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::
ZIP: Unassigned
Title: Block Reward Allocation for Non-Direct 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 [#BCP14]_ 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."
The "lockbox" will be a separate pool of issued funds tracked by the protocol,
as described in ZIP <TBD>: Lockbox Funding Streams
[#zip-lockbox-funding-streams]_. No disbursement mechanism is currently defined
for this "lockbox"; the Zcash community will need to decide upon and specify a
suitable decentralized mechanism for permitting withdrawals from this lockbox
in a future ZIP in order to make these funds available for funding grants to
ecosystem participants.
The proposed lockbox addresses significant issues observed with ZIP 1014
[#zip-1014]_, 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:
1. **Regulatory Risks**: The current model involves direct funding of US-based
organizations, which can potentially attract regulatory scrutiny from
entities such as the SEC, posing legal risks to the Zcash ecosystem.
2. **Funding Inefficiencies**: The current model directly funds organizations
rather than specific projects, leading to a potential mismatch between those
organizations' development priorities and the priorities of the community.
Furthermore, if organizations are guaranteed funds regardless of
performance, there is little incentive to achieve key performance indicators
(KPIs) or align with community sentiment. A future system that allocates
resources directly to projects rather than organizations may help reduce
inefficiencies and better align development efforts with community
priorities.
3. **Centralization Concerns**: The current model centralizes decision-making
power within a few organizations, contradicting the decentralized ethos of
blockchain technology. Traditional organizational structures with boards and
executives introduce a single point of failure and limit community
involvement in funding decisions.
4. **Community Involvement**: The current system provides minimal formal input
from the community regarding what projects should be funded, leading to a
misalignment between funded projects and community priorities.
5. **Moving Towards a Non-Direct Funding Model**: There is strong community
support for a non-direct Dev Fund funding model. Allocating funds to a
Deferred Dev Fund Lockbox incentivizes the development of a decentralized
mechanism for the disbursement of the locked funds.
By addressing these issues, this proposal aims to ensure sustainable,
efficient, and decentralized funding for essential activities within the Zcash
ecosystem.
Requirements
============
1. **In-Protocol Lockbox**: The alternatives presented in this ZIP depend upon
the Lockbox Funding Streams proposal [#zip-lockbox-funding-streams]_.
2. **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:
1. **Disbursement Mechanism**: The exact method for disbursing the accumulated
funds from the lockbox is not defined in this ZIP. The design,
implementation, and governance of the disbursement mechanism will be
addressed in a future ZIP. This includes specifics on how funds will be
allocated, the voting or decision-making process, and the structure of the
decentralized mechanism (such as a DAO).
2. **Regulatory Compliance Details**: The proposal outlines the potential to
reduce regulatory risks by avoiding direct funding of US-based
organizations, but it does not detail specific regulatory compliance
strategies. Future ZIPs will need to address how the disbursement mechanism
complies with applicable laws and regulations.
3. **Impact Assessment**: The long-term impact of reallocating a portion of the
block subsidy to the lockbox on the Zcash ecosystem, including its effect on
miners, developers, and the broader community, is not analyzed in this ZIP.
Subsequent proposals will need to evaluate the outcomes and make necessary
adjustments based on real-world feedback and data.
Specification
=============
The following alternatives all depend upon the Lockbox Funding Streams proposal
[#zip-lockbox-funding-streams]_ 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: Lockbox For Decentralized Grants Allocation (perpetual 50% option)
---------------------------------------------------------------------------------
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: Hybrid Deferred Dev Fund
---------------------------------------
Proposed by Jason McGee, Peacemonger, GGuy
* 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: Lockbox For Decentralized Grants Allocation (20% option)
-----------------------------------------------------------------------
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: Masters Of The Universe
--------------------------------------
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:
1. 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.
2. ZCG SHOULD support well-specified work proposed by the grantee, at
reasonable market-rate costs. They can be of any duration or ongoing without
a duration limit. Grants of indefinite duration SHOULD 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. 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.
5. ZCG awards are subject to approval by a five-seat ZCG Committee. The ZCG
Committee SHALL be selected by the ZF’s Community Advisory Panel or a
successor process (e.g. as established by FPF). Elections SHALL be staggered
to ensure continuity within the Committee.
6. The ZCG Committee’s funding decisions will be final, requiring no approval
from the FPF Board, but are subject to veto if the FPF judges them to
violate any relevant laws or other (current or future) obligations.
7. ZCG Committee members SHALL have a one-year term and MAY sit for reelection.
The ZCG Committee is subject to the same conflict of interest policy that
governs the FPF Board of Directors (i.e. they MUST recuse themselves when
voting on proposals where they have a financial interest). At most one
person with association with the BP/ECC, at most one person with
association with the ZF, and at most one person with association with FPF
are allowed to sit on the ZCG Committee.
“Association” here means: having a financial interest, full-time employment,
being an officer, being a director, or having an immediate family
relationship with any of the above. 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.
8. A portion of the ZCG Slice shall be allocated to a Discretionary Budget,
which may be disbursed for expenses reasonably related to the administration
of the ZCG program. The amount of funds allocated to the Discretionary
Budget SHALL be decided by the ZF’s Community Advisory Panel or successor
process. Any disbursement of funds from the Discretionary Budget MUST be
approved by the ZCG Committee. Expenses related to the administration of the
ZCG program include, without limitation the following:
* Paying third party vendors for services related to domain name
registration, or the design, website hosting and administration of
websites for the ZCG Committee.
* Paying independent consultants to develop requests for proposals that
align with the ZCG program.
* Paying independent consultants for expert review of grant applications.
* Paying for sales and marketing services to promote the ZCG program.
* Paying third party consultants to undertake activities that support the
purpose of the ZCG program.
* Reimbursement to members of the ZCG Committee for reasonable travel
expenses, including transportation, hotel and meals allowance.
9. A portion of the Discretionary Budget MAY be allocated to provide reasonable
compensation to members of the ZCG Committee. Committee member compensation
SHALL be limited to the hours needed to successfully perform their positions
and MUST align with the scope and responsibilities of their roles. The
allocation and distribution of compensation to committee members SHALL be
administered by the FPF. The compensation rate and hours for committee
members SHALL be determined by the ZF’s Community Advisory Panel or
successor process.
10. The ZCG Committee’s decisions relating to the allocation and disbursement
of funds from the Discretionary Budget will be final, requiring no approval
from the FPF Board, but are subject to veto if the FPF judges
them to violate laws or FPF reporting requirements and other
(current or future) obligations.
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
financials and any disbursements made to grantees.
* Bi-weekly meeting minutes documenting the decisions made by the ZCG committee
on grants.
* Quarterly reports, detailing future plans, execution on previous plans, and
finances (balances, and spending broken down by major categories).
* Annual detailed review of the organization performance and future plans.
* Annual financial report (IRS Form 990, or substantially similar information).
BP, ECC, ZF, FPF, ZCG and grant recipients MUST promptly disclose any security
or privacy risks that may affect users of Zcash (by responsible disclosure
under confidence to the pertinent developers, where applicable).
All substantial software whose development was funded by the Dev Fund SHOULD be
released under an Open Source license (as defined by the Open Source Initiative
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
==========
.. [#BCP14] `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" <https://www.rfc-editor.org/info/bcp14>`_
.. [#zip-1014] `ZIP 1014: Dev Fund Proposal and Governance <zip-1014.rst>`_
.. [#zip-lockbox-funding-streams] `Lockbox Funding Streams <https://zips.z.cash/draft-nuttycom-lockbox-streams>`_
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