Digital currencies and blockchain technologies represent countless hours of hard work in visualizing, coding, testing, and so forth. Because of the required talent and effort in order to make a cryptocurrency successful, one of the first questions asked when starting a new project should be: “How are we going to pay for all this?” Here are some of the more common forms of funding development teams:
The “default” funding model for a cryptocurrency is, of course, none at all. This approach certainly does away with most ethical concerns or conflicts of interest, however without a paid development team, few means and little incentive remains to develop a top-notch project.
Similar to the above approach, running a “free” project while leveraging the support of a foundation achieves the same basic independence, while providing incentives and means for future development. A drawback of this approach is uncertainty of funding, and with it the potential for development compensation to become infiltrated by outside elements which may add the conflict of interest issue. Bitcoin’s development featured elements of this early on via the Bitcoin Foundation.
Now a staple of the blockchain world, the Initial Coin Offering, or ICO, involves a premine and subsequent presale of tokens to early investors and adopters. This raises a large initial sum to fund future development, leaving coders to code at peace. However, it does leave a potential vulnerability in that development teams, once properly funded, don’t necessarily have a performance-based financial compensation scheme set up, and may lose focus over time without adequate market pressure. Ethereum is the foremost example of the ICO model, with a presale of 60 million Ether, currently valued at close to $12 billion.
Sketchy Distribution (“Stealth ICO”)
On the other side of the ICO model, some coins can make similar attempts at the same funding mechanism while avoiding acknowledging that this is indeed what they’re doing. A “stealth ICO” can include any number of functions in the coin’s setup that have the effect of dishonestly providing the founders with funding. These can include a large and poorly-documented premine distribution, a rapid or not publicized initial mining schedule, a secretly more efficient mining method not immediately disclosed to the community, etc.
In order to avoid having to either continuously raise money or raise a considerable sum before delivering a viable product, one way of pursuing funding is to have to built into the coin itself. Funding via block reward gives developers a portion of the newly-created coins. This provides both for continuous funding for long-term developmental goals, and for an incentive to remain committed to the project instead of stalling out over time. However, while having developer salary tied to the coin’s performance does maintain an element of accountability, an assured income also limits the amount of beneficial pressure to perform, as the team can get by with maintaining the coin’s value to a certain minimum degree and still live comfortably. Zcash has a similar mechanism called the “Founder’s Reward,” which will amount to 10% of the coin’s supply over time set aside for the Zcash Company.
Another method of funding development from the network itself is by tapping into transaction fees rather than the block reward. Such a method leaves the entire block reward to the miners, but adds an extra fee to users on top of the usual mining fee, potentially cutting into usability if the total fee paid per transaction becomes too high. Monero plans to implement such an auto-donation model, though it will reportedly be “completely optional.”
Dash’s development funding model revolves around setting aside 10% of the block reward to fund various projects. Unlike various other built-in development funding models, Dash’s development team does not have any funds guaranteed, but must submit a proposal (or several proposals) each month to be voted on by the masternode network. This provides incentives to ensure that the network approves of the work of the Core team.