Note: This letter was written as a response to the intense conversation that was initiated and is being driven by members of the Zcash community, starting with mineZcash, Gareth Davies, Aristarchus, et al and joined by an increasing number of other community members. If you’re not following the Zcash community very closely then this might be the first you’ve heard of it, but they’ve been working on it for months. They are the ones who are serving the Zcash mission by driving this discussion.
It’s an exciting time for the Zcash community! The Zcash community is currently having a major conversation about what to do ahead of October 2020, when the first halvening occurs and the Zcash Founders Reward ends.
I hope that the community will decide to renew the “Dev Fund” structure, allocating coins from future block rewards for core support functions such as software development, user support, business development, regulatory and government outreach, security auditing and monitoring, educational and marketing initiatives, new protocol development, and so forth. And, I hope the community offers to hire the Electric Coin Company to do that work. But it is far from certain that the outcome from this process will be what I personally hope.
Here are my thoughts about what I personally — and we as the Electric Coin Company — can do to support this process.
First, a quick backgrounder for people who may not have followed all the details:
The Story So Far
Unlike an “ICO”, in which a project raises a bunch of money from the public on the promise of delivering future results, Zcash followed a very different model.
Funding the Launch (2015)
The Zcash project was originally funded by a group of professional investors who put in a total of $3 million to fund the creation of Zcash. Zcash was designed to follow the same issuance schedule as Bitcoin — issuing 21 million coins in total — half as many coins in each four-year-long period. We agreed that during the first 4 years, 2.1 million coins (that is, 20% of the 10.5 M coins issued during that period, which is also 10% of the 21 M coins ever to be issued) would be distributed to the founders and the rest distributed to Proof-of-Work miners.
In return for their $3M, we agreed that the investors would receive a small fraction of the Electric Coin Company’s equity (much too small of a slice to give them any control over the company, by the way), and with that equity they would receive rights to a small slice of the Founder’s Rewards coins, to be paid out to them over the course of the first twelve months of the coin’s existence.
This initial bootstrap structure was a success: we delivered Zcash 1.0 on time and under budget in October of 2016. I’m extremely proud of our team for both inventing break-through protective technology and simultaneously delivering a live, secure system that has survived years of active attack in the wild while delivering around ten billion of dollars of transactional value for its users. There are few other teams on earth that can claim this kind of achievement — either within the cryptocurrency industry or any industry, and probably none that have accomplished something like this on such a small initial budget. And, this was only the first of many wins for our team.
Because, in addition to the initial bootstrap structure, we had also made a plan for ongoing development. Nathan Wilcox (the company’s co-founder and CTO) and I decided to have ECC buy a small share of the founders rewards back from some of the founders so that those coins would be used for funding ongoing operations instead of distributed to founders. That share was called the “The Strategic Reserve” in our original blog posts, but that is a confusing name because it turns out that money wasn’t held in reserve, it was used to fund ongoing operations! So I sometimes refer to that share of the coins as “The Dev Fund”.
At the same time, a couple of the founders including me pledged to donate a portion of their founders rewards to fund a new non-profit charity — The Zcash Foundation. The vast majority of the coins for the Zcash Foundation are due to a pledge from myself and my family. I pledged to donate more or less half of all of the wealth I ever expect to see in this world to create the Zcash Foundation. We decided to do this because we thought that having an independent entity from the Electric Coin Company would be an important part of the Zcash community’s decentralization and stability in the long run. Having two independent organizations working for you is a lot more resilient than having one. Therefore, we made Zcash Foundation wholly independent of me and outside of my control.
Focused Delivery and Execution (2017–2019)
Meanwhile, back at Electric Coin Company, using the Strategic Reserve/Dev Fund, we continued to support and improve Zcash. With that funding, we developed and launched Zcash “Sapling”, in which we made another advance in fundamental computer science. Some of the technologies we pioneered in Zcash “Sapling” are now becoming the global standard for zero-knowledge proofs, not only in the cryptocurrency industry but in every industry. Along the way, we discovered and fixed a critical mistake in the underlying computer science which — if it had not been caught and corrected in time — could have harmed not only users of Zcash but also users of other applications built on zero-knowledge proofs.
At the same time as advancing the science and the core protocol and supporting more and more users of the software, we also invested in extensive government outreach, business development, and educational projects around the world. We made the strategic decision to invest heavily in educating regulators about this new technology, how it is compatible with existing laws and regulations, and how it can protect individual security, corporate security, and national security.
This resulted in United States regulators officially approving Zcash as one of only a handful of approved cryptocurrencies, and Zcash being listed on Gemini and Coinbase, as well as Zcash being supported in almost every one of the biggest and best exchanges, wallets, payment processors, and other such products around the world.
A Positive Alternative For Society (2019)
Most importantly, this unique combination of successful scientific innovation and government outreach has given us a unique opportunity to present a working example of a positive alternative for society. In every nation on Earth, society is currently convulsed by a crisis of run-away information technology. The current model in which everyone in the whole world is vulnerable to Facebook and whoever can exploit them is no longer considered tolerable. Alternative models that are being pushed, such as the model in which everyone in the world is vulnerable to the Chinese Communist Party or everyone in the world is vulnerable to the United States Department of Justice are not going to solve our problems.
Zcash demonstrates that a better model is possible, in which people are protected by their products and services instead of endangered by them, and which fits laws and regulations, and honors the great American traditions of civil rights, free enterprise, trustworthy institutions, and the rule of law.
(I say that because I’m an American, but Zcash is — of course — a global technology that serves the needs and the values of all peoples.)
Our work is far from done. A great work is never done. We are currently in the midst of helping our business partners world-wide upgrade their users to the newer protective technology, and in the early stages of developing yet another scientific breakthrough — one that will allow decentralized networks to — for the first time — scale up to being able to serve all people on Earth without compromising their safety or their sovereignty.
The Costs Of Core Support Functions
As of May 2019, the Strategic Reserve/Dev Fund, plus the coins that were being distributed to active employees of the Electric Coin Company added up to about 4% of all the coins issued per month. Thanks to financial prudence on our part plus a bit of luck, we were able to come through the Great Bear Market of 2018 without having to do any layoffs — unlike many others such as Ethereum Classic, Dash, Steem, SpankChain, ShapeShift, Consensys, and countless others (layoffs article 1, layoffs article 2).
However, during the Bear Market, as the price of ZEC hovered around $60/coin, that 4% proved to be inadequate, and we went back to the founders who own the equity in the Electric Coin Company and negotiated a dilution agreement in which fewer of the coins were distributed to them and more were used for funding operations. That new agreement kicked in in June of 2019, and as of now about 8% of the monthly issuance is going to fund operations and to compensate active employees.
We’re currently focusing on hiring great people to fill critical roles in the next stage of our mission (see our hiring page!) and ramping up our team. It will probably take six to twelve months to build our team up to full power and velocity using our current funding from the blockchain.
The Decision Facing The Zcash Community
The Founders Reward/Strategic Reserve/Dev Fund structure was designed to last for four years. I figured that this would probably be enough time for the Electric Coin Company and the Zcash Foundation to get the Zcash project off the ground. In conversations with Andrew Miller (then a key architect of the project, now the Chair of the Board of the Zcash Foundation) at the time, I compared it to the “booster stage of the rocket”.
I knew that if the booster stage of the rocket were to succeed, that the work would not be done! Major breakthroughs typically take about ten years to reach maturity. Any great innovation always needs more work as it gets more and more users and becomes more important to their lives. We talked about defining a perpetual Dev Fund into the initial consensus rules, but I thought that, given enough years or decades, any organization that received a perpetual fund would be in danger of falling into complacency or corruption, so I opted for the initial Dev Fund to sunset itself, so that in the future, if Zcash were a success and a community were to grow up to support it, that community would have to collectively decide what to do next.
Now is the time for that decision. As Placeholder Capital expertly summarized, the options include sending 100% of new issuance to the miners, creating a new Dev Fund using a portion of new issuance, or other alternatives.
We chose to make the initial Dev Fund time-limited on purpose, so that we could get the ball rolling without trying to solve the “100 year governance problem”. We knew that if we succeeded then we would, in four years’ time, undergo a difficult and messy decision process. That’s healthy and expected. The complexity and noisiness of the debate in the Zcash community right now is a good sign.
Here are my current thoughts about how the company and I can support the process. But first, what we can’t do:
It’s Not Up To Me
I can’t make this decision for the community. When we initially set up the Zcash project years ago, I set the shape of it in consultation with many others, including Nathan Wilcox, Andrew Miller, Matthew Green, Naval Ravikant, and many, many other people that I consulted.
I set the shape of it, but the Zcash community breathed life into it. For example, remember when I said that I pledged more or less half of all the wealth that I ever expected to see in the world to found the Zcash Foundation? Well, I did that, but you know what? Those coins were worth nothing at that time. So in a sense, I pledged half of nothing. The same goes with the rest of the Zcash structure. I decided that the Founder’s Reward would be 20% of the first four years of issuance. That was 20% of nothing.
All of the value of issuance comes from coin-holders. It is only because the Zcash community chose to start using and valuing ZEC that the miners and the founders received their rewards and that the Strategic Reserve/Dev Fund and the Zcash Foundation got funded.
All of the value of issuance comes from the coin-holders. All of the value of issuance comes from the coin-holders.
I chose the shape of it, but the community made it real.
That worked for the first four years of Zcash, but for the next four years, the time has passed for that process. This time around, the community is going to have to set the shape of it.
This Isn’t About ECC
This decision isn’t about the Electric Coin Company. If all of the employees of the Electric Coin Company were to board the same airplane tomorrow to go to an off-site meeting, and that plane were to crash with no survivors, the Zcash community would still be facing the exact same choice: shall we use some of the tens of millions of dollars that we’re spending on issuance every month to fund core support functions like protocol development, software support, security auditing, government outreach, educational initiatives, and business development, or shall we instead send 100% of that money to miners?
What The Electric Coin Company and I Can Do To Support the Process
Inform and Advise
We can tell you what we’ve learned so far, such as the costs of the work we’ve done so far, the results we’ve gotten from various efforts in engineering, government relations, business development, educational outreach, etc. This is why we’ve redoubled our already extensive transparency.
I think the single most reliable data point that the Zcash community has to go on is what ECC has accomplished on various initiatives and what resources that has required over the last few years. This is useful both as the best prediction for the future performance of ECC itself if the community is considering hiring ECC again, as well as a good data point for what another similarly skilled team could accomplish, and how long it would take and how much it would cost.
I can also tell you what I think would be the consequences of various funding alternatives. We at ECC have a lot of knowledge of the Zcash ecosystem — the operations of our current and potential business partners, government and regulatory developments, upcoming scientific and technological developments, etc. etc. — that we can use to form assessments of the proposals the community has submitted. Within the next few days, ECC will publish a blog post about how we will assess proposals.
Implement the Community’s Decision In Software
We can offer to develop, security-audit, test, and distribute the software upgrade to implement whatever the community decides. This will be true even if that decision is to defund ECC, or to defund core support functions entirely, in which case we won’t be able to provide on-going support for the software ourselves in the long term. However, we currently have enough of a financial footing that we can offer to implement, security-audit, etc. in order to support the software through the transition.
Honor The Community’s Decision with Trademark Support
ECC is currently the owner of the trademark on “Zcash”™, the golden-Z logo, and so on in a lot of different countries. We’ve talked with the Zcash Foundation about entering into some sort of power-sharing agreement with them on the use of the trademark, but as long as we’re the sole owners of the trademark, we can support the process by using the trademark to compel exchanges and other third parties to use the name “Zcash”™ only for things that honor the community’s collective decision.
If the community unambiguously chooses a path that defunds ECC, or defunds core support functions entirely, then we can use the trademark for things that support that. If ECC is defunded, we will not be able to continue to develop and defend the trademark long-term ourselves, but we can at least make sure that it is applied correctly during the transition, and then we can work toward some solution for long-term stewardship of the trademark.
On the other hand if the community chooses to continue to fund core functions, then we’ll use the trademark to make sure exchanges and others honor that decision.
It will be very difficult to assess the community’s collective decision, since the community is very large, diverse, anonymous, international, etc. No method of assessing collective decision-making will satisfy everyone. Nonetheless, it is our responsibility as the wielders of the trademark to do so to the best of our ability and to honor the community’s decision.
Offer Ourselves As Candidates For the Job
As long as ECC still exists, and as long as you — the Zcash community — offer us the kind of funding necessary to do this job, we’re offering to take the job. We love Zcash, we’ve dedicated our lives to it, and we have the best track record in the industry.
Elevate and Amplify Your Voice
If you own any ZEC, if you are a developer or entrepreneur who uses or is considering using Zcash, if you are a supporter and advocate for a better alternative for your society, then your voice has value in this conversation.
There are plenty of public threads happening, on the forum, the community chat, reddit, twitter, medium, etc. that you could join. If you are not comfortable speaking up in public, or even if you are, please also send email to email@example.com telling us what you think. We will read all email sent there, anonymize you, and report to the rest of the community what you told us.
Finally, the Zcash Foundation has said that they are going to publish a community decision procedure soon. I ask you to stay tuned for that and then to try to contribute to that process.
I’m so excited about the future of Zcash! We’ve come a long way together, and this is only the beginning of our collective contribution to humanity’s future. With any luck, we can build a better world for our children’s children.
Whether this particular community decision goes the way that I hope or not, I will always be grateful to you all for making Zcash real.
(Thanks to Richard Renno for help with the images and formatting.)