By Ria Bhutoria and Wilson Withiam
In a recent core dev call, the participants briefly discussed a proposal to leverage EIP-1890 to add 0.0055 ETH to each block for the next 3.1 million blocks (~18 months) for the upcoming Istanbul hard fork to fund ETH 1.x development — this would increase the issuance rate for the ~18 month period the EIP outlined. As a reminder, the purpose of ETH 1.x is to continue to improve upon Ethereum as it stands and ease the transition to 2.0. James Hancock, project team lead at ETHSignals who drafted the proposal, suggested creating working groups that would focus on different challenges. These include State rent, Better sync, Finality gadget, Fee market, and Testing infrastructure. Hancock outlined that “governance of the funds would be through a multisig of trusted individuals from the ecosystem including client teams, the foundation, and the community.” The reason for drafting the proposal was the lack of funding for ETH 1.x.
Hancock is also behind Alternateth. He described the idea for Alternateth as an Ethereum “sister chain” or testnet environment where the community can experiment with ideas and proofs of concept before they’re proposed for integration on ethereum. One of the changes Hancock wants to implement is a formal funding model where a predetermined portion of block rewards will be sent to a multisig address controlled by “multiple trusted community members”. His proposal for EIP-2025 may have been an attempt to test the waters and gauge the reception to this facet of Alternateth.
Concerns regarding block reward funding in Ethereum
The discussion of EIP-2025 in the last core dev call sparked a heated debate within the community, with certain developers that stand to benefit from the proposal in favor, while many investors (and some developers) expressed strong opposition. Those against the proposal – who appeared to outweigh supporters in Twitter discussions – cited numerous reasons why EIP-2025 should not be implemented, including but not limited to: (1) complications in changing the existing issuance policy, (2) the risk of a contentious hard fork, (3) the dangers of setting an untested precedent, and (4) the lack of a concrete governance model for fund allocation.
Altering monetary policy
Monetary policy is a critical feature of a crypto platform and plays a major role in attracting stakeholders (users, investors, miners, developers, etc.), incentivizing participation, and securing the network (since the cost of an attack is often directly related to network value). Therefore, the process of adjusting monetary policy for active networks should be thoughtful and consider all stakeholder perspectives.
There has been discussion around formalizing funding for ecosystem development as the community understands that current funding methods (EF, ECF, donation-based funding, etc.) don’t have an infinite runway. One example is Kevin Owocki’s longer-term Proposal for Inflation Funding for Protocol Maintenance. However, block reward funding was not a part of Ethereum’s original design and is a relatively untested area as it relates to Ethereum. Separately, increasing the issuance rate to fund a subset of the development community working on just one of many important projects still dilutes all stakeholders. As a community member pointed out in an Ethereum Magicians forum, “asking users and miners to essentially pay the cost of inflation (even temporarily) breaks multiple social contracts Ethereum has committed to. The most basic of which is ‘do not debase the currency.’” In addition, the idea is that ETH 1.x will eventually be abandoned once the ETH 2.0 mainnet launches — however, we note it isn’t completely clear as ETH 1.x may be supported as a shard within the ETH 2.0 network. As a result, the short-term proposal put forth in EIP-2025 may not be worth the outsized, long-term risk it may place on the perception, value, and security of the network.
Hard fork risk
The concept of allocating a portion of block rewards into a treasury to establish a sustainable funding model for continued development is not outlandish. Zcash, Decred and Beam are examples of projects that have implemented such a model. However, these projects made this funding/design/governance decision at the inception such that it was already in the DNA before they began the process of building a community of stakeholders. The difference in this instance is that Ethereum is already the second-largest crypto asset by market cap with many stakeholders across the world. Thus, the risk of engendering a rift in the community and facilitating a contentious hard fork through such a change is much greater at this stage in Ethereum’s life. In order to reduce the risk of a hard fork, which can be disruptive and dangerous, it is important to test the idea and gauge support over a longer period of time to first determine whether a large enough portion of stakeholders are even receptive to the idea. If so, the next steps include educating, iterating, identifying technical and political risks and attack vectors and uncovering ways to reduce these risks, among other things.
Setting a dangerous precedent
Adjusting monetary policy for a short-term, one off project may also set a dangerous precedent. Eric Conner posits that allowing anyone to “capture block rewards” (i.e. claim a portion of the block subsidy for themselves) while diluting other participants is a “slippery slope,” as similar proposals may be considered acceptable down the line. If approved, it may also lead stakeholders to conclude that Ethereum upgrade proposals are controlled by a select few influential developers, compromising the perceived decentralization of Ethereum’s governance process. To preserve Ethereum’s future outlook, many developers and community members felt that EIP-2025 should be shut down early “before people think it’s a good idea”, even though it was just an idea that was being floated (though a similar model may be implemented in Alternateth, or what Hancock has described as the “friendly fork” of Ethereum).
No fair and concrete governance model
The proposal outlines the governance of the funds would be placed in the hands of a few “trusted individuals” via a multisig contract, but offered little insight into how these individuals or entities would be selected, how the funds would be allocated and how teams receiving funds would be held accountable. Critics of EIP-2025 argue that decision-making and oversight could be centralized to a small group, which introduces the risk (or at least the fear) that members will “act in self-interest at the expense of the broader network.” Further, allowing developers to oversee the management of funds also becomes problematic as (1) developer groups have historically exhibited less informed money and risk management skills and (2) certain dev teams may have a vested interest in the allocation of funds. As a result, there is no clear path for the fair distribution of funds to 1.x efforts under EIP-2025 at this point in time. Separately, once funding is deployed, there is no mechanism to hold dev teams accountable for their work. A lack of proper oversight would give developers the opportunity to cash in on grants without being beholden to deadlines or even completing the project.
Alternate Ethereum funding models
Despite the opposition to funding one-off efforts via increased issuance, most contributors to the EIP-2025 discussion agreed that investing in all levels of Ethereum research and development is vital for long-term sustainability. But current capital allocation methods (i.e. Ethereum Foundation grants) have, in some cases, been labeled as insufficient in supporting every important project. This has led to the development of alternative funding measures that range from the allocation of voluntary donations and community-based investments to the more exotic methods proposed by James Hancock and Kevin Owocki.
The Ethereum Foundation is a Swiss-based non-profit foundation that supports Ethereum and helps coordinate important efforts and initiatives including education and research and development. It was originally created to manage funds raised in the ETH token sales. The Foundation describes one of its core functions as resource allocation. In a recent blog post, the Foundation highlighted that it holds 0.6% of the total ETH supply (or ~642k ETH based on Messari’s supply figures) along with cash reserves. It outlined its plans to spend $30 million (resistant to a downward movement in the price of ETH) over the next 12 months. The bulk of the funds ($19 million) is reserved for the development of longer term projects such as ETH 2.0. A smaller portion ($8 million) will be devoted to “supporting the ethereum of today” while developers build the ethereum of tomorrow. This includes initiatives that relate to 1.x. The Foundation also mentions how it has supported ETH 1.x initiatives in the past such as funding research around stateless clients, state rent, and a new sync protocol that could reduce the time it takes for a full node to sync the Ethereum blockchain state.
Voluntary donation-based DAO
MolochDAO is an experiment conceived by Ameen Soleimani and other key members of the Ethereum community that aims to (1) address the “tragedy of the commons” coordination problems in allocating funds towards Ethereum development and (2) make the process of allocating funds more timely and efficient. The experiment launched with 22 members that each contributed 100 ETH. After a few months of effective operation, the DAO received 1k in ETH from Joe Lubin/ConsenSys and Vitalik Buterin/Ethereum Foundation each. It now has about 50 members and $2 million in funds that it is deploying across areas that aren’t receiving as much or any attention from the Ethereum Foundation so as to expand the projects and improvements that receive funding.
In an Into the Ether podcast episode, Ameen Soleimani articulates a couple of challenges that apply to the proposal to introduce developer funding from block rewards. We believe these points are also relevant to the recently withdrawn proposal. One point he brings up is that, with block reward funding, there’s no clear solution to the fact that stakeholders cannot reclaim their share if they don’t agree with a funding decision. This puts the ecosystem’s funds at risk and creates the potential for a hard fork if there is disagreement. Moloch addresses this challenge with its ragequit mechanism – any member can withdraw the funds they contributed because they voluntarily donated those funds.
Connecting coders to funding via Gitcoin
Gitcoin is a project that aims to foster a sustainable open source crypto community by connecting projects to developers, developers to funding and projects to funding. Gitcoin’s first product was bounties where a team can post a Github issue or feature request to Gitcoin along with some amount of ETH or ERC-20 token as payment to the developer that picks up and addresses the feature request or issue fix. Another solution Gitcoin offers is Grants, which the team describes as a decentralized alternative to Patreon that allows projects to create a recurring stream of funds from supporters. The founder, Kevin Owocki, has mentioned that the Ethereum Foundation has used the platform to source and fund developers for aspects of ETH 2.0.
An innovative funding method that Eric Conner and others have proposed is pooling tokens, lending them out on a platform like Dharma or Compound, and donating the interest earned to projects in need of funding. A week later, Zefram from Betoken, executed on that exact idea by introducing Pooled cDAI, a set of smart contracts that pools DAI from many contributors, lends it out on Compound, and directs the interest earnings to a beneficiary. Participants receive cDAI for each DAI token they contribute to the pool.
Projects and developer teams developing the Ethereum of both today and tomorrow need to be both open source and well-funded, two aspects that are often at odds with one another. Therefore, discovering and testing sustainable funding models will be essential to attracting developers, thus continued innovation and network longevity. We aren’t sure if EIP-2025 was even technically sound, but it spurred an important and arguably healthy discussion around the challenges of introducing such a form of funding when it’s not in the community/network’s DNA.