zips/zip-1012.rst

::

  ZIP: 1012
  Title: Dev Fund to ECC + ZF + Major Grants
  Owner: Eran Tromer <eran@tromer.org>
  Status: Obsolete
  Category: Consensus Process
  Created: 2019-11-10
  License: MIT
  Discussions-To: <https://forum.zcashcommunity.com/t/dev-fund-proposal-dev-fund-to-ecc-zfnd-major-grants/35364>
  Pull-Request: <https://github.com/zcash/zips/pull/291>


Abstract
========

This proposal describes a structure for a the Zcash Development Fund, to be
enacted in Network Upgrade 4 and last for 4 years. This Dev Fund would consist
of 20% of the block rewards, split into 3 slices:

* 35% for the Electric Coin Company;
* 25% for Zcash Foundation (for internal work and grants);
* 40% for additional "Major Grants" for large-scale long-term projects (decided
  by the Zcash Foundation, with extra community input and scrutiny).

Funding is capped at $700k/month per slice. Governance and accountability are
based on existing entities and legal mechanisms, and increasingly decentralized
governance is encouraged.


Motivation
==========

Starting at Zcash's first halving in October 2020, by default 100% of the block
rewards will be allocated to miners, and no further funds will be automatically
allocated to research, development and outreach. Consequently, no substantial
new funding may be available to existing teams dedicated to Zcash: the Electric
Coin Company (ECC), the Zcash Foundation (ZF), and the many entities funded by
the ZF grant program.

There is a need to strike a balance between incentivizing the security of the
consensus protocol (i.e., mining) versus other crucial aspects of the Zcash
security and functionality, such as development and outreach.

Furthermore, there is a need to balance the sustenance of ongoing work by the
current teams dedicated to Zcash, with encouraging decentralization and growth
of independent development teams.

Difference from Matt Luongo's proposal
--------------------------------------

This proposal is based on Matt Luongo's `Decentralizing the Dev Fee`_ proposal,
which has similar motivations. The major changes are as follows:

* The Dev Fund slice intended for external recipients (beyond ECC, ZF and
  existing ZF grants) may be used to fund ECC if no competitive alternatives
  present themselves, to mitigate unwarranted loss of existing capabilities.
* For simplicity, the above slice is combined with the Foundation's existing
  grant system; but is accompanied by explicit requirements to achieve its
  goals, independent advisory input, and a Restricted Funds mechanism to
  enforce these requirements.
* The "easing function" coin value cap is removed, in favor of capping each
  slice at $700k/month funding target. Any excess is kept in a reserve, from
  which it can be withdrawn only to maintain the funding target in the future.
* Strengthened the transparency and accountability requirements, and
  harmonized them across ECC, ZF and major grantees.
* Removed ZF's supervisory role in determining the "principal developer",
  fixing it to be ECC (changing this would be sufficiently dramatic to merit a
  fork).
* Small differences in prescribed changes to the ZF board.
* Call for, and incentivize, development of decentralized voting and governance.
* Clarity and brevity.

.. _Decentralizing the Dev Fee: https://forum.zcashcommunity.com/t/decentralizing-the-dev-fee/35252


Requirements
============

The Dev Fund should encourage decentralization of the work and funding, by
supporting new teams dedicated to Zcash.

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.

There should not be any single entity which is a single point of failure, i.e.,
whose capture or failure will effectively prevent effective use of the funds.

Major funding decisions should be based, to the extent feasible, on inputs from
domain experts and pertinent stakeholders.

The Dev Fund mechanism should not modify the monetary emission curve (and in
particular, should not irrevocably burn coins).

In case the value of ZEC jumps, the Dev Fund recipients should not be allowed
to wastefully use excessive amounts of funds. Conversely, given market volatility
and eventual halvings, it is desirable to create rainy-day reserves.

The Dev Fund mechanism should not reduce users' financial privacy or security.
In particular, it should not cause them to expose their coin holdings, or to
maintain access to secret keys for much longer than they would otherwise. (This
rules out some forms of voting, and of disbursing coins to past/future miners).

The new Dev Fund system should be simple to understand and realistic to
implement. In particular, it should not assume the creation of new mechanisms
(e.g., election systems) or entities (for governance or development) for its
execution; but it should strive to support and use these once they are built.

Comply with legal, regulatory and taxation constraints in pertinent
jurisdictions.


Non-requirements
================

General on-chain governance is outside the scope of this proposal.

Rigorous voting mechanism (whether coin-weighted, holding-time-weighted or
one-person-one-vote) are outside the scope of this proposal, though there is
prescribed room for integrating them once available.


Specification
=============

Dev Fund allocation
-------------------

Starting at the first Zcash halving in 2020, until the second halving in 2024,
20% of the block rewards will be allocated to a "Dev Fund" that consists of
the following three slices:

* 35% for the Electric Coin Company (denoted **ECC slice**);
* 25% for the Zcash Foundation, for general use (denoted **ZF-GU slice**);
* 40% for additional "Major Grants" for large-scale long-term projects
  (denoted **ZF-MG slice**).

Details below. The fund flow will be implemented at the consensus-rule layer,
by sending the corresponding ZEC to the designated address in each block. This
Dev Fund will end at the second halving (unless extended/modified by a future
ZIP).


ECC slice (Electric Coin Company)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

This slice of the Dev Fund will flow to ECC.

ECC must undertake a firm obligation to use the Dev Fund only in support of the
Zcash cryptocurrency and its community.

In particular, ECC must commit to not distribute the Dev Fund proceeds to its
partners ("shareholders"), other than:

1. In fair-market-value compensation for specific new work.
2. For covering pass-through tax obligations to partners caused by ECC's receipt
   of the Dev Fund.

(ECC is encouraged to transition to a corporate structure that would avoid the
latter taxes.)

This obligation must be made irrevocable, e.g., within ECC's corporate
governance structure (i.e., its Operating Agreement) or contractual obligations.


ZF-GU slice (Zcash Foundation, for general use)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

This slice of the Dev Fund will flow to ZF, to be used at its discretion for
any purpose within its mandate to support Zcash and financial privacy,
including: development, education, support community communication on-line
and via events, gathering community sentiment, and external awarding grants
for all of the above.

ZF may award grants as profit-sharing contracts, in which case any resulting
profits will be added to the ZF-GU slice (to fund its ongoing operations and
any future grants).


ZF-MG slice (Zcash Foundation, for major grants)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

This slice of the Dev Fund is intended to fund independent teams entering the
Zcash ecosystem, to perform major ongoing development (or other work) for the
public good of Zcash ecosystem, to the extent that such teams are available
and effective.

The funds will be received and administered by ZF. ZF will disburse them as
"Major Grants", within the framework of ZF's grant program but subject to the
following additional constraints:

1. These funds may be only be used to issue Major Grants to external parties
   that are independent of ZF. They may not be used by ZF for its internal
   operations and direct expenses.

2. Major Grants 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, but have semiannual review points for
   continuation of funding.

3. Major Grants may be issued to ECC only if no other parties are available
   and capable of performing the specified work with similar effectiveness and
   cost. (The intent is that eventually ECC will not receive Major Grants.)

4. Priority will be given to Major Grants that bolster new 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 will be
   given Major Grants that support ecosystem growth by mentorship, coaching,
   technical resources, creating entrepreneurial opportunities, etc.

5. Major Grants should specifically further the Zcash cryptocurrency and its
   ecosystem; this is more restrictive than ZF's general mission of furthering
   financial privacy.

6. Major Grants awarding is subject to individual approval by ZF's Board of
   Directors, by a majority excluding any members with a conflict of interest.

7. ZF shall seek advisory input on its choice of Major Grant awards, by all
   effective and reasonable means (e.g., on-line discussion forums, the
   community Advisory Board, on-chain voting by holders and miners, and
   proactive consultation with experts). The ZF Board of Directors shall
   strive to follow this advisory input (within the confines of the
   Foundation's charter and duties).

8. ZF shall strive to create an independent grant committee to evaluate and
   publicly recommend Major Grant proposals, based on the committee's
   expertise and the above inputs.

ZF shall recognize the ZF-MG 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.

From grant proposers' side, proposals for such grants will be submitted
through ZF usual grant process, allowing for public discussion and public
funding. It is intended that small one-time grants will be funded by drawing
on the ZF-GU slice (where they also compete with other ZF activities), whereas
large long-duration will be funded from the dedicated ZF-MG slice; though this
is at ZF's discretion.

ZF shall strive to define target metrics and key performance indicators, and
utilize these in its funding decisions.


Direct-grant option
'''''''''''''''''''

It may be deemed better, operationally or legally, if the Major Grant funds
are not accepted and disbursed by ZF, but rather directly assigned to the
grantees. Thus, the following mechanism may be used in perpetuity, if agreed
upon by both ECC and ZF before NU4 activation:

Prior to each Network Upgrade, the Foundation shall publish a list of
grantees' addresses and the total number of Dev Fund ZEC per block they
should receive. ECC and ZF shall implement this list in any implementations
of the Zcash consensus rules they maintain. This decision will then be,
effectively, ratified by the miners as the network upgrade activates.


Funding Target and Volatility Reserve
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Each Dev Fund slice has a Funding Target, initially US $700,000 for each
slice. At the end of each calendar month, the fair market value of the Dev
Fund ZEC received during that month will be computed, and the excess over
the Funding Target will be put into a dedicated Volatility Reserve account
by the funds' recipient.

Funds may be withdrawn from the Volatility Reserve account only by that same
party, in months where the aforementioned monthly ZEC value falls short of
the Funding Target, and only to the extent needed to cover that shortfall.

The Volatility Reserve may be kept as ZEC, or sold and held as fiat currency
or investments (whose profits will remain in the Volatility Reserve).

The Funding Target may be changed only by unanimous agreement of ZF, ECC and
the majority vote of a voting mechanism weighted by ZEC coin holding. (This is
meant to encourage the creation of such a voting mechanism. Moreover, in case
of excessive accumulation of reserves, the community can condition an increase
of the Funding Target on the redirection of some of the reserves to a
different entity, miners or an airdrop).

Dev Fund ZEC that has been received, not placed in the Volatility Reserve,
and has not yet been used or disbursed, will be kept by the corresponding
party (as ZEC, or sold and invested) for later use under the terms of the
corresponding slice.

Irrevocable obligations to the above must be made by the recipients (e.g.,
using their Operating Agreements or by receiving the slice as Restricted
Funds).


Transparency and Accountability
-------------------------------

Obligations
~~~~~~~~~~~

ECC, ZF and Major Grant recipients (during and leading to their award period)
shall all accept the following obligations:

Ongoing public reporting requirements:

* Quarterly reports, detailing future plans, execution on previous plans, and
  finances (balances, and spending broken down by major categories).
* Monthly developer calls, or a brief report, on recent and forthcoming tasks.
  (Developer calls may be shared.)
* Annual detailed review of the organization performance and future plans.
* Annual audited financial report (IRS Form 990, or substantially similar
  information).

These reports may be either organization-wide, or restricted to the income,
expenses and work associated with the receipt of Dev Fund.

It is expected that ECC, ZF and Major Grant recipient will be focused
primarily (in their attention and resources) on Zcash. Thus, they must
promptly disclose:

* Any major activity they perform (even if not supported by the Dev Fund) that
  is not in the interest of the general Zcash ecosystem.
* Any conflict of interest with the general success of the Zcash ecosystem.

ECC, ZF and grant recipients must promptly disclose any security of privacy
risks that may affect users of Zcash (by responsible disclosure under
confidence to the pertinent developers, where applicable).

ECC's reports, and ZF's annual report on its non-grant operations, should be
at least as detailed as grant proposals/reports submitted by other funded
parties, and satisfy similar levels of public scrutiny.

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), preferably the MIT license.


Enforcement
~~~~~~~~~~~

For grant recipients, these conditions should be included in their contract
with ZF, such that substantial violation, not promptly remedied, will cause
forfeiture of their grant funds and their return to ZF.

ECC and ZF will 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).


Future Community Governance
---------------------------

Decentralized community governance is used in this proposal in the following
places:

1. As advisory input to the `ZF-MG slice (Zcash Foundation, for major grants)`_.

2. For changing the `Funding Target and Volatility Reserve`_ (which is an
   incentive for ECC and ZF to *create* the voting mechanism).

3. In ZF's future board composition (see below).

It is highly desirable to develop robust means of decentralized community
voting and governance, and to integrate them into all of the above processes,
by the end of 2021. ECC and ZF should place high priority on such development
and its deployment, in their activities and grant selection.


ZF Board Composition
--------------------

ZF should formally integrate robust means of decentralized community voting
into its Board of Director elections, in a way that is consistent with ZF's
mission and values. ZF should lead the process for determining and
implementing this, legally and technically, by the end of 2021.

Members of ZF's Board of Directors must not hold equity in ECC or have current
business or employment relationships with ECC.

Grace period: members of the board who hold ECC equity (but do not have other
current relationships to ECC) may dispose of their equity, or quit the Board,
by 1 March 2021. (The grace period is to allow for orderly replacement, and
also to allow time for ECC corporate reorganization related to Dev Fund
receipt, which may affect how disposition of equity would be executed.)


Disclosures
===========

The author is

* a coauthor of the Zerocash_ academic paper underlying Zcash;
* a technical adviser to the Zcash Foundation;
* a founding scientist, a shareholder, and formerly a technical adviser to the
  Electric Coin Company;
* an academic researcher and adviser to various other organizations.

This proposal is his private opinion and does not represent any of the above.

.. _Zerocash: https://eprint.iacr.org/2014/349


Acknowledgements
================

This proposed is most closely based on the Matt Luongo `Decentralizing the Dev
Fee`_ proposal, with substantial changes and mixing in elements from
*@aristarchus*'s `20% split between the ECC and the Foundation`_ proposal, Josh
Cincinnati's `A Grand Compromise/Synthesis ZIP Proposal`_ proposal and
extensive discussions in the `Zcash Community Forum`_. The author is grateful to
all of the above for their excellent ideas and many insightful discussions, and
to Howard Loo and forum users *@aristarchus* and *@dontbeevil* for valuable
initial comments on this proposal.

.. _20% split between the ECC and the Foundation: https://forum.zcashcommunity.com/t/dev-fund-proposal-20-split-between-the-ecc-and-the-foundation/33862
.. _A Grand Compromise/Synthesis ZIP Proposal: https://forum.zcashcommunity.com/t/a-grand-compromise-synthesis-zip-proposal/34812
.. _Zcash Community Forum: https://forum.zcashcommunity.com/