Zcash’s Block Reward Debate Will Be a Difficult But Necessary Challenge

Zcash is going through a tough time, and the future doesn’t look easy.

When Zcash first launched, it included a provision where 20% of the block reward would be allocated to “founders.” Part of the reward is now allocated to the Electric Coin Company (previously Zcash Company) and the Zcash Foundation. The founders funded some of the initial research and development of Zcash, but other public details are sparse.

The founders’ reward is set to expire in November 2020, at which point the entirety of block rewards will go to the miners. At the moment, the miners only receive 80% of the block reward. At the same time, the block reward will be halved from 12.5 ZEC/block to 6.25 ZEC/block. A block reward is the new issuance of coins.

Zcash Founders’ Reward Visualization. As shown in the text, the FR depiction is a joke.

In Zcash’s entire history, the community has largely relied upon the Electric Coin Company (ECC) and Zcash Foundation (ZF) to provide research, development, and project stewardship. They implemented Sapling, an efficiency upgrade, and hosted Zcon0 and Zcon1, two Zcash conferences, among many other initiatives. Unfortunately, not enough community infrastructure was set up throughout Zcash’s three year existence to be self-sustaining. No other individuals or entities match the ECC and ZF’s scope of initiatives, and it’s unlikely that something magical will happen in the next year.

Therefore, most Zcash community members are worried that November 2020 will signal the halt of Zcash development. ECC employees voice concern that they will need to “wind down or pivot” without further funding from the community. Making matters worse, there is no good way to assess community sentiment regarding how to handle future block rewards. Who can sensibly make a decision on how to go forward?

The ECC and ZF can’t unilaterally (or bilaterally) make a decision to give themselves more funding without raising severe regulatory and ethical questions. They need some community indicator, but no one can agree on what this looks like.

I personally believe that without a clear indicator of community consensus, even if flawed, the ECC and ZF will be in a position to define community consensus however they like. This is hugely dangerous for the entire Zcash ecosystem. The Zcash community has issues with centralization, but an organization modifying the block reward to give themselves additional funding without a defined decision-making process takes the cake.

Let me summarize a few main concerns here:

Annoyingly, this problem was known for a long time. Someone’s cat didn’t press the wrong button on the keyboard and sneak in an unwanted consensus change. The absence of reward after November 2020 was known since day 1. I’m frustrated that we are in the current chaotic situation, and I wish I could say that it was unexpected. Instead, everyone hoped that a totally awesome, self-sustaining, vibrant community would exist by now, but Zcash isn’t there yet. The community didn’t prepare well enough, and so now we’re left scrambling.

But scramble we must. If we want private digital cash to be used by millions of people, we need to work these problems out. In the rest of this article I will do the following:

Summary of the Status Quo

Let’s take a deeper look at what information is available. All the relevant public blog posts by the ECC and ZF are listed below for completeness.

ECC: [1] [2] [3] [4] [5] [6]

ZF: [1] [2] [3] [4]

The ECC and ZF have made some financial information available. Note that since the ZF is a registered 501(c)(3) nonprofit, you may request a copy of their 990 at any time. Here’s theirs from 2017. Notably, both organizations are most likely running at a loss (versus block reward revenue) as shown in the image below. Furthermore, to sustain the same burn rate from 2020–11 to 2024–11, the ECC and ZF would need 19.56% and 4.81% of the block reward, respectively. It’s a tall order compared to 0%. If these percentages are allocated, miners would see their ZEC rewards fall by 53% next November (compared to 37.5% with no dev fund).

Of course, this is highly variable with the price of ZEC. The likelihood that 1 ZEC = $50 in 5 years is unlikely. However, it’s also rash to assume that the price will increase significantly to make up a shortfall. Such thinking is most likely to end in disaster. Remember that the Zcash inflation rate is still high, currently over 30% per year. If the total market cap stays the same, 1 ZEC will be worth less than $50.

The reality is this: at current ZEC prices, the operating budgets of the ECC and ZF will need to be slimmed, or they will need a large percent of the block reward. There’s no way to say this easily. Increase taxes or reduce spending.

The Zcash Community Is at a Negotiation Disadvantage

All parties need to choose a number that’s reasonable, even if that number is zero. However, the ECC in particular is at an advantage in this negotiation.

The community is a disorganized, decentralized, and broad set of stakeholders. There’s no official community representative to talk to (nor should there be)! Meanwhile, the ECC is an organized, centralized company with an internal decision-making process. As a result, there is a huge information asymmetry wherein the community is being asked to step up and make a decision without understanding the whole picture.

The ECC won’t confirm the current burn rate, which they expressed desire to increase to $1,100,000/month. They won’t share possible budgets and broad plans of what they could accomplish with varying levels of funding. I don’t know the answer to “if you only received $250,000/month, what could you do with it?” or “at what monthly revenue would the ECC pivot away from maintaining the Zcash ecosystem?” They have yet to comment more than a sentence or two on the outstanding proposals, and they have not clearly indicated where these thresholds are. We can’t make better ZIPs without these. Talking about arbitrary percents is useless if we don’t know how they materially impact operations.

I’m not necessarily asking for the ECC to publish everything in the open. They are a private company who should be allowed to protect some of their financial information. However, the ECC is asking the community for funding without the community being able to effectively determine how much the ECC should receive.

Sarang Noether, researcher at the MRL, shared this analogy on the Zcash forum, which I largely agree with:

If I need to buy a car, I’ll go to the only dealer in my town that sells them. The dealer tells me that the Fancy Car is 100 Sarangbux (which is a lot). I tell him that I’m not sure if I need all the fancy things in the Fancy Car, and might be interested in the Pretty OK Car next to it. If he refused to tell me what any of the other cars cost, or what their features are, until I gave him an irrevocable amount of Sarangbux, I’d say he was mad and storm off to find another dealer in another town.

Yes, ECC is a private company, but it’s trying to operate in an open-source world. All the cards should be on the table here, and it seems nuts to be throwing around specific percentages of block rewards without knowing what value that would provide to the community going forward. This sort of thing should precede any informal or formal decisions.

In this analogy, the “dealer” is the ECC, and the “cars” are different levels of ecosystem support. The community should have the tools it needs to make a proper assessment on how much to allocate to the ECC (if any). The dealer is incentivized to sell the nicest cars, but maybe we need a more value-focused car right now. The dealer shouldn’t choose the car that the consumer buys, or ask for a blank check before describing what those checks would be in exchange for. Not everyone wants to pay for Lambos and Teslas :P

I sat right here and said I didn’t want any TruCoat!

This analogy isn’t perfect of course, but I personally feel it’s a great way to get the point across. The ECC provides a lot more public information than most companies, but it also is also asking more of the community. The community has every right to demand certain information and to set accountability standards before releasing funds. Unfortunately, the decentralized nature of the “community” means this type of negotiation is unlikely. Who in the community could demand certain information? The ECC would need to surrender it voluntarily, which it has not yet done.

It’s worth mentioning that the ZF has stated that they want fund-receiving entities to publish some financial documents and roadmaps, among other criteria “at a bare minimum.” I agree with the ZF’s push for accountability requirements, and I think these are reasonable. I do not necessarily agree that funding must only go to nonprofits directly, especially since “nonprofit” is a weak term in this context.

A Third-Party Solution Makes the Most Sense to Me

I have spent the last several months organizing Zcash community calls and otherwise participating in this block reward discussion. There is no proposal that will satisfy everyone. It won’t be perfect. But we need to take our best stand to give Zcash its best chance. In my opinion, setting up a flawed third-party solution that negotiates funding with the community and other entities is the best chance we have.

To those who know me mainly as the organizer of the Monero Community Workgroup, you may be extremely confused why I am proposing this. I love the decentralized nature of Monero and its Community Crowdfunding System (CCS). However, Zcash isn’t there. If I felt that Zcash’s community could support this type of arrangement, I absolutely would support this more decentralized funding model. However, I think it’s more likely that the Zcash community would crumble under the acclimation pains as they were adjusting to a donation model for the first time and quickly collapse. I completely agree with the ideal of not having block rewards given to a specific entity, but Zcash can’t survive without this. Better luck in another 4 years.

As I mentioned however, I absolutely oppose the idea of the ECC and ZF choosing to increase their funding without proper community involvement. If there is no reasonable means of assessing what this looks like, by default nothing should happen. I’d rather see the ECC and ZF go without block reward funding as they await a better community consensus model. Otherwise, they’re receiving funds that they effectively stole without consent. That’s bullshit and I wish nothing but the strongest regulatory enforcement should that happen. They are not entitled to these funds, and the community should only offer them if they feel it’s the best for the ecosystem.

We need some way to reasonably represent the wills of the Zcash community. There will be downsides, limitations, imperfections, etc. But it’s our best way of handling the situation in my opinion. If the community looks up at this legitimate attempt to reasonably represent their views which should hopefully improve over time, that’s a win.

Unfortunately, the devil is in the details here, and this post is already too long to provide many details. Rest assured that I am drafting another post outlining these. This will be a long, open dialog to make sure that the community is putting our best foot forward. However, I ask that all stakeholders please view imperfections as areas of improvement that I will make it my mission to address. If every limitation is treated as an indisputable barrier, then this proposal will forever be held in a bureaucratic holding pattern. We would instead need to choose between the ECC and ZF having no future block reward funding or allocating funds to themselves without appropriate community consensus. The alternatives are bleak and we need to act.

For this third-party model, I am building heavily off Avichal Garg’s ZIP proposal. I strongly recommend you read it.

In short, the “strategic council” is a group of five board members elected by the community. They determine how to allocate funding to “executing entities,” which could include the ECC and ZF. Ideally, this organization would be best suited to represent the community’s wishes while efficiently interacting with any number of entities who would make a case for funding. The relationship between the strategic council and executing agencies would be closer to a VC-startup relationship than the current community-ECC/ZF relationship.

I’m sure you have a million questions about how the council is selected and what powers they have. These are critically important questions, and I hope that you can help us come up with the most ideal system possible. Look for a more detailed proposal soon, but I fully expect to support this governance initiative going forward. I would love to hear your feedback on this post, and I hope you remain optimistic that this difficult Zcash governance decision can be made reasonably well despite the circumstances.

Twitter: @JEhrenhofer

Disclosure: I do not receive and have not ever received a portion of the Zcash Founders’ Reward.

I never got around to making a second article.

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