Executive Summary: Blocktown Proposal for Zcash 2020 Network Upgrade
By Joseph Todaro and James Todaro, MD
Our in-depth proposal is available here.
Bitcoin introduced the world to the liberating properties of a decentralized, censorship resistant, sound money. The creation of censorship resistant money is inextricably linked to privacy. In our opinion, Zcash has achieved a level of unparalleled privacy. In the upcoming weeks, the Zcash network faces a critical decision regarding the expiration of its “Founder’s Reward.”
We propose a continuation of the Founder’s Reward, albeit marked by a reduction from the current 20% allocation of mining rewards to a more modest 10% allocation. We believe this will afford continued development of the Zcash network while simultaneously strengthening the ZEC currency itself with greater censorship resistance and community unity.
Censorship Resistance, Decentralization and Network Security
Money laundering, black market activities and terrorism are common regulatory talking points that put privacy-centric currencies like Zcash in the crosshairs of governments and institutions. Prohibition of privacy-oriented currencies will likely tighten with growing adoption. To withstand this pressure, Zcash’s greatest strengths are its decentralization and network security.
The Founder’s Reward weakens both decentralization and network security. It should be minimized and not utilized to sustain a bloated budget — a practice that is rampant in early stage companies flush with funding.
Bitcoin has survived because it has no central point of failure. The Zcash network must strive to operate as closely as possible to the proven network effects that allow bitcoin to flourish. A large foundation with continual, algorithmically driven funding over 4 years is an attack vector. The Zcash Foundation and Electric Coin Company (ECC) are central points of failure vulnerable to subpoenas, indictments and regulatory attack.
Chain security is equally important to maintain censorship resistance. Bitcoin allocates 100% of the coinbase rewards to miners — making bitcoin the most secure and resilient PoW chain. Zcash currently allocates only 80% of rewards to miners.
Over the next 5 years, we could see Zcash move from an experimental blockchain project to an established means of privately storing wealth and transferring value. With this expansion of economic utility, pressure will come from regulators and institutions alike as they lose the ability to monitor and control the movement of wealth. Aggressive regulatory attack is a likely outcome and could manifest itself in a 51% attack if mining rewards are too low. We believe a continuation of the full 20% Founder’s Reward unnecessarily weakens Zcash network security and departs too greatly from the proven bitcoin mining reward model.
Projected Value of Founder’s Reward
As of August 2019, the cumulative Founder’s Reward is estimated to be 1.4M ZEC, which, if sold on the corresponding days it was received, aggregates to 250M USD. At today’s low ZEC price of 55 USD, the Founder’s Reward still amounts to 80k USD daily or 30M USD annually.
Current State of the Market
ZEC has been one of the worst performing large cap digital assets in 2019 — vastly underperforming bitcoin and most large cap altcoins, including privacy coins Dash and Monero. Sentiment for ZEC investors and the Zcash community is likely near an all-time low. We must be cautious making projections on the USD value of an extended Founder’s Reward at such a time.
It would be a mistake to make projections on the USD value of the Founder’s Reward based on the speculation that the exchange price of ZEC will remain in the vicinity of 50 USD over the next 5 years.
Bitcoin’s history has shown us that a decrease in the USD value of mining rewards after halvings is short lived. Actually, USD denominated rewards are often magnitudes higher merely a year or two after halving events (Figure 4).
A magnitude peak increase of 10x for ZEC from present value within the next 5 years would result in a 10% Founder’s Reward valued at a projected 37M USD annually and aggregated sum of 150M USD.
While the efforts by the Zcash Foundation and ECC this past year — specifically in research and development — deserve applause, we find recent expense reports released by the Zcash Foundation and ECC concerning.
In late 2018 and early 2019, most blockchain and cryptocurrency companies dramatically downsized operations. While operating at a loss, the Zcash Foundation and ECC, increased operations and expenses during this time. We are concerned that this spending behavior is reminiscent of that of state departments and governments. That is, a nation state will be spiraling into debt, yet state departments rapidly exhaust resources near spending deadlines in order to justify budget renewals/increases and avoid spending cuts.
It is the community’s responsibility to ensure that this behavior does not plague the Zcash Foundation and ECC at the expense of network decentralization and security. Decreasing the Founder’s Reward to 10% would be a step in the right direction.
A sustainable social contract is critical for decentralized projects. We agree that Zcash will benefit from a continued source of funding dedicated toward development of a young, evolving cryptocurrency. However, we also believe that this social contract should set a sustainable precedent. If the social contract is such that the Founder’s Reward is simply extended at its current rate of 20%, then the precedent for future halvings will be set for a perpetual extension of the Founder’s Reward at this rate. Most of the community agrees though that an indefinite 20% reward is inappropriate.
By decreasing the Founder’s Reward to 10%, the precedent is set that the Founder’s Reward is not indefinite and will rapidly decrease over the next decade.
In an environment where governments and banks are increasingly hostile to privacy-centric cryptocurrencies, decentralization and network security need to be strengthened as opposed to weakened. An extended Founder’s Reward comes at the cost of decentralization and chain security, and should be minimized as much as possible.
We propose a decrease in the Founder’s Reward from 20% to 10% of the miner’s rewards. Zcash price appreciation over the coming 5 years should mitigate concerns regarding development funding. Furthermore, this proposal could offer greater consensus by uniting the Zcash community with a compromise between terminating the Founder’s Reward altogether and extending the full 20% reward. The outcome would be a stronger community and social contract, increased network security and decentralization, and greater adoption for the Zcash network.
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 — although we hope they will agree with this proposed course of action.