zips/zip-1006.rst

::

   ZIP: 1006
   Title: Development Fund of 10% to a 2-of-3 Multisig with Community-Involved Third Entity
   Owners: James Todaro <james@blocktown.capital>
           Joseph Todaro <joseph@blocktown.capital>
   Credits: Mario Laul
            Chris Burniske
   Status: Obsolete
   Category: Consensus Process
   Created: 2019-08-31
   License: MIT
   Discussions-To: <https://forum.zcashcommunity.com/t/blocktown-development-fund-proposal-10-to-a-2-of-3-multisig-with-community-involved-third-entity/34782>


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

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

The additional terms below are to be interpreted as follows:

Mining
   The actions of processing transactions, which include processing
   transactions in a Proof-of-Stake or Proof-of-Work/Proof-of-Stake
   hybrid system, in the event Zcash implements either at a future date.
Mining software
   Pool software, local mining software or staking software.
Mining rewards / Block rewards
   Network transaction fees and/or coinbase rewards (e.g. newly issued
   ZEC associated with block generation).
Network Upgrade
   Any consensus rule change to the Zcash protocol, introduced as part
   of the standard Zcash Network Upgrade Pipeline [#nu-pipeline]_ or
   otherwise.
Founder’s Reward
   The 20% ZEC from mined blocks allocated to the Electric Coin Company
   (ECC), Zcash Foundation (ZF), employees, investors and/or other
   entities prior to the expected first halving in October 2020.
Zcash Development Fund
   Transparent address(es) controlled jointly by the Electric Coin
   Company, Zcash Foundation, and a “Third Entity”. The fund is intended
   for research, development, maintenance, and other technical work
   directly connected to the Zcash protocol, as well as non-technical
   initiatives (including design, marketing, events, regulatory
   outreach, education, governance, and any other form of business or
   community development) that contribute to the long-term success of
   the Zcash network. In the context of this proposal, the Zcash
   Development Fund consists of 10% of newly issued ZEC from block
   rewards between the first and second halvings of the Zcash network.
Applicant
   Any individual, group, or entity that seeks funding from the Zcash
   Development Fund.
Recipient
   Any individual, group, or entity that receives funding from the Zcash
   Development Fund.


Abstract
========

This proposal puts forward the financing mechanism and fundamental rules
of governance for the creation of a Zcash Development Fund.


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

Funding mechanism of the Zcash Development Fund
-----------------------------------------------

* This funding mechanism MUST be hard-coded so that 10% of newly issued
  ZEC from block rewards are automatically directed to the transparent
  address(es) of the Zcash Development Fund.
* The above requirement MUST be met between the first halving and
  second halving. Upon the second halving, future governance decisions
  MAY result in a further decrease of the Zcash Development Fund to 5%
  of newly issued ZEC from block rewards, or alternatively MAY result
  in another percent allocation which includes the possibility of a
  system whereby 100% of block rewards go to miners.
* The two aforementioned requirements above MUST remain regardless of
  any additional Network Upgrades or changes to mining or mining software
  prior to the second halving.
* The Zcash Development Fund MAY outlive the period of its initial
  funding mechanism, either through the appreciation in the price of ZEC,
  or from alternative funding sources upon the second halving in 2024.
* The hard-coded transparent address(es) of the Zcash Development Fund
  MAY be periodically rotated for operational security purposes to
  decrease the risk of any potential loss of funds associated with the
  address(es). The ECC, ZF, and/or “Third Entity” described below SHOULD
  take any possible precautions within the confines of this Specification
  section to avoid loss of funds.


Governance of the Zcash Development Fund
----------------------------------------

* Funds allocated to the Zcash Development Fund MUST be used only for
  their intended purpose as defined in the following Rationale section of
  this proposal.
* The transparent address(es) of the Zcash Development Fund MUST be
  jointly controlled by the ECC, ZF, and Third Entity, and all funds
  transferred from the Zcash Development Fund MUST be publicly confirmed
  in an official manner by a majority decision among the ECC, ZF, and
  Third Entity–commonly referred to as “2-of-3 multisig”. That is, funding
  decisions MUST be put to an officially documented vote which MUST NOT
  pass unless at least 2 of the 3 entities above vote approvingly.
* Prior to any movement of funds from the Zcash Development Fund, the ZF
  and ECC MUST coordinate with each other and the community to establish
  the Third Entity that will be involved in governance of the Zcash
  Development Fund. The process of determining the exact initial
  composition and rules of governance of the Third Entity MUST involve the
  Zcash community at large in a process similar to that outlined in the
  section "How the Foundation will select a particular proposal" in the
  ZF’s August 6, 2019 statement [#zfnd-guidance]_.

The governance rules of the Third Entity MUST include the following:

* All decision-making and other governing processes of the Third Entity
  MUST be independent of the ECC and ZF, and MUST include measures that
  are necessary to avoid conflicts of interest in relation to the ECC and
  ZF.
* At creation, the Third Entity MUST include an uneven number of at least
  5 individuals with independent previous affiliations, each having a
  single vote. All such decisions MUST have majority support within the
  Third Entity to result in an overall approving vote by the Third Entity.
* Once the Third Entity is established, it MAY decide to change its rules
  of governance (e.g. simple majority versus supermajority rules), but
  any such change MUST be preceded by the involvement of the Zcash
  community at large, similar to the process outlined in the ZF’s
  August 6, 2019 statement [#zfnd-guidance]_.
* Once the Third Entity is established as a self-governing body, it
  SHOULD evolve toward a system whereby ZEC holders have a direct role in
  determining votes and internal governance of the Third Entity.
* The Third Entity MAY apply for funding from the Zcash Development Fund,
  if deemed appropriate by its governing body. This would be subject to a
  majority vote by the ECC, ZF and Third Entity.

Prior to any transfer of funds from the Zcash Development Fund, the ECC,
ZF, and Third Entity MUST specify, approve, and make public the final
rules on applying for and receiving funding from the Zcash Development
Fund, including the details of the decision-making process for approving
or rejecting funding requests. These rules MUST apply equally to all
Applicants, including the ECC, ZF, and Third Entity, and MUST include
the following:

* Funding from the Zcash Development Fund MUST be available to not only
  the ECC, ZF, and Third Entity but also to other individuals, groups,
  or entities that could make technical and/or non-technical
  contributions to Zcash as described in the Rationale section of this
  proposal.
* To receive funding from the Zcash Development Fund, all Applicants
  MUST follow the rules described in the Specification section of this
  proposal and in final detail by the ECC, ZF, and Third Entity.
* As part of an application, each Applicant MUST produce a public
  overview of the activities and projected costs for which they are
  seeking funds.
* Each funding decision MUST be preceded by a community review period
  of reasonable length to be determined by the ECC, ZF and Third Entity
  in which Zcash stakeholders and community members can familiarize
  themselves with the Applicant’s request and make suggestions, or
  raise objections.
* In situations of overwhelming opposition from Zcash stakeholders and
  community members to requests from Applicants, the ECC, ZF, and Third
  Entity SHOULD NOT approve the request before striving to address
  stakeholders and community concerns, and modifying the request, if
  appropriate, to assuage concerns.
* Each funding decision MUST be accompanied by an easily referenced
  joint public statement by the ECC, ZF, and Third Entity, which MUST
  include the final tally of the relevant vote, as well as the votes of
  the three involved entities. As part of this statement, each of the
  three entities MUST provide explicit justification for its respective
  vote.
* The ZF MUST ensure that all Zcash Development Fund votes and the
  accompanying justifications described previously remain archived and
  easily accessible online by Zcash community members, stakeholders and
  the general public.
* The ECC, ZF, and Third Entity MAY approve funding requests on a
  rolling basis, but all funding requests MUST be revisited and voted
  on at a minimum of every 6 months to receive renewed approval.
* Recipients MUST publicize at minimum quarterly progress updates on
  their activities funded from the Zcash Development Fund. In the case
  of short-term assignments (less than 6 months), a single report upon
  completion of the project is sufficient. Standard reporting
  requirements MUST be specified by the ECC, ZF, and Third Entity prior
  to any approved requests from the Zcash Development Fund and
  additional requirements MAY be introduced as needed.
* Depending on the nature of each request, funds MAY be disbursed in a
  single payment or incrementally, subject to objective milestones
  and/or other performance metrics.

Any decision to alter the governance of the Zcash Development Fund as
described in this proposal and in final detail by the ECC, ZF, and Third
Entity MUST involve the Zcash community at large, similar to the process
outlined in the ZF’s August 6, 2019 statement [#zfnd-guidance]_.
All transfers from the Zcash Development Fund MUST be in full accordance
with the requirements described in this proposal.


Issues not addressed in this proposal/Out-of-Scope
==================================================

* Details of the decision-making process for supporting or rejecting
  this or other relevant proposals by the ECC, ZF, and/or other Zcash
  stakeholders. We do maintain, however, that any decision by the ECC
  and/or the ZF on the issue described in the Motivation section below
  SHOULD be preceded by the procedures for measuring community sentiment
  as outlined in the ZF’s August 6, 2019 statement [#zfnd-guidance]_.
* Additional methods for measuring community sentiment MAY include a
  way for ZEC holders to signal their support of specific proposals.
* The matter of whether the ECC should reorganize itself into a
  non-profit or remain for-profit, as addressed by the ZF in their
  August 6, 2019 statement [#zfnd-guidance]_. The current proposal is
  neutral on this matter, and funding from the Development Fund would be
  available for non-profit and/or for-profit entities. We consider the
  governance rules of the Development Fund outlined in this Specification
  section adequate for transparency and accountability.


Motivation
==========

The Zcash network is scheduled to undergo its first halving in October
2020, per current protocol specifications. At the time of the first
halving, the codebase dictates that the Founder’s Reward, which consists
of 20% of the ZEC from every block reward, will be terminated. Without
codebase modification, for example in the upcoming NU4 Network Upgrade,
100% of block rewards would be claimed by miners after the first halving.

The two organizations presently leading development and maintenance of
the Zcash network receive funds from the Founder’s Reward. These
organizations, the ECC and ZF, have recently requested a source of
funding after the first halving in order to continue operations for the
foreseeable future. The source of funds could theoretically be from
either a modification to the codebase dictating a Zcash Development Fund
from block rewards or, alternatively, from external sources. The ECC has
indicated though that it would “wind down or pivot” rather than accept
funding from any sources that would give “special interests” control
over the ECC [#ecc-assessment]_.

Based on the ECC’s demands, the block reward appears to be the most
agreeable source of resources for a Zcash Development Fund.

This proposal, originally published in the Zcash Community Forum on
August 14, 2019 [#blocktown-proposal]_ and formalized further in a
blog post on August 23, 2019 [#blocktown-blog]_, outlines the funding
mechanism and governance of such a Zcash Development Fund. Herein, we
propose a feature of NU4 whereby 10% of the ZEC from every new block
reward between the first halving and second halving would be directly
deposited in a Zcash Development Fund.

For the period between the launch of the Zcash network in 2016 and the
first halving, there has been a centralized 20% fee known as the
Founder’s Reward taken from the block reward. Other active ZIP drafts
advocate a Zcash Development Fund of 20% allocation from the block
reward after the first halving. We believe that a cumulative eight years
of centralized fees from the block reward at the identical rate of 20%
would ultimately result in a narrow community that accepts the
likelihood of a perpetual 20% fee on the Zcash network.

With a Zcash Development Fund that is only 10% of the block reward, a
precedent will be set that a large centralized fund is not indefinite
and will decrease faster than simply the rate of block reward halvings.
Although this proposal specifically addresses the period between the
first and second halving, this proposed feature may set a precedent
whereby the percent fee from block rewards allocated to a Zcash
Development Fund continually decreases every halving, e.g. 20% (FR) from
2016-2020, 10% from 2020-2024, 5% from 2024-2028, 2.5% from 2028-2032
(effectively quartering the ZEC allocated to a development fund every
four years). We believe that this social contract could restore the
community’s faith in the decentralization of Zcash as the network
incentives align more closely with that of Bitcoin’s over time.
Alternatively, it is not unreasonable for the Zcash governance system to
elect a 0% allocation for the Zcash Development Fund upon the second
halving. For a more detailed exploration regarding the selection of 10%,
please review the blog post ‘Proposal for 10% Dev Fund in Zcash 2020
Network Upgrade’ [#blocktown-10pc]_.

Of note, we are not suggesting or implying that the funding from the
Founder’s Reward and a Zcash Development Fund would be managed in a
similar way or have similar directives. The Zcash Development Fund
feature that we propose for NU4 does not allocate any funds to former
angel investors, VCs or vested employees. Furthermore, the Zcash
Development Fund would be subject to more explicit and transparent
rules of governance, as outlined in the Specification section of this
proposal.


Rationale
=========

The rationale behind this proposal is as follows:

* To provide financial resources for research, development, and any
  other technical work connected to software upgrades/maintenance of
  the Zcash protocol, as well as non-technical initiatives including
  marketing, design, events, regulatory outreach, education,
  governance, and any other form of business that contribute to the
  success of the Zcash network.
* To increase decentralization and network security of the Zcash
  network.
* To increase decentralization through greater community involvement
  in Zcash governance and resource allocation.
* To establish basic rules of governance and accountability regarding
  the deployment of funds in the Zcash Development Fund.
* To encourage transparency and cooperation among Zcash stakeholders
  and strengthen the community’s governance capabilities moving
  forward.


Discussion
==========

Recognized objections to this proposal include:

* This proposal is not in accordance with the current Zcash protocol,
  which is programmed to allocate 100% of the coinbase to miners upon
  the first halving in 2020. However, at least during the next few
  years of Zcash’s infancy, we believe it is advantageous to have a
  funded and dedicated development team.
* The funding mechanism in this proposal is a Zcash Development Fund
  consisting of 10% of newly issued ZEC from block rewards after the
  first halving. This is in contrast to other proposals that allocate
  20% of the mining rewards to the Zcash Development Fund – presumably
  a popular selection because the original Founder’s Reward was also
  set at 20%. For reasons we have explored in depth [#blocktown-10pc]_
  and summarized in [#blocktown-summary]_, we believe 10% instead of
  20% is superior for network security, decentralization, uniting the
  Zcash community and renewing interest in ZEC.
* Various parameters of governance in approving Applicant requests for
  funding from the Zcash Development Fund.
* The inclusion of a Third Entity in governance. One notable objection
  is the possibility of collusion between Third Entity and either the
  ECC or ZF that would result in a “usurped” Zcash Development Fund.
  We believe that the process for a community elected Third Entity,
  however, will mature over time – giving the community and Zcash
  stakeholders that important third opinion in deciding the proper
  allocation of funds. As demonstrated by the resilience of the Bitcoin
  network and community, well-formed communities tend to resist any
  collusion with corporations and controlling entities that do not
  promote the direct success of the network. Moreover, the inclusion of
  a Third Entity has the advantage of offering a “tie-breaker” in the
  event of a deadlock vote between the ECC and ZF and/or a situation
  where one entity holds the other hostage, which is a possible
  scenario in a 2-of-2 multisig agreement.
* This proposal does not have a clause dictating that a Recipient must
  abstain from voting. If a Recipient must abstain from voting in a
  2-of-3 multisig governance system, then this could –as in the case of
  2-of-2 multisig– result in an entity holding another hostage. For
  example, if the ECC refuses to fund the ZF until the ZF complies with
  the ECC’s demands, then the ECC has the power to deadlock any vote to
  fund the ZF, which requires the ECC and Third Entity to both vote
  approvingly.


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

Aspects of this proposal, particularly the Terminology and Specification
sections, were adapted and expanded definitions and concepts put forth
in Placeholder’s dev fund proposal from August 22, 2019 [#placeholder-proposal]_.


References
==========

.. [#RFC2119] `RFC 2119: Key words for use in RFCs to Indicate Requirement Levels <https://www.rfc-editor.org/rfc/rfc2119.html>`_
.. [#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/>`_
.. [#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/>`_
.. [#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>`_
.. [#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>`_
.. [#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>`_
.. [#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>`_
.. [#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>`_
.. [#nu-pipeline] `The Zcash Network Upgrade Pipeline. Electric Coin Company blog, December 3, 2018. <https://electriccoin.co/blog/the-zcash-network-upgrade-pipeline/>`_