Various developer funding models can be found across different crypto projects. Most rely on some form of premine or ICO reserves, but there are also some very unique approaches that have built a sustainable base which might be able to thrive long term. The question is, do they have any elements of decentralization and is truly decentralized developer funding reality or a pipe dream? Keep reading to find out.
Decentralized Developer Funding
Let’s cover what is decentralized developer funding in the first place. Ideally, if true decentralization would be achieved, each person would have one vote. Funds would be controlled on the protocol level, and could move only if the majority reaches consensus. It all sounds good in theory but is it possible in practice? How desirable is it? Is it wise to put the power into community hands and believe the majority will act in the projects best interest? Time will tell if decentralized solutions are superior to centralized funding models most crypto projects employ these days. One thing is clear. Reliable funding is a key that all projects need to unlock doors to long term success.
We will compare various funding governance implementations and assess the level of decentralization they achieved. Each project will receive our subjective score of 1-5 stars depending on its decentralization level. Let’s see if anyone comes close to 5 stars and strives to achieve true decentralization.
Tezos Foundation was assembled with the purpose to deploy funds and resources to various new projects built on top of Tezos blockchain. It has an immense war chest of over $600m. Full breakdown of Tezos foundation assets is available in the infographic below.
Foundation publishes detailed biannual updates that cover all grants and milestones achieved by the Tezos community. According to the latest update, in the period of roughly 5 months, 78 new projects received over a total of $38m in funding.
But let’s examine how the grants process works and how it fares against decentralization metrics:
- All applications need to past formal elimination test
- Then they are passed over to the technical committee who evaluates the application and assess its merits
- Finally, Tezos foundation council makes a final decision and issues the grant
As we can see, Tezos network participants have no say in the application grants and there are no elements of decentralized developer funding we were looking for. All decisions are made by the members of the Foundation. A final decision is in the hands of 7 members of the Foundation council while technical vetting comes from the 9 members of the technical committee.
Tezos funding decentralization score: ★☆☆☆☆
Zcash Miners Tax
Zcash launched in 2016 with at the time novel founders’ reward. Reward was based on the miner’s tax. 20% of all block rewards were taken away from miners and sent to founders wallets. It was meant to be a temporary thing lasting 4 years to kickstart the project and fund early development. However, at the beginning of 2020, the funding (with some changes) has been extended by yet another 4 years – in line with Zcash halvings. We won’t discuss if that move is good or a bad thing as it goes beyond the scope of this article, but one thing is clear. Every project needs consistent funding. Instead, let’s explore the nature of the dev fund extension decision and check if it was made in a decentralized manner.
Zcash foundation assembled Zcash improvement proposals which describe dev fund extension and invited three groups of people to voice their opinions in a so-called sentiment collection:
- Community advisory panel assembled by Zcash foundation – voting results
- Zcash forum members – voting results
- Zcash miners – abstained from voting
Interestingly enough, miners refused to vote. Why did the party that is directly impacted by Zcash development funding decision declined to exercise its voting right?
There was an opposing Zcash fork called Ycash that occurred in the mid-2019. It appears that miners who didn’t leave the network in favor of opposing fork, fully support Zcash Foundation and its decisions. Nonetheless, it is strange to see complete disinterest from the miners that are known to have opportunistic nature.
At the end of the process, it was decided that the 20% miner’s tax will be split as follows:
- Electric Coin Company (ECC) → 35%
- Zcash Foundation, a non-profit serving the protocol users → 25%
- Major Grants – third-party development funding → 40%
The final decision was made by the Zcash Foundation and ECC as the ZIP in question represents their joint venture.
Anyone can submit a draft ZIP. Draft ZIPs are debated by the community at large, then accepted or rejected by the ZIP editors. Currently there are two ZIP editors – Daira Hopwood represents the Electric Coin Company and George Tankersley represents the Zcash Foundation.
Another point worth mentioning is that the grants which are administered by the Zcash Foundation are also awarded in a centralized manner. Foundation has the final say and allocates the funds as they see fit. The whole process is described here.
Zcash funding decentralization score: ★★☆☆☆
Nano Community Project Award
Zcash didn’t score well, but we are not losing hope, let’s see what Nano has in store when it comes to decentralized developer funding.
Each month, the winner that receives a community project award is chosen by the community.
The process is split into multiple steps:
- Open discussion between Nano Center members – everyone is welcome to join and propose potential projects that they deem worthy of an award.
- The voting jury consisting of 8 members is assembled.
- Jury panel decides which community project will get an award.
- Panel’s decision is presented to the Nano Center who make final quality checks and award the prize.
Nano center is an open organisation of various Nano community members who act as custodians and are in charge of this initiative. While the initiative is commendable and promotes building, the complete process is manual and there is no decentralization at the protocol level. However, it will receive two stars as winners are selected by a jury of community members that exhibit some form of decentralization.
Nano funding decentralization score: ★★☆☆☆
Idena Community Foundation Fund
Idena utilises a foundation wallet that accumulates 5% of all newly minted DNA and rewards for invites issued by the core team. The wallet currently contains roughly 700k DNA that is worth around $84k at the moment. The foundation wallet can be explored here.
Foundation funds are controlled by the core Idena devs in a centralised manner until governance protocol is established. In the meantime, devs have proposed a system that somewhat emulates decentralized governance and is meant to test the waters. The proposed method works like an auction where developers are bidding the work down until the lowest acceptable price is reached. 2% of all Idena validated identities are required to be in favor of every proposal.
If the proposal is approved, devs can funnel the funds from the foundation wallet. The total amount can be a maximum of 5x the sum of community donated funds. Full details can be read here.
Solution For Decentralized Developer Funding
Community doesn’t favor this proposal in its current manual form and it hasn’t been accepted with open hands when it comes to larger projects. We are likely to see significant changes to the system. But the framework that can be built upon appears to be stable. Thanks to Idena unique consensus that enables each person to have exactly one vote (or close to it), voting could reach unprecedented democratic levels that are unseen in decentralized networks. Funds are also available and are getting slowly replenished over time as new coins are minted. DNA coin metrics are detailed in our Idena review.
Now it’s a matter of developing a proper governance structure that will put theory to practice. Resistance to abuse and ease of use are the main points to consider when designing decentralized developer funding models. Until the governance system goes live, Idena will have to settle with 3 stars.
Idena funding decentralization score: ★★★☆☆
Nyzo Cycle Fund
Nyzo cycle fund contains the majority of Nyzo supply. Around 77m Nyzos which are worth around $12m at the time of writing this article. The funding war chest is patiently waiting for projects that Nyzo cycle deem exciting and worthy of diluting Nyzo supply. It is important to note that the coins cycle fund controls are fully locked (effectively burned) and are not part of circulating supply. Cycle wallet address can be explored here. If you are not familiar with how Nyzo works and what a verifier is, read our Nyzo review before proceeding further.
Let’s cover some basics to understand how Nyzo cycle fund works:
- Any in-cycle verifier can create cycle transaction that other verifiers can vote on.
- 51% consensus is required to approve cycle transactions.
- 100k Nyzo is the maximum amount that can be transferred in one cycle transaction.
Getting Your Proposal Funded
The process is simple. The idea is pitched on Nyzo forum, cycle transaction is created, cycle votes and finally transfers the coins if the proposal is approved.
If we make an educated guess that the cycle is sufficiently decentralized and that no single party controls the majority of in-cycle verifiers, then we can safely determine that Nyzo cycle fund is the only genuinely democratic funding mechanism we have stumbled upon. Decentralized developer funding at its best.
The whole process has been tested in practice multiple times and successful governance was easily achieved for all essential proposals. At the time of writing this article, Nyzo is the only coin that has successfully decentralized both voting and funds control.
Nyzo cycle fund will also remain sustainable long term if the project gains any meaningful adoption. 1% of all organic transaction fees are slowly replenishing and making sure the cycle fund never reaches zero.
Nyzo funding decentralization score: ★★★★☆
Nyzo is the clear leader in the decentralized developer funding, while Idena has the potential to join its ranks if it successfully implements decentralized governance and in-client voting. Other projects are mostly centralized and exhibit negligible efforts to decentralize the funding process. Do you think a developer fund should be in the hands of foundation or every network participant needs to have a say? Let us know your thoughts in the comments below.
Petar & Ana