zips/zip-1014.rst

::

  ZIP: 1014
  Title: Establishing a Dev Fund for ECC, ZF, and Major Grants
  Owners: Josh Cincinnati <josh@zfnd.org>
          Zooko Wilcox <zooko@electriccoin.co>
  Original-Author: Eran Tromer
  Credits: Matt Luongo
           Howard Loo
           @aristarchus
           @dontbeevil
           Daira Hopwood
           George Tankersley
  Status: Proposed
  Category: Consensus / Process
  Created: 2019-11-10
  License: MIT
  Discussions-To: <https://forum.zcashcommunity.com/t/community-sentiment-polling-results-nu4-and-draft-zip-1014/35560>


Terminology
===========

The key words "MUST", "MUST NOT", "SHALL", "SHALL NOT", "SHOULD", and "MAY"
in this document are to be interpreted as described in RFC 2119. [#RFC2119]_

The term "network upgrade" in this document is to be interpreted as
described in ZIP 200 [#zip-0200]_ and the Zcash Trademark Donation and License
Agreement ([#trademark]_ or successor agreement).

The terms "block subsidy" and "halving" in this document are to be interpreted
as described in sections 3.9 and 7.7 of the Zcash Protocol Specification.
[#protocol]_

"Electric Coin Company", also called "ECC", refers to the Zerocoin Electric
Coin Company, LLC.

"Zcash Foundation", also called "ZF", refers to the 501(c)(3) nonprofit
corporation of that name.


Abstract
========

This proposal describes a structure for 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 subsidies, 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
  (administered by the Zcash Foundation, with extra community input and
  scrutiny).

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
subsidies 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.


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 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, nor
cause them 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 mechanisms (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 subsidy of each block SHALL 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 slice**);
* 40% for additional "Major Grants" for large-scale long-term projects
  (denoted **MG slice**).

The slices are described in more detail below. The fund flow will be implemented
at the consensus-rule layer, by sending the corresponding ZEC to the designated
address(es) for 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 (e.g., to employees
   and contractors).
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 slice (Zcash Foundation's 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, supporting community communication online
and via events, gathering community sentiment, and awarding external grants
for all of the above.


MG slice (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 the Zcash ecosystem, to the extent that such teams are available
and effective.

The funds SHALL be received and administered by ZF. ZF MUST disburse them as
"Major Grants", but subject to the following additional constraints:

1. These funds MUST only be used to issue Major Grants to external parties
   that are independent of ZF. They MUST NOT be used by ZF for its internal
   operations and direct expenses. Additionally ECC and ZF are ineligible
   to receive Major Grants.

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. Grants of indefinite duration SHOULD have
   semiannual review points 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. Major Grants SHOULD be restricted to furthering the Zcash cryptocurrency and
   its ecosystem (which is more specific than furthering financial privacy in
   general).

5. Major Grants awards are subject to approval by a five-seat Major Grant
   Review Committee. The Major Grant Review Committee SHALL be selected by the
   ZF's Community Panel [#zf-community]_ or successor process.

6. The Major Grant Review Committee's funding decisions will be final, requiring
   no approval from the ZF Board, but are subject to veto if the Foundation
   judges them to violate U.S. law or the ZF's reporting requirements and other
   (current or future) obligations under U.S. IRS 501(c)(3).

7. Major Grant Review Committee members SHALL have a one-year term and MAY sit
   for reelection. The Major Grant Review Committee is subject to the same
   conflict of interest policy that governs the ZF 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 ECC, and at most one
   person with association with the ZF, are allowed to sit on the Major Grant
   Review 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 Panel and SHOULD work toward making it more
   representative and independent (more on that below).

ZF SHALL recognize the 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.

ZF SHALL strive to define target metrics and key performance indicators,
and the Major Grant Review Committee SHOULD 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 for some
or all grantees, 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.


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

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

ECC, ZF, and Major Grant recipients (during and leading to their award period)
SHALL all accept the obligations in this section.

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 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 recipients 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 or 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 [#osd]_), 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 MUST 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 MG (whose integrity is legally protected by the Restricted
Fund treatment).


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

Decentralized community governance is used in this proposal via the Community
Panel as input into the Major Grant Review Committee which governs the
`MG slice (Major Grants)`_.

It is highly desirable to develop robust means of decentralized community
voting and governance –either by expanding the Community Panel or a
successor mechanism– and to integrate them into this process 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
--------------------

Members of ZF's Board of Directors MUST NOT hold equity in ECC or have current
business or employment relationships with ECC, except as provided for by the
grace period described below.

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 November 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.)

The Foundation SHOULD endeavor to use the Community Panel (or successor
mechanism) as advisory input for future board elections.


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

This proposal is a limited modification of Eran Tromer's ZIP 1012 [#zip-1012]_
by the Zcash Foundation, the ECC, further modified by feedback from the
community and the results of the `latest Helios poll`_.

Eran's proposal is most closely based on the Matt Luongo 'Decentralize the
Dev Fee' proposal (ZIP 1011) [#zip-1011]_. Relative to ZIP 1011 there are
substantial changes and mixing in of elements from *@aristarchus*'s
'20% Split Evenly Between the ECC and the Zcash Foundation' (ZIP 1003)
[#zip-1003]_, Josh Cincinnati's 'Compromise Dev Fund Proposal With Diverse
Funding Streams' (ZIP 1010) [#zip-1010]_, and extensive discussions in the
`Zcash Community Forum`_.

The authors are grateful to all of the above for their excellent ideas and
any insightful discussions, and to Howard Loo and forum users *@aristarchus*
and *@dontbeevil* for valuable initial comments on ZIP 1012.

.. _Zcash Community Forum: https://forum.zcashcommunity.com/
.. _latest Helios poll: https://vote.heliosvoting.org/helios/elections/43b9bec8-39a1-11ea-914c-b6e34ffa859a/view


References
==========

.. [#RFC2119] `Key words for use in RFCs to Indicate Requirement Levels <https://www.rfc-editor.org/rfc/rfc2119.html>`_
.. [#protocol] `Zcash Protocol Specification [Overwinter+Sapling+Blossom] <protocol/protocol.pdf>`_
.. [#trademark] `Zcash Trademark Donation and License Agreement <https://www.zfnd.org/about/contracts/2019_ECC_ZFND_TM_agreement.pdf>`_
.. [#osd] `The Open Source Definition <https://opensource.org/osd>`_
.. [#zip-0200] `ZIP 200: Network Upgrade Mechanism <zip-0200.rst>`_
.. [#zip-1003] `ZIP 1003: 20% Split Evenly Between the ECC and the Zcash Foundation, and a Voting System Mandate <zip-1003.rst>`_
.. [#zip-1010] `ZIP 1010: Compromise Dev Fund Proposal With Diverse Funding Streams <zip-1010.rst>`_
.. [#zip-1011] `ZIP 1011: Decentralize the Dev Fee <zip-1011.rst>`_
.. [#zip-1012] `ZIP 1012: Dev Fund to ECC + ZF + Major Grants <zip-1012.rst>`_
.. [#zf-community] `ZF Community Advisory Panel <https://github.com/ZcashFoundation/zfnd/blob/bdd3ec9434e90f436acc9655ece70f634cb47681/governance/community-advisory-panel.md>`_