Crypto Non-Profits Are Flawed – Zcash Thinks It Can Change That
Ahead of the Zcash Foundation's first big gathering, crypto aficionados are watching to see if the non-profit can redeem a maligned governance model.
On the eve of the Zcash Foundation's first major gathering, cryptocurrency aficionados worldwide are watching to see if the year-old non-profit can rehabilitate a long-maligned model of governance.
Earlier this month, dozens of privacy tech fans from across the ecosystem, from lawyers to monero community veteran Justin Ehrenhofer, joined the foundation's online forum to vote for two new additions to the board of directors by the Monday deadline. The election will bring the total number of board members up to five, in addition to one elected runner-up in case any member steps down.
The ballot results will be discussed at length during Zcon0, which kicks off the next day in Montreal, drawing 145 attendees.
The election is noteworthy for several reasons. One is the relative transparency of the process. The community panel voters, many of whom are not affiliated with the Zcash Foundation or the startup that created zcash, are clearly listed on the foundation's online forum.
More strikingly, one of the nine candidates for the two board seats is Robert Viglione, co-founder of zencash – a competing privacy coin that uses some of zcash's source code.
His presence on the ballot is no fluke: Zcash Foundation director Josh Cincinnati has made a point of inviting members of competing projects to help govern his cryptocurrency's community.
Despite the bitter rivalries between crypto tribes, Cincinnati told CoinDesk his foundation would also gladly sponsor research related to other rival projects, such as monero.
By offering such opportunities for external input, and taking other steps to ensure transparency and independence from the company that created zcash, Cincinnati said he aims to dispel the notion that crypto foundations are nothing more than a legal workaround for nepotistic funding or free marketing for startups.
"I hope we can demonstrate over the long-term that this is not the case," he said.
Yet the foundation model to date has been plagued by countless mishaps related to governance and management.
Stepping back, the Zcash Foundation is one of a long line of non-profits that have been created around cryptocurrencies since the Bitcoin Foundation was established in 2012. These early organizations have had varying degrees of success (with the Bitcoin Foundation even failing entirely).
However, the idea was given new life when ethereum creator Vitalik Buterin established the Swiss-based Ethereum Foundation with proceeds from a token sale in 2014, with many projects following his footsteps to Switzerland.
In the view of skeptics such as Stephen Palley, a partner at the law firm Anderson Kill in Washington, D.C., some of them did so to exploit legal workarounds.
"People looked at the Ethereum Foundation's model and thought, 'if we want to avoid U.S. securities laws we can create this thing in Switzerland and use that to sell in the U.S.,'" Palley said.
Regardless of motive, using a distant foundation to manage a cryptocurrency created by a startup complicates governance.
For example, the Tezos project illustrated a worst-case scenario after its $232 million token sale when the president of the project's Swiss foundation had a falling out with the California-based token creators, leading to a complex legal battle that delayed development for almost a year.
Despite the Ethereum Foundation's numerous accomplishments, Twitter trolls often disparage Buterin and ethereum co-founder Joe Lubin, who currently heads the startup empire ConsenSys, because events sponsored by the nonprofit offer superb marketing opportunities for startups like ConsenSys and OmiseGo, the latter of which Buterin is himself an advisor for. (The Ethereum Foundation declined to comment.)
Several other foundations suffered from rumors of deliberate secrecy and nepotism. For instance, critics accused the Bitcoin Foundation's board of keeping quiet about early evidence that the early bitcoin exchange Mt.Gox was bankrupt.
"There seems to be very little advantage to setting up a foundation at all," monero project lead Riccardo Spagni told CoinDesk. "It just seems to create this facade of being a super benevolent, decentralized, not-for-profit."
Funded, yet independent
The Zcash Foundation is hoping to avoid the pitfalls of its predecessors, in part because it has an unusual setup.
For example, instead of a token sale, its main source of funding is a fixed share – 1.44 percent – of all the zcash that is mined. This comes out of the 10 percent "founders reward," collected from all zcash miners, that goes to the creators of zcash, several of whom work at Zerocoin Electronic Coin Company (ZEC), the startup that still indirectly profits from and promotes the currency.
ZEC's CEO, Zooko Wilcox, joined half a dozen other zcash founders in signing contracts compelling them to donate the 1.44 percent directly to the foundation. This structure imposes more discipline on the foundation than a token sale in a white-hot market would have, according to Cincinnati.
"Since the founders' reward is structured like a four-year vest, the foundation's access to capital is much more restricted compared to other crypto foundations, which encourages a longer-term view and more measured spending," Cincinnati said.
Beyond the financial arrangement, though, Wilcox isn't directly involved with the foundation or the community election. This, too, is unusual: Buterin, who has a roughly analogous figurehead role in the ethereum community, was still the president of the Ethereum Foundation board as of last year, Swiss records show.
Explaining his preference not to join the Zcash Foundation, Wilcox told CoinDesk:
That said, Wilcox has openly challenged the foundation to establish its own trademarks, hire staff software experts, and find sources of independent funding.
And when it comes to the controversial debates about whether and how to combat the centralizing effects of specialized mining chips, the foundation already takes an independent approach.
Rather than wait for Wilcox, who is not prioritizing software updates to help zcash resist mining consolidation, Cincinnati is hiring a developer to build tools for reducing corporate influence on the network.
This mining issue is also an issue in the election. In addition to choosing new board members, the digital ballots due Monday also include a question asking if the foundation should prioritize so-called ASIC resistance. "It's going to be a good moment for the foundation to figure out what the community will is for where we go forward," said Cincinnati.
Privacy above profit
Another way the Zcash Foundation stands out is by eagerly courting contributors from other crypto communities. The nonprofit says its ultimate goal is to promote privacy tech as a human right, regardless of whether the ultimate solution benefits Wilcox's startup.
One such effort is allowing a community panel, separate from the foundation board, to approve funding for research grants. Despite the well-publicized rivalry between zcash and monero, that review committee includes Brandon Goodell from the Monero Research Lab.
"It's a weird hybrid between having a group of insiders decide everything, which is the way that most organizations are run, and entirely crowdsourcing our decisions," said Sonya Mann, the Zcash Foundation's communications manager, acknowledging that the model is an experiment.
"At this point, it's an open question whether our approach will be effective or whether it will be a good way to direct our efforts going forward," she said.
One more departure from the norm: The Zcash Foundation is registered not in Switzerland, but Delaware. This helps with transparency, because as a U.S. nonprofit, it must share financial documents such as employee salaries and some tax forms.
"It's all public information, as it should be," Cincinnati said.
Being located in the same country as Colorado-based ZEC may produce a further benefit: it could simplify the legal process in the event any zcash founders attempt to renege on their funding obligations to the foundation, reducing risks of a Tezos-style fiasco.
It remains to be seen if Cincinnati's unorthodox methods will give his foundation a unique role in the broader ecosystem, beyond its namesake cryptocurrency.
But William Mougayar, the founder of Token Summit, said so far the Zcash Foundation appears to have one of the most mature foundation models in the industry.
All of the cryptocurrencies that sprouted up in the wake of ether need "a neutral party that will look after the community before anyone else," Mougayar said.
"Eventually there should be a separation" between such stewards and the issuers or creators of the coin, he said. "I think Zcash is working on it."
Flower growing through cracks image via Shutterstock
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.
Learn more about Consensus 2024, CoinDesk’s longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.