least during the next few years of Zcash’s infancy, we believe it is advantageous to have a funded and dedicated development team.
The funding mechanism in this proposal is a Zcash Development Fund consisting of 10% of newly issued ZEC from block rewards after the first halving. This is in contrast to other proposals that allocate 20% of the mining rewards to the Zcash Development Fund – presumably a popular selection because the original Founder’s Reward was also set at 20%. For reasons we have explored in depth 6 and summarized in 7, we believe 10% instead of 20% is superior for network security, decentralization, uniting the Zcash community and renewing interest in ZEC.
Various parameters of governance in approving Applicant requests for funding from the Zcash Development Fund.
The inclusion of a Third Entity in governance. One notable objection is the possibility of collusion between Third Entity and either the ECC or ZF that would result in a “usurped” Zcash Development Fund. We believe that the process for a community elected Third Entity, however, will mature over time – giving the community and Zcash stakeholders that important third opinion in deciding the proper allocation of funds. As demonstrated by the resilience of the Bitcoin network and community, well-formed communities tend to resist any collusion with corporations and controlling entities that do not promote the direct success of the network. Moreover, the inclusion of a Third Entity has the advantage of offering a “tie-breaker” in the event of a deadlock vote between the ECC and ZF and/or a situation where one entity holds the other hostage, which is a possible scenario in a 2-of-2 multisig agreement.
This proposal does not have a clause dictating that a Recipient must abstain from voting. If a Recipient must abstain from voting in a 2-of-3 multisig governance system, then this could –as in the case of 2-of-2 multisig– result in an entity holding another hostage. For example, if the ECC refuses to fund the ZF until the ZF complies with the ECC’s demands, then the ECC has the power to deadlock any vote to fund the ZF, which requires the ECC and Third Entity to both vote approvingly.

Acknowledgements

Aspects of this proposal, particularly the Terminology and Specification sections, were adapted and expanded definitions and concepts put forth in Placeholder’s dev fund proposal from August 22, 2019 8.

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"

2	Zcash Foundation Guidance on Dev Fund Proposals. Zcash Foundation blog, August 6, 2019.

3	ECC Initial Assessment of Community Proposals. Electric Coin Company blog, August 26, 2019.

4	Proposal for the Zcash 2020 Network Upgrade (topic on the Zcash community forum).

5	Blocktown Proposal for Zcash 2020 Network Upgrade. Blocktown Capital, August 23, 2019.

6	Proposal for 10% Dev Fund in Zcash 2020 Network Upgrade. Blocktown Capital, August 14, 2019.

7	Executive Summary: Blocktown Proposal for Zcash 2020 Network Upgrade. Blocktown Capital, August 15, 2019.

8	Dev Fund Proposal: 20% to a 2-of-3 multisig with community-involved governance (topic on the Zcash community forum).

9	The Zcash Network Upgrade Pipeline. Electric Coin Company blog, December 3, 2018.