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ZIP: 1006
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Title: Development Fund of 10% to a 2-of-3 Multisig with Community-Involved Third Entity
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Owners: James Todaro <james@blocktown.capital>
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Joseph Todaro <joseph@blocktown.capital>
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Credits: Mario Laul <mario@placeholder.vc>
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Chris Burniske <chris@placeholder.vc>
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Status: Draft
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Category: Consensus / Process
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Created: 2019-08-31
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License: MIT
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Discussions-To: <https://forum.zcashcommunity.com/t/blocktown-development-fund-proposal-10-to-a-2-of-3-multisig-with-community-involved-third-entity/34782>
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Terminology
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===========
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The key words “MUST”, “SHOULD”, “SHOULD NOT”, and “MAY” in this document
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are to be interpreted as described in RFC 2119. [#RFC2119]_
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The additional terms below are to be interpreted as follows:
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Mining
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The actions of processing transactions, which include processing
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transactions in a Proof-of-Stake or Proof-of-Work/Proof-of-Stake
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hybrid system, in the event Zcash implements either at a future date.
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Mining software
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Pool software, local mining software or staking software.
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Mining rewards / Block rewards
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Network transaction fees and/or coinbase rewards (e.g. newly issued
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ZEC associated with block generation).
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Network Upgrade
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Any consensus rule change to the Zcash protocol, introduced as part
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of the standard Zcash Network Upgrade Pipeline [#nu-pipeline]_ or
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otherwise.
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Founder’s Reward
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The 20% ZEC from mined blocks allocated to the Electric Coin Company
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(ECC), Zcash Foundation (ZF), employees, investors and/or other
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entities prior to the expected first halving in October 2020.
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Zcash Development Fund
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Transparent address(es) controlled jointly by the Electric Coin
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Company, Zcash Foundation, and a “Third Entity”. The fund is intended
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for research, development, maintenance, and other technical work
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directly connected to the Zcash protocol, as well as non-technical
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initiatives (including design, marketing, events, regulatory
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outreach, education, governance, and any other form of business or
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community development) that contribute to the long-term success of
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the Zcash network. In the context of this proposal, the Zcash
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Development Fund consists of 10% of newly issued ZEC from block
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rewards between the first and second halvings of the Zcash network.
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Applicant
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Any individual, group, or entity that seeks funding from the Zcash
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Development Fund.
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Recipient
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Any individual, group, or entity that receives funding from the Zcash
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Development Fund.
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Abstract
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========
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This proposal puts forward the financing mechanism and fundamental rules
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of governance for the creation of a Zcash Development Fund.
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Specification
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=============
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Funding mechanism of the Zcash Development Fund
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-----------------------------------------------
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* This funding mechanism MUST be hard-coded so that 10% of newly issued
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ZEC from block rewards are automatically directed to the transparent
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address(es) of the Zcash Development Fund.
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* The above requirement MUST be met between the first halving and
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second halving. Upon the second halving, future governance decisions
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MAY result in a further decrease of the Zcash Development Fund to 5%
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of newly issued ZEC from block rewards, or alternatively MAY result
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in another percent allocation which includes the possibility of a
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system whereby 100% of block rewards go to miners.
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* The two aforementioned requirements above MUST remain regardless of
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any additional Network Upgrades or changes to mining or mining software
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prior to the second halving.
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* The Zcash Development Fund MAY outlive the period of its initial
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funding mechanism, either through the appreciation in the price of ZEC,
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or from alternative funding sources upon the second halving in 2024.
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* The hard-coded transparent address(es) of the Zcash Development Fund
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MAY be periodically rotated for operational security purposes to
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decrease the risk of any potential loss of funds associated with the
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address(es). The ECC, ZF, and/or “Third Entity” described below SHOULD
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take any possible precautions within the confines of this Specification
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section to avoid loss of funds.
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Governance of the Zcash Development Fund
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----------------------------------------
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* Funds allocated to the Zcash Development Fund MUST be used only for
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their intended purpose as defined in the following Rationale section of
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this proposal.
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* The transparent address(es) of the Zcash Development Fund MUST be
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jointly controlled by the ECC, ZF, and Third Entity, and all funds
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transferred from the Zcash Development Fund MUST be publicly confirmed
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in an official manner by a majority decision among the ECC, ZF, and
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Third Entity–commonly referred to as “2-of-3 multisig”. That is, funding
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decisions MUST be put to an officially documented vote which MUST NOT
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pass unless at least 2 of the 3 entities above vote approvingly.
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* Prior to any movement of funds from the Zcash Development Fund, the ZF
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and ECC MUST coordinate with each other and the community to establish
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the Third Entity that will be involved in governance of the Zcash
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Development Fund. The process of determining the exact initial
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composition and rules of governance of the Third Entity MUST involve the
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Zcash community at large in a process similar to that outlined in the
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section "How the Foundation will select a particular proposal" in the
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ZF’s August 6, 2019 statement [#zfnd-guidance]_.
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The governance rules of the Third Entity MUST include the following:
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* All decision-making and other governing processes of the Third Entity
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MUST be independent of the ECC and ZF, and MUST include measures that
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are necessary to avoid conflicts of interest in relation to the ECC and
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ZF.
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* At creation, the Third Entity MUST include an uneven number of at least
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5 individuals with independent previous affiliations, each having a
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single vote. All such decisions MUST have majority support within the
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Third Entity to result in an overall approving vote by the Third Entity.
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* Once the Third Entity is established, it MAY decide to change its rules
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of governance (e.g. simple majority versus supermajority rules), but
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any such change MUST be preceded by the involvement of the Zcash
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community at large, similar to the process outlined in the ZF’s
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August 6, 2019 statement [#zfnd-guidance]_.
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* Once the Third Entity is established as a self-governing body, it
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SHOULD evolve toward a system whereby ZEC holders have a direct role in
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determining votes and internal governance of the Third Entity.
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* The Third Entity MAY apply for funding from the Zcash Development Fund,
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if deemed appropriate by its governing body. This would be subject to a
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majority vote by the ECC, ZF and Third Entity.
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Prior to any transfer of funds from the Zcash Development Fund, the ECC,
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ZF, and Third Entity MUST specify, approve, and make public the final
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rules on applying for and receiving funding from the Zcash Development
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Fund, including the details of the decision-making process for approving
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or rejecting funding requests. These rules MUST apply equally to all
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Applicants, including the ECC, ZF, and Third Entity, and MUST include
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the following:
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* Funding from the Zcash Development Fund MUST be available to not only
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the ECC, ZF, and Third Entity but also to other individuals, groups,
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or entities that could make technical and/or non-technical
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contributions to Zcash as described in the Rationale section of this
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proposal.
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* To receive funding from the Zcash Development Fund, all Applicants
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MUST follow the rules described in the Specification section of this
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proposal and in final detail by the ECC, ZF, and Third Entity.
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* As part of an application, each Applicant MUST produce a public
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overview of the activities and projected costs for which they are
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seeking funds.
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* Each funding decision MUST be preceded by a community review period
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of reasonable length to be determined by the ECC, ZF and Third Entity
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in which Zcash stakeholders and community members can familiarize
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themselves with the Applicant’s request and make suggestions, or
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raise objections.
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* In situations of overwhelming opposition from Zcash stakeholders and
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community members to requests from Applicants, the ECC, ZF, and Third
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Entity SHOULD NOT approve the request before striving to address
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stakeholders and community concerns, and modifying the request, if
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appropriate, to assuage concerns.
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* Each funding decision MUST be accompanied by an easily referenced
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joint public statement by the ECC, ZF, and Third Entity, which MUST
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include the final tally of the relevant vote, as well as the votes of
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the three involved entities. As part of this statement, each of the
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three entities MUST provide explicit justification for its respective
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vote.
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* The ZF MUST ensure that all Zcash Development Fund votes and the
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accompanying justifications described previously remain archived and
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easily accessible online by Zcash community members, stakeholders and
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the general public.
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* The ECC, ZF, and Third Entity MAY approve funding requests on a
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rolling basis, but all funding requests MUST be revisited and voted
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on at a minimum of every 6 months to receive renewed approval.
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* Recipients MUST publicize at minimum quarterly progress updates on
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their activities funded from the Zcash Development Fund. In the case
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of short-term assignments (less than 6 months), a single report upon
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completion of the project is sufficient. Standard reporting
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requirements MUST be specified by the ECC, ZF, and Third Entity prior
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to any approved requests from the Zcash Development Fund and
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additional requirements MAY be introduced as needed.
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* Depending on the nature of each request, funds MAY be disbursed in a
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single payment or incrementally, subject to objective milestones
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and/or other performance metrics.
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Any decision to alter the governance of the Zcash Development Fund as
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described in this proposal and in final detail by the ECC, ZF, and Third
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Entity MUST involve the Zcash community at large, similar to the process
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outlined in the ZF’s August 6, 2019 statement [#zfnd-guidance]_.
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All transfers from the Zcash Development Fund MUST be in full accordance
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with the requirements described in this proposal.
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Issues not addressed in this proposal/Out-of-Scope
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==================================================
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* Details of the decision-making process for supporting or rejecting
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this or other relevant proposals by the ECC, ZF, and/or other Zcash
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stakeholders. We do maintain, however, that any decision by the ECC
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and/or the ZF on the issue described in the Motivation section below
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SHOULD be preceded by the procedures for measuring community sentiment
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as outlined in the ZF’s August 6, 2019 statement [#zfnd-guidance]_.
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* Additional methods for measuring community sentiment MAY include a
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way for ZEC holders to signal their support of specific proposals.
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* The matter of whether the ECC should reorganize itself into a
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non-profit or remain for-profit, as addressed by the ZF in their
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August 6, 2019 statement [#zfnd-guidance]_. The current proposal is
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neutral on this matter, and funding from the Development Fund would be
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available for non-profit and/or for-profit entities. We consider the
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governance rules of the Development Fund outlined in this Specification
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section adequate for transparency and accountability.
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Motivation
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==========
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The Zcash network is scheduled to undergo its first halving in October
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2020, per current protocol specifications. At the time of the first
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halving, the codebase dictates that the Founder’s Reward, which consists
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of 20% of the ZEC from every block reward, will be terminated. Without
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codebase modification, for example in the upcoming NU4 Network Upgrade,
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100% of block rewards would be claimed by miners after the first halving.
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The two organizations presently leading development and maintenance of
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the Zcash network receive funds from the Founder’s Reward. These
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organizations, the ECC and ZF, have recently requested a source of
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funding after the first halving in order to continue operations for the
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foreseeable future. The source of funds could theoretically be from
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either a modification to the codebase dictating a Zcash Development Fund
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from block rewards or, alternatively, from external sources. The ECC has
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indicated though that it would “wind down or pivot” rather than accept
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funding from any sources that would give “special interests” control
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over the ECC [#ecc-assessment]_.
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Based on the ECC’s demands, the block reward appears to be the most
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agreeable source of resources for a Zcash Development Fund.
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This proposal, originally published in the Zcash Community Forum on
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August 14, 2019 [#blocktown-proposal]_ and formalized further in a
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blog post on August 23, 2019 [#blocktown-blog]_, outlines the funding
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mechanism and governance of such a Zcash Development Fund. Herein, we
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propose a feature of NU4 whereby 10% of the ZEC from every new block
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reward between the first halving and second halving would be directly
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deposited in a Zcash Development Fund.
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For the period between the launch of the Zcash network in 2016 and the
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first halving, there has been a centralized 20% fee known as the
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Founder’s Reward taken from the block reward. Other active ZIP drafts
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advocate a Zcash Development Fund of 20% allocation from the block
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reward after the first halving. We believe that a cumulative eight years
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of centralized fees from the block reward at the identical rate of 20%
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would ultimately result in a narrow community that accepts the
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likelihood of a perpetual 20% fee on the Zcash network.
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With a Zcash Development Fund that is only 10% of the block reward, a
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precedent will be set that a large centralized fund is not indefinite
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and will decrease faster than simply the rate of block reward halvings.
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Although this proposal specifically addresses the period between the
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first and second halving, this proposed feature may set a precedent
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whereby the percent fee from block rewards allocated to a Zcash
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Development Fund continually decreases every halving, e.g. 20% (FR) from
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2016-2020, 10% from 2020-2024, 5% from 2024-2028, 2.5% from 2028-2032
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(effectively quartering the ZEC allocated to a development fund every
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four years). We believe that this social contract could restore the
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community’s faith in the decentralization of Zcash as the network
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incentives align more closely with that of Bitcoin’s over time.
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Alternatively, it is not unreasonable for the Zcash governance system to
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elect a 0% allocation for the Zcash Development Fund upon the second
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halving. For a more detailed exploration regarding the selection of 10%,
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please review the blog post ‘Proposal for 10% Dev Fund in Zcash 2020
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Network Upgrade’ [#blocktown-10pc]_.
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Of note, we are not suggesting or implying that the funding from the
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Founder’s Reward and a Zcash Development Fund would be managed in a
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similar way or have similar directives. The Zcash Development Fund
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feature that we propose for NU4 does not allocate any funds to former
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angel investors, VCs or vested employees. Furthermore, the Zcash
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Development Fund would be subject to more explicit and transparent
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rules of governance, as outlined in the Specification section of this
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proposal.
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Rationale
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=========
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The rationale behind this proposal is as follows:
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* To provide financial resources for research, development, and any
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other technical work connected to software upgrades/maintenance of
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the Zcash protocol, as well as non-technical initiatives including
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marketing, design, events, regulatory outreach, education,
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governance, and any other form of business that contribute to the
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success of the Zcash network.
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* To increase decentralization and network security of the Zcash
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network.
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* To increase decentralization through greater community involvement
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in Zcash governance and resource allocation.
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* To establish basic rules of governance and accountability regarding
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the deployment of funds in the Zcash Development Fund.
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* To encourage transparency and cooperation among Zcash stakeholders
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and strengthen the community’s governance capabilities moving
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forward.
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Discussion
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==========
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Recognized objections to this proposal include:
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* This proposal is not in accordance with the current Zcash protocol,
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which is programmed to allocate 100% of the coinbase to miners upon
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the first halving in 2020. However, at least during the next few
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years of Zcash’s infancy, we believe it is advantageous to have a
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funded and dedicated development team.
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* The funding mechanism in this proposal is a Zcash Development Fund
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consisting of 10% of newly issued ZEC from block rewards after the
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first halving. This is in contrast to other proposals that allocate
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20% of the mining rewards to the Zcash Development Fund – presumably
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a popular selection because the original Founder’s Reward was also
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set at 20%. For reasons we have explored in depth [#blocktown-10pc]_
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and summarized in [#blocktown-summary]_, we believe 10% instead of
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20% is superior for network security, decentralization, uniting the
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Zcash community and renewing interest in ZEC.
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* Various parameters of governance in approving Applicant requests for
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funding from the Zcash Development Fund.
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* The inclusion of a Third Entity in governance. One notable objection
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is the possibility of collusion between Third Entity and either the
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ECC or ZF that would result in a “usurped” Zcash Development Fund.
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We believe that the process for a community elected Third Entity,
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however, will mature over time – giving the community and Zcash
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stakeholders that important third opinion in deciding the proper
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allocation of funds. As demonstrated by the resilience of the Bitcoin
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network and community, well-formed communities tend to resist any
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collusion with corporations and controlling entities that do not
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promote the direct success of the network. Moreover, the inclusion of
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a Third Entity has the advantage of offering a “tie-breaker” in the
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event of a deadlock vote between the ECC and ZF and/or a situation
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where one entity holds the other hostage, which is a possible
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scenario in a 2-of-2 multisig agreement.
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* This proposal does not have a clause dictating that a Recipient must
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abstain from voting. If a Recipient must abstain from voting in a
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2-of-3 multisig governance system, then this could –as in the case of
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2-of-2 multisig– result in an entity holding another hostage. For
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example, if the ECC refuses to fund the ZF until the ZF complies with
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the ECC’s demands, then the ECC has the power to deadlock any vote to
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fund the ZF, which requires the ECC and Third Entity to both vote
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approvingly.
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Acknowledgements
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================
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Aspects of this proposal, particularly the Terminology and Specification
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sections, were adapted and expanded definitions and concepts put forth
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in Placeholder’s dev fund proposal from August 22, 2019 [#placeholder-proposal]_.
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References
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==========
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.. [#RFC2119] `Key words for use in RFCs to Indicate Requirement Levels <https://tools.ietf.org/html/rfc2119>`_
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.. [#zfnd-guidance] `Zcash Foundation Guidance on Dev Fund Proposals. Zcash Foundation blog, August 6, 2019. <https://www.zfnd.org/blog/dev-fund-guidance-and-timeline/>`_
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.. [#ecc-assessment] `ECC Initial Assessment of Community Proposals. Electric Coin Company blog, August 26, 2019. <https://electriccoin.co/blog/ecc-initial-assessment-of-community-proposals/>`_
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.. [#blocktown-proposal] `Proposal for the Zcash 2020 Network Upgrade (topic on the Zcash community forum). <https://forum.zcashcommunity.com/t/proposal-for-the-zcash-2020-network-upgrade/34503>`_
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.. [#blocktown-blog] `Blocktown Proposal for Zcash 2020 Network Upgrade. Blocktown Capital, August 23, 2019. <https://medium.com/blocktown/blocktown-proposal-for-zcash-2020-network-upgrade-fdec1e9d507c>`_
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.. [#blocktown-10pc] `Proposal for 10% Dev Fund in Zcash 2020 Network Upgrade. Blocktown Capital, August 14, 2019. <https://medium.com/blocktown/proposal-for-the-zcash-2020-network-upgrade-fcd320a5d6f5>`_
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.. [#blocktown-summary] `Executive Summary: Blocktown Proposal for Zcash 2020 Network Upgrade. Blocktown Capital, August 15, 2019. <https://medium.com/blocktown/executive-summary-blocktown-proposal-for-zcash-2020-network-upgrade-84ff20997502>`_
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.. [#placeholder-proposal] `Dev Fund Proposal: 20% to a 2-of-3 multisig with community-involved governance (topic on the Zcash community forum). <https://forum.zcashcommunity.com/t/dev-fund-proposal-20-to-a-2-of-3-multisig-with-community-involved-governance/34646>`_
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.. [#nu-pipeline] `The Zcash Network Upgrade Pipeline. Electric Coin Company blog, December 3, 2018. <https://electriccoin.co/blog/the-zcash-network-upgrade-pipeline/>`_
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