ZIP: 1014 Title: Dev Fund to ECC + ZF + Major Grants Owner: Josh Cincinnati <email@example.com> Original-Author: Eran Tromer Credits: Matt Luongo Howard Loo @aristarchus @dontbeevil Status: Draft Category: Consensus / Process Created: 2019-11-10 License: MIT Discussions-To: <https://forum.zcashcommunity.com/t/dev-fund-proposal-dev-fund-to-ecc-zfnd-major-grants/35364>
The key words "MUST", "MUST NOT", "SHALL", "SHALL NOT", "SHOULD", and "MAY" in this document are to be interpreted as described in RFC 2119. 
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 rewards, 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 (decided by the Zcash Foundation, with extra community input and scrutiny).
Funding is capped at $700k/month per slice. Governance and accountability are based on existing entities and legal mechanisms, and increasingly decentralized governance is encouraged.
Starting at Zcash's first halving in October 2020, by default 100% of the block rewards 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.
Difference from Matt Luongo's proposal
This proposal is based on Matt Luongo's Decentralizing the Dev Fee proposal, which has similar motivations. The major changes are as follows:
- The Dev Fund slice intended for external recipients (beyond ECC, ZF and existing ZF grants) may be used to fund ECC if no competitive alternatives present themselves, to mitigate unwarranted loss of existing capabilities.
- For simplicity, the above slice is combined with the Foundation's existing grant system; but is accompanied by explicit requirements to achieve its goals, an independent body to disburse funds, and a Restricted Funds mechanism to enforce these requirements.
- The "easing function" coin value cap is removed, in favor of capping each slice at $700k/month funding target. Any excess is kept in a reserve by each organization, from which it can be withdrawn only to maintain the funding target in the future.
- Strengthened the transparency and accountability requirements, and harmonized them across ECC, ZF, and major grantees.
- Removed ZF's supervisory role in determining the "principal developer", fixing it to be ECC (changing this would be sufficiently dramatic to merit a fork).
- Calls for the development of decentralized voting and governance.
- Clarity and brevity.
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 be allowed to 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, or 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.
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.
Dev Fund allocation
Starting at the first Zcash halving in 2020, until the second halving in 2024, 20% of the block rewards 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-GU slice);
- 40% for additional "Major Grants" for large-scale long-term projects (denoted ZF-MG slice).
Details below. The fund flow will be implemented at the consensus-rule layer, by sending the corresponding ZEC to the designated address in 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:
- In fair-market-value compensation for specific new work (e.g., to employees and contractors).
- 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-GU slice (Zcash Foundation, for 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, support community communication online and via events, gathering community sentiment, and external awarding grants for all of the above.
ZF-MG slice (Zcash Foundation, for 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 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", within the framework of ZF's grant program but subject to the following additional constraints:
- 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.
- 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, but have semiannual review points for continuation of funding.
- Major Grants may be issued to ECC only if there are no other proposals to perform the specified work with similar capabilities, effectiveness and cost. (The intent is that eventually ECC will not receive Major Grants.)
- 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 by mentorship, coaching, technical resources, creating entrepreneurial opportunities, etc. If one proposal substantially duplicates anothers' plans, priority should be given to the originator of the plans.
- Major Grants SHOULD be awarded based on ZF's mission and values, restricted to furthering of the Zcash cryptocurrency and its ecosystem (which is more specific than furthering financial privacy in general).
- Major Grants awarding is 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. 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 the ZF's operating documents or U.S. law.
- 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). Additionally, no one with interest in or association with the ECC may sit on the Major Grant Review Committee --- since the ECC can be a beneficiary, this avoids those potential conflicts altogether. 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 ZF-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.
From grant proposers' side, proposals for such grants SHALL be submitted through ZF's usual grant process, allowing for public discussion and public funding. It is intended that small one-time grants will be funded by drawing on the ZF-GU slice (where they also compete with other ZF activities), whereas large long-duration will be funded from the dedicated ZF-MG slice; though this is at ZF's discretion (e.g. if there are no Major Grant applications the ZF may opt to direct the ZF-MG to smaller grants).
ZF SHALL strive to define target metrics and key performance indicators, and the Major Grant Review Committee SHOULD utilize these in its funding decisions.
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, 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.
Funding Target and Volatility Reserve
Each Dev Fund slice has a Funding Target, initially US $700,000 for each slice. At the end of each calendar month, the fair market value of the Dev Fund ZEC received during that month will be computed, and the excess over the Funding Target SHALL be deposited into a dedicated Volatility Reserve account by the funds' recipient.
Each slice has its own separate Volatility reserve account, owned and managed by the recipient (ECC or ZF), but limited in how it may be used (i.e., analogously to some types of retirement or trust accounts). Funds MAY be withdrawn from the Volatility Reserve account, only by that same party, in months where the aforementioned monthly ZEC value falls short of the Funding Target, and only to the extent needed to cover that shortfall.
The Volatility Reserve may be kept as ZEC, or sold and held as fiat currency or investments (whose profits will remain in the Volatility Reserve).
The Funding Target SHALL NOT be changed other than by unanimous agreement of ZF, ECC, and the majority vote of the Community Panel. (In case of excessive accumulation of reserves, the community MAY condition an increase of the Funding Target on the redirection of some of the reserves to a different entity, miners or an airdrop.)
Dev Fund ZEC that has been received, not placed in the Volatility Reserve, and has not yet been used or disbursed, SHALL be kept by the corresponding party (as ZEC, or sold and invested) for later use under the terms of the corresponding slice.
Note that grantees of Major Grants are not directly subject to the Funding Target, and do not have to manage a Volatility Reserve account; this is addressed upstream by the Zcash Foundation, which awards these grants. The hope is that the Foundation-managed Zfnd-MG Volatility Reserve will ultimately form a large long-term "endowment" pool that cushions the volatility for the various grantees, so grantees can focus on their work instead of hedging short-term price risks.
Irrevocable obligations to the above MUST be made by the recipients (e.g., using their Operating Agreements or by receiving the slice as Restricted Funds).
Transparency and Accountability
ECC, ZF, and Major Grant recipients (during and leading to their award period) SHALL all accept the following obligations:
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 audited 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 ), preferably the MIT license.
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 ZF-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 in the following places:
- As input into the Major Grant Review Committee which governs the ZF-MG slice (Zcash Foundation, for major grants).
- For changing the Funding Target and Volatility Reserve.
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 both of these processes, 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.
This proposal is a limited modification of Eran Tromer's ZIP 1012 by the Zcash Foundation, based on feedback from the Foundation's board and the community. Eran's original acknowledgements are below:
This proposed is most closely based on the Matt Luongo Decentralizing the Dev Fee proposal, with substantial changes and mixing in elements from @aristarchus's 20% split between the ECC and the Foundation proposal, Josh Cincinnati's A Grand Compromise/Synthesis ZIP Proposal proposal and extensive discussions in the Zcash Community Forum. The author is grateful to all of the above for their excellent ideas and many insightful discussions, and to Howard Loo and forum users @aristarchus and @dontbeevil for valuable initial comments on this proposal.
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