ZIP: 1015
Title: Block Subsidy Allocation for Non-Direct Development Funding
Owners: Jason McGee <aquietinvestor@gmail.com>
        @Peacemonger (Zcash Forum)
        Kris Nuttycombe <kris@nutty.land>
Credits: @GGuy (Zcash Forum)
         Daira-Emma Hopwood
         Jack Grigg
         Skylar Saveland
Status: Proposed
Category: Consensus
Created: 2024-08-26
License: MIT
Pull-Request: <https://github.com/zcash/zips/pull/881>

Terminology

The key words "MUST", "SHALL", "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.

"Zcash Community Advisory Panel", also called "ZCAP", refers to the panel of community members assembled by the Zcash Foundation and described at 5.

"Zcash Community Grants", also called "ZCG", refers to the committee selected by the Zcash Community Advisory Panel or a successor process (e.g. as established by FPF) to decide on the funding of grants intended to fund the Zcash ecosystem.

"Financial Privacy Foundation", also called "FPF", refers to the Cayman Islands-incorporated non-profit foundation company limited by guarantee of that name.

"Autonomous Entities" refers to committees, DAOs, teams or other groups to which FPF provides operations, administrative, and financial management support.

Abstract

This ZIP proposes the allocation of a percentage of the Zcash block subsidy, post-November 2024 halving, split between Zcash Community Grants (ZCG) and an in-protocol "lockbox." The "lockbox" is 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, under pre-existing consensus rules 100% of the block subsidies would be allocated to miners, and no further funds would be automatically allocated to any other entities. Consequently, unless the community takes action to approve new block-subsidy-based funding, existing teams dedicated to development or outreach or furthering charitable, educational, or scientific purposes would 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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 disproportionately impact grant recipients. This hybrid approach promotes decentralization and the growth of independent development teams.
  8. 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.

By addressing these issues, this proposal aims to ensure sustainable, efficient, and decentralized funding for essential activities within the Zcash ecosystem.

Requirements

  1. In-Protocol Lockbox: The alternatives presented in this ZIP depend upon the Lockbox Funding Streams proposal 4.
  2. 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:

  1. 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).
  2. 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.
  3. 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

Development Funding Recipients

Lockbox

The "lockbox" is a 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.

Zcash Community Grants (ZCG)

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:

  1. These funds MUST be used exclusively for issuing Zcash Community Grants to external parties that are independent of the FPF or to Autonomous Entities operating under the FPF umbrella. Additionally, they MAY be used to cover expenses reasonably related to the administration of Zcash Community Grants. These funds MUST NOT be used by FPF for its internal operations or for any direct expenses unrelated to the administration of Zcash Community Grants.
  2. 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 be reviewed periodically (on a schedule that the Zcash Community Grants Committee considers appropriate for the value and complexity of the grant) for continuation of funding.
  3. 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.
  4. 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 any relevant jurisdictional requirements.
  5. 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.
  6. The ZCG Committee's funding decisions will be final, requiring no approval from the FPF Board, but are subject to veto if FPF judges them to violate Cayman law or the FPF's reporting requirements and other (current or future) obligations under the Cayman Islands' Companies Act (2023 Revision) and Foundation Companies Law, 2017.
  7. 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.
  8. 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 for operational management and administration services that support the purpose of the Zcash Community Grants program, including administration services provided by FPF.
    • 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.
  9. 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.
  10. 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 under Cayman Islands law.

FPF SHALL be contractually required to 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.

ZCG 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 keep 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 a 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.

Funding Streams

  • 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 the activation of this ZIP, the complete set of funding streams for Mainnet will be:

Stream Numerator Denominator Start height End height
FS_FPF_ZCG 8 100 2726400 3146400
FS_DEFERRED 12 100 2726400 3146400

The set of funding streams for Testnet will be:

Stream Numerator Denominator Start height End height
FS_FPF_ZCG 8 100 2976000 3396000
FS_DEFERRED 12 100 2976000 3396000

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 The Open Source Definition
3 ZIP 1014: Dev Fund Proposal and Governance
4 ZIP 2001: Lockbox Funding Streams
5 Zcash Community Advisory Panel