Block Reward Funding

Some blockchains utilize a portion of ongoing block rewards to fund development. In the same way that miners are rewarded for the hashpower security they provide, those who build the infrastructure can also be rewarded for their work on an ongoing basis. This model is good for aligning the incentives of developers (or those who can expect to draw on the development funding) with the long term interests of the network. The funds will accrue over the course of years and decades, giving the likely beneficiaries an incentive to ensure that the network continues to improve its utility and value over the long term. It is difficult to make a fast exit with a large profit.

This kind of ongoing funding also makes the developers more beholden to whatever entity is distributing the funds, likely reducing the degree to which they can act in an unfettered manner to try and impose their will on the network.

With any dedicated source of development funds (premine, ICO, block rewards), the question of who receives those funds or how they are allocated is important in understanding how that network is governed and who has power. As an ICO or premine is a one-time event, funds are typically discharged to the custody of an organization or set of individuals who subsequently follow their own private methods of decision-making about how funds are used.

Ongoing block reward funding is more likely to be paired with a mechanism through which some constituency or set of stakeholders can make ongoing decisions about how those funds are used. There are projects which aim to decentralize the decision-making about how these funds are spent, bringing an important factor that will determine the project’s direction and whether it succeeds on to the commons. Where development funds are controlled by people or foundations, the way that key entities will act and the decisions they make are likely to be determined in private. For the rest of the constituents these entities are autonomous black boxes that exist at the periphery of the commons but have significant effects on its landscape.

In contrast, attempting to decentralize governance means attempting to govern the common pool resource’s development on those same commons. This holds the promise of removing some of the dependence on “external” entities. More specifically, it can grant the stakeholders in the common pool resource independence from relying on the specific set of developers who are resourced and incentivized to maintain and improve the network’s software infrastructure. The network’s independence is achieved through having the means to fund an alternative set of developers, should the “founders’” decision-making fall out of alignment with what other stakeholders want or perceive to be in the network’s best interests.

Bitcoin gamified timestamping and created an open distributed ledger that anyone can transact on, with a method of ordering transactions and determining which are valid that doesn’t rely on authority figures. The constituencies which together give the resource value can have conflicting goals, and without established forms of collective decision-making, disputes can smoulder or burn for a long time, occasionally escalating to a hard fork and splintering of the network to give birth to a new chain which would tend to be a fierce rival.

Decentralizing control over how blockchains develop, in a way which leverages the strengths of all stakeholders to the greatest degree possible while maintaining cohesion around a single chain and network, has the potential to enhance robustness and longevity.

The kind of organization and coordination required to cultivate a top-tier public blockchain is not so dissimilar to the kind of coordination required within conventional firms to deliver other software based services. If such a decentralized autonomous entity were to successfully propel a blockchain ecosystem forward, there would surely be lessons that could be applied to more conventional organizations. The funding and management of a cryptocurrency’s development effort just happens to be in particular need of decentralization, because the network derives its value from its decentralization.

It is also interesting to consider these organizations through the lens of Coase’s theory of the firm - and to look at the degree to which they embrace contracts and the hiring of employees as methods of organizing work. This will be considered in later sections reviewing specific projects, but it is worth mentioning a novel aspect to the distribution of funds here, as it pervades the space (or did so for a time).

The popularity of “Bounty campaigns” in association with ICOs is an interesting example of the use of open contracts whereby any participants who make certain small measurable contributions (e.g. follow on twitter) are rewarded. Such bounty campaigns are usually geared towards raising the project’s profile, but they have also been used to incentivize translation efforts by many projects. This kind of approach follows the more general blockchain approach of incentivizing the behavior the project requires from constituents, in the expectation that those incentives will attract the required participants.

Offering small payments such as bounties to engage contributors on small tasks is quite a transactional approach which is unlikely to bring in contributors who make sustained high quality contributions. A high volume of contributions seeking to collect small bounties can be more effort to manage than it is worth, absent the inflow of the kind of key contributors who make open source projects tick.

Block reward funding can offer stability, regular long-term issuance is an advantage and if the funds are well managed this can create an environment where valued contributors are effectively encouraged to maintain their participation on an ongoing basis. As observations reported in later sections indicate however, there is considerable variation in how well funds created to support blockchain development are spent.