Yes, I said it. 

Zcash is undergoing a governance crisis. And in this article, I will make it crystal clear why.

Let me preface this by saying that Zooko Wilcox, the CEO of the Electric Coin Company the company behind Zcash, is a clear leader in this industry. 

We’ve met a few times over the years, most recently at the DCG Summit, and every time I’ve been impressed by how charismatic and intelligent he is. 

I’ll also say that the entire Zcash team is also pretty amazing. I’ve had several interactions with a variety of Zcash team members and they’ve all been positive. Zcash consistently produces a high-quality product and is one of the few projects I admire.  

I’m leading with this to make it clear that the opinions I am about to share in this article are not targeting any individual or institution out of malice or spite. This article is strictly about project governance.  

After all, decentralized governance is a brand new frontier. And all efforts to be a pioneer in this space are valuable for the overall development of the ecosystem and progress toward becoming ‘antifragile’. 

Part of growth is recognizing not only what works, but what doesn’t work. “Fail fast and fail forward” as they say. 

And in an effort to recognize what doesn’t work, I want to emphasize that Zcash’s governance structure was implemented with a major flaw. One that guaranteed a crisis from the start. 

Now hopefully in the coming months, an amicable and fair resolution to the current crisis will be agreed to by various factions within the Zcash ecosystem. But regardless, Insiders should learn from Zcash’s mistake.

Read on in today’s article to find out what governance flaw might cause one of the world’s best crypto projects to fall apart.

What Makes Governance Successful?

It seems only logical that to start a discussion about the relative success of a crypto project’s governance model, it’s necessary to first establish the purpose of governance and what makes it “successful” or not. 

At its core, successful governance is measured by the ability of a group or organization to make effective decisions towards a specific goal or end. 

Of course, the ultimate goal of strong governance is to allow an organization to make the best decisions given the information available. But this is very difficult, if not impossible, to assess. After all, how do you compare the decisions that have been made using one governance structure against those that would have been made in another? 

So, while the best way for a project to make decisions is still up for debate, what isn’t up for debate is whether or not a project needs some governance structure in place for making decisions. This is black or white. A project either has a plan or it doesn’t. 

To put this into context, imagine asking everyone in a country to decide who should be the next leader. But then there was no system in place — whether through succession, voting, coin toss etc — to make the final decision.   

You could never move forward because it would be impossible to determine a winner.

By contrast, governance means having a system for decisions to be made for a project. Whether these are small daily decisions or major decisions in response to a crisis. In layman’s terms governance needs to answer: what should a project to, who decides, and who chooses the deciders?

So now that we’re on the same page for what we’re assessing, let me walk you through the Zcash structure…

The Zcash Structure

When Zcash was founded, it was set up with a very unique structure that gave a portion of the block reward to the project’s founders — for a limited period of time. 

Unlike most block rewards, which are based on a percentage split of each block reward, the Zcash award allocated 10% of the total 21 million ZEC that would ever be produced to the founders within the first four years of the project. 

The ‘Founder’s Reward’, as it’s called, was designed to reward the Electric Coin Company (ECC), a private company headed by Zcash founder, Zooko Wilcox and the investors who made the project possible. 

Then, half a year later, a portion of the Founder’s Reward was donated (mainly by Zooko and his family) to create the non-profit Zcash Foundation. 

These two organizations led the project’s development and decision-making because they had the greatest vested interest in the project and, importantly, a significant funding source to draw from. 

But now, things are about to get completely shaken up because, in just over a year, the Founder’s Reward is scheduled to expire. After which, if nothing is agreed to, 100% of the block reward will be allocated to miners. 

This means no more funds for either the ECC or the Zcash Foundation.

The debate over what should happen next has begun, and already we’re seeing things start to unravel.

The Dev Fund Proposal

I’ve written before how critical charismatic leaders are in unstructured governance models. Because even if there is no set way to achieve consensus, they are often able to pull together community opinion on their own.

We’re seeing this in action here. In a personal letter to the community, Zooko gave a very impassioned plea to continue automatically funding development for the Zcash project through the block reward. But this time through a ‘Dev Fund’. 

Then, when development or other work is needed, individuals or groups can compete to win contracts for the execution of these projects. It will be up to the Zcash Foundation to decide how these contracts are awarded. (This type of funding model is already in use by projects like Dash and Horizen.)

Though Zooko passionately advocates this solution, he also says that he “wants the Zcash community to decide” what is best for it. 

While this might sound honorable to the average reader, from a governance perspective it’s chaos.

Zooko claims that the founders specifically did not choose a solution to succeed them in the name of decentralization, knowing full well that it would be a messy affair:

“We knew that if we succeeded then we would, in four years’ time, undergo a difficult and messy decision process. That’s healthy and expected. The complexity and noisiness of the debate in the Zcash community right now is a good sign.”

‘Healthy’ is not exactly how I would describe the debate. So far, on the Zcash forum thread “The future of zcash in 2020” there have been a solid 8 months of fierce debate with no real conclusion. 

Intellectually, it’s quite an interesting discussion. But in terms of decision-making for the project, this is going nowhere.

Meanwhile, in his letter, Zooko also reminded readers about the ECC’s ownership of the Zcash trademark. While he repeatedly insists that it will be used only according to the community’s wishes, it is commonly speculated that if the community chooses not to support a Dev Fund that the ECC could fork the Zcash blockchain and use the trademark there if it wanted.

So now we have the future of one of the biggest cryptocurrencies being determined by Medium posts and seemingly endless bickering on forums and trademark threats. And still, there is no clear decision on what will happen after the Founder’s Reward expires. 

Right now, the Zcash community is stuck in the middle of a very messy divorce. Everything would have been completely different if the founders had signed a prenup.

At the end of the day, this is what made Zcash’s initial governance structure so bad. The founders created a faux governance structure for the first four years of the project and then took it away.

To be clear, other projects have equally vulnerable unstructured governance, but by starting off that way their communities knew what they were getting into. Whereas the Zcash community is essentially having the rug pulled out from under them in Year 4.

What does this mean for Crypto Law Insiders?

Crypto Law Insiders should prioritize governance in their investment decisions — whether as founders, coin holders, miners, or developers. 

Because without strong systems of governance in place, everything can be lost overnight.

While you may face this same risk in any project — when you’re dealing with projects with unstructured governance, this is not just a risk, but an inevitability. Because there will always come a day when an important decision has to be made. When your benevolent leader is long gone. And either chaos will ensue or you will come to a standstill. 

Sure, some projects can survive this — though not many in my opinion. 

Bitcoin survived and will survive, mostly because it was the first crypto project and has a much stronger backing from those who are invested in the coin or who believe in it ideologically far and beyond any alternative coins.

Only time will tell if ZCash is going to be so lucky.

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