The impending funding crisis that threatens Zcash

The clock is ticking.

The second-largest privacy coin by market cap, Zcash, has a built-in deadline. The mechanism that pays out 20 percent of the block rewards to people and entities tasked with developing the coin—including the Electric Coin Company (ECC) and the Zcash Foundation—is set to disappear. That occurs when the 570,000th block is mined and the new supply of coins is halved (known as the halvening), around November, 2020.

Zcash was created by a team that included privacy advocate Zooko Wilcox, who wanted a cryptocurrency that was as anonymous as cash. That’s long been a dream of the cypherpunks, who saw the rise of the commercial Internet and worried about the loss of privacy around their transactions. Unlike bitcoin, which can reveal a user’s identity via transactional information, Zcash uses zero-knowledge proofs to hide user data from the public domain.

By design, the community needs to figure out a way to maintain itself. But curiously, there’s no governance mechanism in place that would allow its members to reach consensus, so finding a way forward will be especially challenging.

A sense of urgency has slowly been spreading through the Zcash community. It began in January, when the moderator of the Zcash Community Forum—which appears to be the only place community members can reach some sort of accord—started a “Future of Zcash” thread to discuss next steps.

“I think it’s critically important that we start talking about these things now while we have time to work together to come up with a plan,” the moderator, whose name is given as “Shawn,” wrote. Who controls the Zcash Github repo, he asked. Does Zcash have enough devs to continue maintaining its code? What happens to the Zcash trademark, which backs the eponymous currency itself?

These questions were very much on the minds of people attending the annual Zcon1 conference in Split, Croatia this weekend.

In general, zCash has two options. Either the community can decide to continue some sort of funding and keep the current system going. Or the coin can be cast out into the wild to fend for itself, without the core development teams building on it.

“The Founders’ Reward is finishing, that’s final. It will come to an end when Zcash has its first halvening,” Jack Gavigan, head of product and regulatory affairs at the ECC said, in an interview with Decrypt. “The question is, does the Zcash community want the company to continue to work on Zcash? It’s perfectly fine for them to say ‘no, we don’t.’ If that’s the case, the company would have to pivot.”

In this scenario, the ECC—as a for-profit company—would have to adopt a new business model to continue making ends meet.
Gavigan said there have been very few discussions about what this might look like since the company hopes the community will continue to fund development of the network. This would likely result in a Blockstream-esque company, where the network is still being developed, but there are profit motives in place.

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The Founders’ Reward is set to cut off in 2020 but both entities have some funds stockpiled, largely held as Zcash’s native currency ZEC. At the moment, the ECC has a runway of about two years (assuming Zcash’s price stays at the current level) beyond the funding cutoff; the Zcash Foundation has enough money to last for five years, according to executive director Josh Cincinatti.

The Founders’ Reward was only scheduled for four years due to the number of unknowns that existed at the time, according to Nathan Wilcox, chief engineer at the ECC. He told Decrypt that even thinking two to four years ahead was a long enough time at such an early period in the coin’s network. Essentially, the initial funding program was simply to get the ball rolling.
Wilcox said at the conference Saturday that he was fully in favour of extending the Founders’ Reward—or setting up an alternative form of funding—to continue upkeep of the network.

However, the extension of the Founders’ Reward is controversial. It was heavily criticised at last year’s Zcon0, when ECC CEO Zooko Wilcox revealed how much everyone was getting paid—including his own salary of $2.7 million a year (at current prices).
But to avoid criticism, and allow the network to stay decentralized—and not under the control of just one company—the ECC can’t just make the decision on behalf of the Zcash community. Instead, the wider group of miners, holders and fans need to come together and decide what should happen.

But unlike proof-of-stake coins such as Tezos or Cosmos, there’s no in-built voting mechanism, making this a much bigger ask.
There have been a few suggestions as to how the community-led decision should be made. The community could do a normal vote, or a one-off voting mechanism could be set up to enable coin holders to participate in a vote on the Zcash blockchain where users stake their funds for a period of time. Alternatively, two versions of Zcash could be created—one with a further Founders’ Reward, and one without—leaving miners to choose which fork of the code they wish to support.

On the idea of letting the miners choose, one party has already started making moves.
A nonprofit Ycash Foundation is being formed to provide an alternative Zcash chain, where the Founders’ Reward would continue past 2020. But the funds are shrunk to just 5 percent of the block rewards, cutting the funding by 75 percent, with the belief that this will be enough to keep development going.

Ironically, Zcash’s progress has come from a centralized company. And now the coin’s fate depends on a decision from a decentralized community that hasn’t been empowered with a governance mechanism. And with just 17 months remaining to avoid a crisis, time is running out.