Blocktown Proposal for Zcash 2020 Network Upgrade

By James Todaro, MD and Joseph Todaro

This serves as Blocktown’s proposal for Zcash’s fourth network upgrade (NU4). Last week we published a Full Report and Executive Summary supporting our selection of a 10% allocation of the miner’s reward for a “Development Fund” that will go into effect after the halving in October 2020 and replace the soon to be terminated 20% Founder’s Reward (FR).

Proposal for a Development Fund — not a Founder’s Reward

For the past 3 years, the majority of the 20% fee taken from the miner’s reward was allocated to early investors and vested employees in a “Founder’s Reward.” This was compensation for those who took either time and/or monetary risk on Zcash without knowing if Zcash would capture value or even successfully launch. The FR is hardcoded to terminate at the time of the first halving in October 2020.

We are in agreement with the vast majority of the community when we advocate termination/no extension of the Founder’s Reward at the time of the first halving. That is, the Development Fund we propose for NU4 does not allocate a single dollar to angel investors, VCs or vested employees. We consider that debt to be paid in full by October 2020.

TLDR

The NU4 Development Fund will be strictly allocated toward the advancement of the Zcash network and ZEC currency, and not for the enrichment of equity investors, VCs or vested employees.

10% allocation toward Zcash Development Fund

For reasons articulated here, an allocation of 10% of the miner’s reward toward a Zcash Development Fund — instead of 20% or 0% — will unite the community and provide sufficient resources for continued development while maintaining the network security and decentralization characteristics of bitcoin. This proposed 10% allocation would be hardcoded in the Zcash codebase for the approximate years 2020–2024 (period between first and second halvings).

A Development Fund of 10% will set a precedent for a more mature “social contract” whereby the allocation toward a Zcash Development Fund rapidly decreases every halving. We believe that this is superior to extending the 20% allocation that is currently in place. If a 20% allocation is integrated in NU4, there would be an 8-year precedent of a FR/Development Fund at the same rate. Eight years in cryptocurrency is nearly the entire lifespan of bitcoin. Another 4 years at 20% will likely result in part of the community coalescing around a social contract of a perpetual 20% allocation toward a Development Fund while alienating a significant minority of the community. Most agree though that a perpetual 20% allocation is not suitable for a decentralized, privacy-centric cryptocurrency such as Zcash.

We want to re-emphasize that our proposed 10% allocation would be hardcoded in NU4 to terminate by the second halving in 2024. It will be up to Zcash’s decentralized governance model to reach consensus on additional funding as the second halving approaches. Nevertheless, following the precedent of halving the percent allocation, every halving event could result in the following Zcash Development Fund timeline:

• 2016–2020: 20% (FR)
• 2020–2024: 10%
• 2024–2028: 5%
• 2028–2032: 2.5%
• 2032–2036: 1.25%…

TLDR

We propose that 10% of the miner’s reward should be allocated to a Zcash Development Fund in NU4. This allocation will be hardcoded to terminate at the time of the second halving in 2024.

Zcash Foundation and Electric Coin Company

The Zcash Foundation (ZF) and Electric Coin Company (ECC) are best positioned to advance development and exposure for the Zcash network over the next several years. We propose allocating the entirety of Development Fund to the ECC and ZF.

As the ECC and ZF mature with dedicated funding, it is likely that their missions will evolve over time. For this reason, it is not reasonable to formally decide today exactly how the funds will be divided between both entities (e.g. 70/30 split). Nevertheless, during Zcash’s infancy, we do attribute greater importance to advancing protocol development, which supports a greater proportion of funds allocated to the ECC. We hope though that the ZF and ECC will work synergistically toward the shared goal of increasing value capture of the Zcash network and ZEC currency as greater clarity on the division of resources develops.

TLDR

The entirety of the Development Fund should be allocated to the ECC and ZF.

Decentralized governance

Sound money should be resilient and resistant to change. This has been one of the most important characteristics of the Bitcoin network — effectively resisting any increases in block size or coinbase cap.

In his article on governance Zcash Governance: A Step Toward Decentralization, Josh Cincinnati provides an insightful analogy between decentralized governance and American democracy. With a largely 2-party system — Democrats and Republicans — , power in the American democratic system is divided such that radical changes are effectively vetoed by the opposing party, much to the frustration of passionate constituents in either party, but likely for the good of the entire democracy.

As an American, I’ll be the first to admit that we have political problems, but the law grinds slowly for a reason. Systems that can be changed suddenly or drastically are risky in multiple ways, and especially dangerous if a tyrant can gain control.

-Josh Cincinnati, Executive Director, Zcash Foundation

We agree that 2-of-2 multisig consent by the ECC and ZF for changes to the Zcash protocol is superior to 1-of-1 consent. That said, the alternative 2-of-3 multisig consent is another viable option gaining traction in the community with the advantage of offering a “tie-breaker” in the event of an impasse or deadlock. Prior to creating a formal ZIP, we are open to further discussion on these two viable options.

Over time, more sophisticated and complex solutions for greater decentralization may emerge, but for now this division of power should be sufficient while reducing any unforeseen technical or fragmented consensus risks.

TLDR

Decentralized governance for changes to the Zcash protocol should be made in either a 2-of-2 multisig consent by ECC and ZF or a 2-of-3 multisig consent between the ECC, ZF, and a third entity (to be specified at a future time).

Issues and Discussion

This proposal is not in accordance with the current Zcash protocol, which is currently programmed to allocate 100% of the coinbase to miners indefinitely upon the first halving in 2020. However, at least during Zcash’s infancy, we believe it is advantageous to have a funded and dedicated development team.

On the other hand, likely because the original Founder’s Reward was set at 20%, a number of proposals have also chosen 20% as the allocation for the new Development Fund. For reasons we have explored in depth here and summarized here, we believe 10% instead of 20% is superior for network security, decentralization and uniting the Zcash community.

Conclusion

Herein we outline a proposal for 10% of the miner’s reward to be allocated toward a Zcash Development Fund after the first halving in October 2020 that will terminate by the second halving in 2024. Funds would be allocated to the ECC and ZF. The two viable options for decentralized governance are either 2-of-2 or 2-of-3 multisig consent between ECC, ZF and potentially a third entity.

Of course, prior to formalizing a ZIP, we welcome all feedback and assistance from the Zcash community and other interested parties!

Disclaimer

The managing partners of Blocktown Capital do not endorse or recommend any investment action in Zcash or ZEC. This document should not be regarded as investment advice. The managing partners of Blocktown Capital own ZEC. These views are those solely of the managing partners of Blocktown Capital and do not represent the views of the Zcash Foundation or Electric Coin Company.