ZIP: Unassigned +Title: Allocation of Block Rewards for Decentralized Development Funding +Owners: Kris Nuttycombe <kris@nutty.land> + Jason McGee <aquietinvestor@gmail.com> +Original-Authors: Skylar Saveland <skylar@free2z.com> +Credits: Daira-Emma Hopwood + Jack Grigg +Status: Draft +Category: Consensus +Created: 2024-07-03 +License: MIT +Pull-Request: <https://github.com/zcash/zips/pull/866>+
Terminology 
+ The key words "MUST", "REQUIRED", "MUST NOT", "SHOULD", and "MAY" in this document are to be interpreted as described in BCP 14 1 when, and only when, they appear in all capitals.
+ + + + + + + + + + +Abstract
+ This ZIP proposes several options for the allocation of a percentage of the Zcash block subsidy, post-November 2024 halving, to an in-protocol "lockbox." Currently, 80% of the block subsidy goes to miners, while 20% is distributed among the Major Grants Fund (ZCG), Electric Coin Company (ECC), and the Zcash Foundation (ZF). If no changes are made, this 20% dev fund will expire, resulting in the entire block subsidy going to miners, leaving no block-subsidy funds for essential protocol development, security, marketing, or legal expenses.
+The proposed lockbox addresses significant issues observed with 2, such as regulatory risks, inefficiencies in funding organizations instead of projects, and centralization. While the exact disbursement mechanism for the lockbox funds is yet to be determined and will be addressed in a future ZIP, the goal is to employ a decentralized mechanism that ensures community involvement and efficient, project-specific funding. This approach is intended to potentially improve regulatory compliance, reduce inefficiencies, and enhance the decentralization of Zcash's funding structure.
+Motivation
+ Starting at Zcash's second halving in November 2024, by default 100% of the block subsidies will be allocated to miners, and no further funds will be automatically allocated to any other entities. Consequently, no substantial new funding may be available to existing teams dedicated to furthering charitable, educational, or scientific purposes, such as research, development, and outreach.
+It is important to balance the incentives for securing the consensus protocol through mining with funding crucial charitable, educational, and scientific activities like research, development, and outreach. Additionally, there is a need to continue to promote decentralization and the growth of independent development teams.
+For these reasons, the Zcash Community wishes to establish a new Zcash Development Fund after the second halving in November 2024, with the intent to put in place a more decentralized mechanism for allocation of development funds. The alternatives presented here are intended to address the following:
+-
+
- Regulatory Risks: The current model involves direct funding of US-based organizations, which can potentially attract regulatory scrutiny from entities such as the SEC, posing legal risks to the Zcash ecosystem. +
- Funding Inefficiencies: The current model directly funds organizations rather than specific projects, leading to a potential mismatch between those organizations' development priorities and the priorities of the community. Furthermore, if organizations are guaranteed funds regardless of performance, there is little incentive to achieve key performance indicators (KPIs) or align with community sentiment. A future system that allocates resources directly to projects rather than organizations may help reduce inefficiencies and better align development efforts with community priorities. +
- Centralization Concerns: The current model centralizes decision-making power within a few organizations, contradicting the decentralized ethos of blockchain technology. Traditional organizational structures with boards and executives introduce a single point of failure and limit community involvement in funding decisions. +
- Community Involvement: The current system provides minimal formal input from the community regarding what projects should be funded, leading to a misalignment between funded projects and community priorities. +
- Moving Towards a Non-Direct Funding Model: There is strong community support for a non-direct Dev Fund funding model. Allocating funds to a Deferred Dev Fund Lockbox incentivizes the development of a decentralized mechanism for the disbursement of the locked funds. +
By addressing these issues, this proposal aims to ensure sustainable, efficient, and decentralized funding for essential activities within the Zcash ecosystem.
+Requirements
+ -
+
- In-Protocol Lockbox: The alternatives presented in this ZIP depend upon the Lockbox Funding Streams proposal 3. +
- Regulatory Considerations: The allocation of funds should minimize regulatory risks by avoiding direct funding of specific organizations. The design should ensure compliance with applicable laws and regulations to support the long-term sustainability of the funding model. +
Non-requirements
+ The following consideratiosn are explicitly deferred to future ZIPs and are not covered by this proposal:
+-
+
- Disbursement Mechanism: The exact method for disbursing the accumulated funds from the lockbox is not defined in this ZIP. The design, implementation, and governance of the disbursement mechanism will be addressed in a future ZIP. This includes specifics on how funds will be allocated, the voting or decision-making process, and the structure of the decentralized mechanism (such as a DAO). +
- Regulatory Compliance Details: The proposal outlines the potential to reduce regulatory risks by avoiding direct funding of US-based organizations, but it does not detail specific regulatory compliance strategies. Future ZIPs will need to address how the disbursement mechanism complies with applicable laws and regulations. +
- Impact Assessment: The long-term impact of reallocating a portion of the block subsidy to the lockbox on the Zcash ecosystem, including its effect on miners, developers, and the broader community, is not analyzed in this ZIP. Subsequent proposals will need to evaluate the outcomes and make necessary adjustments based on real-world feedback and data. +
Specification
+ The following alternatives all depend upon the Lockbox Funding Streams proposal 3 for storage of funds into a deferred value pool.
+Some of the alternatives described below do not specify a termination height for the funding streams they propose. In these cases, the termination height is set to u32::MAX_VALUE. A future network upgrade is required in order for these streams to be terminated.
+Alternatives
+ Alternative 1
+ Proposed by Skylar Saveland
+-
+
- 50% of the block subsidy is to be distributed to the lockbox. +
As of block height 2726400, and continuing until modified by a future ZIP, the complete set of funding streams will be:
+================= =========== ============= ============== ============ + Stream Numerator Denominator Start height End height +================= =========== ============= ============== ============ +``FS_DEFERRED`` 50 100 2726400 u32::MAX +================= =========== ============= ============== ============+
Motivations for Alternative 1
+ This alternative proposes a substantially larger slice of the block subsidy than is currently allocated for development funding, in order to provide a long-term source of funding for protocol improvements. It is intended that a future mechanism put in place for the disbursement of these funds to only release funds from the pool in relatively small increments and with a bounded upper value, to ensure that funding remains available for years to come.
+Alternative 2
+ Proposed by Jason McGee
+-
+
- 12% of the block subsidy is to be distributed to the lockbox. +
- 8% of the block subsidy is to be distributed to the Financial Privacy Foundation (FPF), for the express use of the Zcash Community Grants Committee (ZCG) to fund independent teams in the Zcash ecosystem. +
As of block height 2726400, and continuing for one year, the complete set of funding streams will be:
+================= =========== ============= ============== ============ + Stream Numerator Denominator Start height End height +================= =========== ============= ============== ============ +``FS_DEFERRED`` 12 100 2726400 3146400 +``FS_FPF_ZCG`` 8 100 2726400 3146400 +================= =========== ============= ============== ============+
Motivations for Alternative 2
+ -
+
- Limited Runway: ZCG does not have the financial runway that ECC/BP and ZF have. As such, allocating ongoing funding to ZCG will help ensure the Zcash ecosystem has an active grants program. +
- Promoting Decentralization: Allocating a portion of the Dev Fund to Zcash Community Grants ensures small teams continue to receive funding to contribute to Zcash. Allowing the Dev Fund to expire, or putting 100% into a lockbox, would disproportionally impact grant recipients. This hybrid approach promotes decentralization and the growth of independent development teams. +
- Mitigating Regulatory Risks: By minimizing direct funding of US-based organizations, the lockbox helps to reduce potential regulatory scrutiny and legal risks. +
Alternative 3
+ Proposed by Kris Nuttycombe
+-
+
- 20% of the block subsidy is to be distributed to the lockbox. +
As of block height 2726400, and continuing for two years, the complete set of funding streams will be:
+================= =========== ============= ============== ============ + Stream Numerator Denominator Start height End height +================= =========== ============= ============== ============ +``FS_DEFERRED`` 20 100 2726400 3566400 +================= =========== ============= ============== ============+
Motivations for Alternative 3
+ This alternative is presented as the simplest allocation of block rewards to a lockbox for future disbursement that is consistent with results of community polling.
+Alternative 4
+ Proposed by NoamChom (Zcash forum)
+-
+
- 17% of the block subsidy is to be distributed to the lockbox. +
- 8% of the block subsidy is to be distributed to the Financial Privacy Foundation (FPF), for the express use of the Zcash Community Grants Committee (ZCG) to fund independent teams in the Zcash ecosystem. +
As of block height 2726400, and continuing for four years, the complete set of funding streams will be:
+================= =========== ============= ============== ============ + Stream Numerator Denominator Start height End height +================= =========== ============= ============== ============ +``FS_DEFERRED`` 17 100 2726400 4406400 +``FS_FPF_ZCG`` 8 100 2726400 4406400 +================= =========== ============= ============== ============+
Motivations for Alternative 4
+ This alternative proposes a slightly larger slice of the block subsidy than is currently allocated for development funding, in order to better provide for the needs of the Zcash community.
+Requirements related to direct streams for the Financial Privacy Foundation
+ The following requirements apply to Alternative 2 and Alternative 4:
+The stream allocated to Zcash Community Grants (ZCG) is intended to fund independent teams entering the Zcash ecosystem, to perform major ongoing development (or other work) for the public good of the Zcash ecosystem, to the extent that such teams are available and effective. The ZCG Committee is given the discretion to allocate funds not only to major grants, but also to a diverse range of projects that advance the usability, security, privacy, and adoption of Zcash, including community programs, dedicated resources, and other projects of varying sizes.
+The funds SHALL be received and administered by the Financial Privacy Foundation (FPF). FPF MUST disburse them for grants and expenses reasonably related to the administration of the ZCG program, but subject to the following additional constraints:
+-
+
- These funds MUST only be used to issue grants to external parties that are independent of FPF, and to pay for expenses reasonably related to the administration of the ZCG program. They MUST NOT be used by FPF for its internal operations and direct expenses not related to the administration of grants or the grants program. +
- ZCG SHOULD support well-specified work proposed by the grantee, at reasonable market-rate costs. They can be of any duration or ongoing without a duration limit. Grants of indefinite duration SHOULD have semiannual review points for continuation of funding. +
- Priority SHOULD be given to major grants that bolster teams with substantial (current or prospective) continual existence, and set them up for long-term success, subject to the usual grant award considerations (impact, ability, risks, team, cost-effectiveness, etc.). Priority SHOULD be given to major grants that support ecosystem growth, for example through mentorship, coaching, technical resources, creating entrepreneurial opportunities, etc. If one proposal substantially duplicates another’s plans, priority SHOULD be given to the originator of the plans. +
- The ZCG committee SHOULD be restricted to funding projects that further the Zcash cryptocurrency and its ecosystem (which is more specific than furthering financial privacy in general) as permitted by FPF and any relevant jurisdictional requirements. +
- ZCG awards are subject to approval by a five-seat ZCG Committee. The ZCG Committee SHALL be selected by the ZF’s Community Advisory Panel or a successor process (e.g. as established by FPF). Elections SHALL be staggered to ensure continuity within the Committee. +
- The ZCG Committee’s funding decisions will be final, requiring no approval from the FPF Board, but are subject to veto if the FPF judges them to violate any relevant laws or other (current or future) obligations. +
- ZCG Committee members SHALL have a one-year term and MAY sit for reelection. The ZCG Committee is subject to the same conflict of interest policy that governs the FPF Board of Directors (i.e. they MUST recuse themselves when voting on proposals where they have a financial interest). At most one person with association with the BP/ECC, at most one person with association with the ZF, and at most one person with association with FPF are allowed to sit on the ZCG Committee. “Association” here means: having a financial interest, full-time employment, being an officer, being a director, or having an immediate family relationship with any of the above. The ZF SHALL continue to operate the Community Advisory Panel and SHOULD work toward making it more representative and independent (more on that below). Similarly, FPF should also endeavor to establish its own means of collecting community sentiment for the purpose of administering ZCG elections. +
- A portion of the ZCG Slice shall be allocated to a Discretionary Budget, which may be disbursed for expenses reasonably related to the administration of the ZCG program. The amount of funds allocated to the Discretionary Budget SHALL be decided by the ZF’s Community Advisory Panel or successor process. Any disbursement of funds from the Discretionary Budget MUST be approved by the ZCG Committee. Expenses related to the administration of the ZCG program include, without limitation the following:
+ ++
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+-
+
- Paying third party vendors for services related to domain name registration, or the design, website hosting and administration of websites for the ZCG Committee. +
- Paying independent consultants to develop requests for proposals that align with the ZCG program. +
- Paying independent consultants for expert review of grant applications. +
- Paying for sales and marketing services to promote the ZCG program. +
- Paying third party consultants to undertake activities that support the purpose of the ZCG program. +
- Reimbursement to members of the ZCG Committee for reasonable travel expenses, including transportation, hotel and meals allowance. +
+ - A portion of the Discretionary Budget MAY be allocated to provide reasonable compensation to members of the ZCG Committee. Committee member compensation SHALL be limited to the hours needed to successfully perform their positions and MUST align with the scope and responsibilities of their roles. The allocation and distribution of compensation to committee members SHALL be administered by the FPF. The compensation rate and hours for committee members SHALL be determined by the ZF’s Community Advisory Panel or successor process. +
- The ZCG Committee’s decisions relating to the allocation and disbursement of funds from the Discretionary Budget will be final, requiring no approval from the FPF Board, but are subject to veto if the FPF judges them to violate laws or FPF reporting requirements and other (current or future) obligations. +
FPF SHALL recognize the ZCG slice of the Dev Fund as a Restricted Fund donation under the above constraints (suitably formalized), and keep separate accounting of its balance and usage under its Transparency and Accountability obligations defined below.
+FPF SHALL strive to define target metrics and key performance indicators, and the ZCG Committee SHOULD utilize these in its funding decisions.
+Direct Grant Option
+ It may be deemed better, operationally or legally, if ZCG funds are not accepted and disbursed by FPF, but rather directly assigned to the grantees. Thus, the following mechanism MAY be used in perpetuity for some or all grantees:
+Prior to each network upgrade, based on the ZCG Committee’s recommendation, the FPF 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.
+Furthering Decentralization
+ FPF SHALL conduct periodic reviews of the organizational structure, performance, and effectiveness of the ZCG program and committee, taking into consideration the input and recommendations of the ZCG Committee. As part of these periodic reviews, FPF MUST commit to exploring the possibility of transitioning ZCG into an independent organization if it is economically viable and it aligns with the interests of the Zcash ecosystem and prevailing community sentiment.
+In any transition toward independence, priority SHALL be given to maintaining or enhancing the decentralization of the Zcash ecosystem. The newly formed independent organization MUST ensure that decision-making processes remain community-driven, transparent, and responsive to the evolving needs of the Zcash community and ecosystem. In order to promote geographic decentralization, the new organization SHOULD establish its domicile outside of the United States.
+Transparency and Accountability
+ FPF MUST accept the following obligations in this section on behalf of ZCG: * Publication of the ZCG Dashboard, providing a snapshot of ZCG’s current
+System Message: ERROR/3 (draft-nuttycom-funding-allocation.rst line 428)
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+++financials and any disbursements made to grantees.
+
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+-
+
- 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 5), preferably the MIT license.
+Enforcement
+ FPF MUST contractually commit to fulfill these obligations on behalf of ZCG, and the prescribed use of funds, such that substantial violation, not promptly remedied, will result in a modified version of Zcash node software that removes ZCG’s Dev Fund slice and allocates it to the Deferred Dev Fund lockbox.
+References
+ | 1 | +Information on BCP 14 — "RFC 2119: Key words for use in RFCs to Indicate Requirement Levels" and "RFC 8174: Ambiguity of Uppercase vs Lowercase in RFC 2119 Key Words" | +
|---|
| 2 | +ZIP 1014: Dev Fund Proposal and Governance | +
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| 3 | +Lockbox Funding Streams | +
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