Zcash (ZEC)
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03 февраля 2020

Decentralizing Zcash

“All networks that claim they will ‘decentralize governance later,’ will have to walk a similar path to the one Zcash’s been walking.” – Chris Burniske

Funding public goods is hard. Funding an open-source zero-knowledge proof cryptocurrency is even harder. This is the new spin on the classic commons issue facing Zcash (ZEC).

Beyond the challenges of funding research & development at the cutting edge of cryptography, Zcash must also balance higher-order concerns regarding the long-run distribution of wealth and power that may result from early governance decisions around the project.

At inception, Zcash implemented a novel development funding scheme called the Founder’s Reward. The Founder’s Reward is a mechanism built into the Zcash protocol that allocates 20% of Zcash’s block reward (10% of the terminal supply) to the project’s founders over the first four years of mining. It exists to provide continued resources and incentives to the founders building the Zcash project.

Zcash launched in 2016 and the founder’s reward is set to expire this November when the network undergoes its first halving. Yet, the Zcash project is far from complete and there’s still plenty of work to be done.

Seeing the writing on the wall, a Zcash community member named mineZcash kicked-off discussion about long-term funding on the Zcash Community Forum in January 2019. The post laid out numerous outstanding questions for the project and the need to begin thinking seriously about its future.

Zcash Governance Discussions

Since the January 2019 post, the Zcash community underwent an intense year-long process to deal with the most pressing issue facing the project: how do we continue to fund the development of Zcash while distributing power more widely across the ecosystem?

Zcash has reached a handful of important resolutions over the past year: - The Zcash Foundation (ZF) and Zcash community assumed a larger role in the project’s ecosystem, tilting the balance of power away from the Electric Coin Company (ECC) - The ECC successfully transferred the Zcash trademark to ZF, further diluting its control and influence over the project - The Zcash community achieved consensus over the developer reward for the next four years, reserving the largest portion of it for third party development While nothing is final until the Zcash community ratifies the decision by opting into Zcash’s Network Upgrade 4 in November, the latest poll results released January 28 now form consensus over developer reward allocations. Under the current proposal, the developer’s reward will remain at 20%, with 35% of it going to the ECC, 25% to the ZF, and 40% to third party grants. The only outstanding item the community needs to agree upon is whether the ZF should have independent authority to verify grants or if a new grant review committee should.

Funding the ECC Central to the development reward discussions was continued funding of the ECC. While it would be great for Zcash to not need to rely on the ECC for protocol development, the ECC is one of the only organizations on earth capable of doing so. The Zcash protocol is so complex that when the ECC disclosed an inflation bug in the Zcash protocol in February 2019, they defended their lack of urgency revealing it with, “discovery of the vulnerability would have required a high level of technical and cryptographic sophistication that very few people possess.” Simply put, the ECC is integral to Zcash development.

Between a depressed ZEC price and uncertainty surrounding developer reward allocations, the ECC and the broader Zcash community were unsure how the ECC would be able to fund itself post-halving. While the latest poll results provide certainty on how much ZEC the ECC will now receive post-halving, it remains unclear whether funding will be enough. Despite ZEC’s dramatic 143% price increase to start the year, at current ZEC prices, the ECC will need to dip into its cash reserves to fund operations with its current expense profile. Luckily, the ECC has a healthy cash balance and is currently running at a surplus. As of it’s latest transparency report released in Dec. 2019, the ECC held $4.4 million in USD and ZEC. Given its monthly surplus, assuming the ZEC price stays steady from now until the November halving, the ECC’s cash balance will grow ~$0.7 million to $5.1 million.

Without giving the ECC the additional benefit of an even further strengthened cash position due to ZEC’s recent price run, it would have just over a 27-month runway post-halving assuming a flatlined ZEC price and expense profile. In other words, at current ZEC prices, there is little cause for panic. Such a runway is common for startups.

However, in reality, the ZEC price is everything but stable. The market can turn against ZEC at any moment. Thus, we look at the ECC’s runway under a bear case scenario where ZEC falls back to its all-time lows post-halving. It should be noted that this model overstates the runway considering part of the cash balance is in ZEC to begin with. Still, under this scenario, the ECC has just over 11 months of runway before it would need to look for alternative funding sources or cut costs.

The situation here is that the ECC is basically being paid in the startup equity of another entity - the Zcash protocol. Yes, ZEC is not startup equity, it’s money, but its risk-reward profile is just like it. It’s worth a lot if it succeeds and nothing if it fails.

This dynamic is great for aligning the ECC’s long-term incentives with the Zcash ecosystem, but problematic for running a business. There’s a good reason why in the traditional startup realm there’s a difference between the asset you pay the bills in and the asset that incentivizes wealth creation.

Financial planning with volatile cryptocurrencies is incredibly difficult. With ZEC denominated funding, the company’s expense profile may end up behaving like an accordion.

The Path Forward Nevertheless just as there are bear cases, there are also bull cases. The ECC is just a 40% ZEC price increase away from reaching breakeven. Furthermore, without the funding cap as decided by the latest developer reward poll, the ECC may find itself with an abundance of funding if another bull market kicks off. This would allow it to recruit more talented employees and profit from growing the Zcash pie.

Perhaps even more important though is the fact that the latest developer reward proposal reduces reliance on the ECC anyways. With over 65% of the developer reward going to the ZF and third parties, the Zcash community has paved the path towards a future less dependent on any specific entity.

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