Ethereum Foundation Financial Report: Reserve Fund Size: $1.6 Billion, Total Expenditure: $48 Million in 2021

Recently, the Ethereum Foundation released its financial and operating report for the first quarter of 2022. The full text is summarized as follows:

What is the Ethereum Foundation?

The Ethereum Foundation (EF) is a non-profit organization that supports the Ethereum ecosystem and is part of a larger community of organizations, individuals, and companies that fund protocol development and work together to advance the community and Ethereum.

In fact, it is difficult to attribute the Ethereum Foundation to a certain type of organization. They are neither a technology company nor an "ordinary" non-profit organization. Just as new concepts and technologies emerge on Ethereum, the Ethereum Foundation is also a new type of organization that supports the long-term development of Ethereum without controlling it.

Overall, the Ethereum Foundation is more like a team community than a traditional organization.

All teams in the Ethereum Foundation community are passionate and committed to a common vision - to invest in Ethereum and make positive contributions to humanity. Of course, many teams in the Ethereum Foundation can exist independently of each other, and they have their own processes, goals, budgets, and products. Therefore, such a team community with highly consistent goals and division of labor and collaboration constitutes the current Ethereum Foundation:

1. Some teams specialize in the development and maintenance of important parts of the Ethereum technology stack.

2. Some teams are responsible for exploring the technological frontiers of Ethereum and its ecosystem.

3. Some teams are responsible for focusing on the ecosystem itself, diving deep into the system and looking for new challenges and opportunities.

4. Other teams focus on the internal aspects of the system, ensuring that the Ethereum Foundation’s resources are allocated appropriately, that problems are solved correctly, and that teams in the community have the support they need to achieve their goals.

What is the philosophy of the Ethereum Foundation?

Since the establishment of the Ethereum Foundation, some key concepts and principles have become the basic guidelines for the Foundation's decision-making and actions. These core principles guide the decisions of the Ethereum Foundation's leadership and have an important impact on the entire team.

• Long-term considerations

The impact of the Ethereum Foundation community on society as a whole may be related to the next few decades or even centuries, and the continuation of this influence cannot be measured in quarters or fiscal years. Frankly speaking, as a coordination protocol, the life cycle of the Ethereum protocol will extend into the future.

This also means that the Ethereum Foundation will have a long-term plan, not only focusing on the interests of the current society, but also on the future. It is like a gardener sowing the seeds of hope for future generations.

• One Prosperity, All Prosperity

The Ethereum Foundation's mission is to resist power centralization, disperse opportunities to the community, and push resources to all teams in the entire ecosystem. The Foundation will be proud of more teams creating value because it means that Ethereum is becoming more decentralized and moving towards sustainability.

If the principle of "prosperity for all" is not followed, then as Ethereum is widely used around the world, the Ethereum Foundation is likely to monopolize all the reputation and influence. However, the Ethereum ecosystem should not be just the Ethereum Foundation.

Based on this idea, the Ethereum Foundation is working with the community as much as possible, and when encountering problems, it tries to consider them from the perspective of the entire community and provide as much help as possible, rather than just considering itself.

• Concept Management

The Ethereum community is a community with soul, and many of its advanced concepts have made Ethereum what it is today. These concepts include open source, decentralization, open access, privacy protection, etc. Of course, the Ethereum Foundation cannot determine the concepts of the Ethereum community, and they are more concerned about how to cultivate those important teams.

If the Ethereum Foundation is likened to a gardener, then their job is to cultivate Ethereum's "natural ecosystem." Like a gardener, the Foundation's role is only to cultivate and support, and it will not control or force the development of nature. They will carefully care for the seedlings under their feet.

How does the Ethereum Foundation support the Ethereum ecosystem?

Over the years, the Ethereum Foundation has tried a number of different approaches to supporting the Ethereum ecosystem, and has evolved toward a “layered” model in which many different groups can participate in decisions about how resources are allocated.

The first layer is the Ethereum Foundation team - the team that contributes directly to the ecosystem; the second layer is called "Grants" , which is where funding is provided to teams outside of the Ethereum Foundation; the third layer is called "Delegated Domain Allocators" , where the Ethereum Foundation works with external groups to decide which team within a specific scope to provide funds to. In addition, the Ethereum Foundation will provide funds directly to external groups and let them decide how to allocate the funds effectively.

Layer 1: Ethereum Foundation Team

The Ethereum Foundation is a team-based community. These teams have made their own contributions to the development of the entire ecosystem, and these dazzling star teams include Geth, Solidity, Devcon, etc.

Not only that, the teams within the community are also very diverse in terms of the content and mode of work these teams do. Some teams are very independent and like to operate as a unique team; some teams prefer to integrate into the community and work closely with other different Ethereum Foundation teams. Some teams like to be the focus of community attention; while others prefer a low-key style.

Regardless, the Ethereum Foundation is open to all, providing funding, operations, and development space support to a wide variety of teams. Not only that, the Ethereum Foundation sometimes makes dynamic adjustments based on new needs of the ecosystem, such as creating new teams or reducing support for certain teams.

Here are two teams supported by the Ethereum Foundation:

• Devcon

The Devcon team aims to support the Ethereum ecosystem by hosting various events, including the Ethereum Developer Conference Devcon and launching new programs like Devconnect. In addition, the team also supports Ethereum community events all year round and strives to develop the Ethereum community around various events.

• Geth

The Geth team is responsible for the development and maintenance of go ethereum (Geth). Users can access the Ethereum blockchain through the geth client and related libraries. Currently, Geth is the most popular Ethereum client and an integral part of the Ethereum ecosystem.

Second layer: Grants

In 2021, the Ethereum Foundation provided a total of 19.6 million yuan in funding to teams in the ecosystem. The entire sponsorship process is carried out through an open sponsorship program called the Ecosystem Support Program (ESP), which includes: the ESP team receives applications, processes applications, solicits feedback, approves grants, and manages grant relationships. In addition, the ESP team is also looking for other non-financial ways to support teams applying for funding.

Not only that, the Ethereum Foundation team will also receive sponsorship from other teams and use these sponsorship funds to achieve their set goals in the ecosystem.

It is worth mentioning that these sponsorship funds are not only obtained through applications, but also include some "active" sponsorship. Usually, the Ethereum Foundation team will firmly grasp various opportunities to develop and improve the Ethereum ecosystem and have conversations with community members about financial sponsorship.

In many cases, the Ethereum Foundation collaborates with other teams in the Ethereum ecosystem to jointly launch sponsorship activities. For example, in 2021, the Foundation worked with a group of community donors to raise $1.5 million for the implementation client team. However, what the Ethereum Foundation hopes to see most is that the team does not obtain funds through a single channel, but can directly obtain funding sources on their own and smoothly achieve their respective goals.

Note: The above figures reflect the Ethereum Foundation's grants in 2021. In addition, the Ethereum Foundation also announced the total amount of sponsorship agreements signed in 2021, which exceeded previous years because they promised to sponsor a large project, but this money will not be paid all at once, but will be gradually redeemed over several years.

Here are some examples of teams the Ethereum Foundation has sponsored:

• Uniswap

In 2018, the Ethereum Foundation provided the first batch of external sponsorship funds to an Ethereum developer. Through his own exploration, the developer developed a decentralized exchange called Uniswap. At that time, the Ethereum Foundation provided the developer with a sponsorship of $50,000 and 120 ETH, with the aim of making the Uniswap mainnet debut successfully at the 2018 Ethereum Global Developer Conference Devcon4. Before that, auditing, preparing materials and UI design would cost a lot of money. Since its launch, Uniswap has become an indispensable key infrastructure in the Ethereum ecosystem. Today, the Uniswap community also manages up to $4.8 billion in funds - part of which is used to sponsor the Ethereum ecosystem, and all of this is inseparable from the funds four years ago.

• Consensus (“Eth2”) consensus client

Since 2018, the Ethereum Foundation has sponsored multiple teams working on consensus clients (formerly “Eth2 clients”). Through the Foundation’s unremitting efforts over the years, Ethereum has successfully transitioned to the Proof-of-Stake consensus mechanism. There may be five more consensus clients to be integrated in the near future.

Layer 3: Delegated Domain Allocators

The Ethereum Foundation has been actively working with experts in the field and giving them the power to review and provide sponsorship within a specific scope, while the Foundation itself has also received guidance on the allocation of funds.

Experts who have worked with the Ethereum Foundation have their own areas of expertise, including developing zero-knowledge technology and staking infrastructure, focusing on developer experience improvement and developer onboarding training, etc. If the Ethereum Foundation works alone, its power will be limited after all, so it must rely on cooperation with the wider community to allocate resources more effectively and provide sponsorship funds for public products in the ecosystem.

Cooperation example:

• Nomic Labs

In June 2019, the Ethereum Foundation began collaborating with Nomic Labs. Initially, the Foundation provided funding to Nomic Labs to improve the developer experience of Ethereum. However, over time, this relationship gradually changed, and Nomic Labs was entrusted to become a fund allocator. This means that the Ethereum Foundation is working tirelessly to find multiple ways to allocate funds throughout the ecosystem to improve the developer experience of Ethereum.

• Devfolio

The Ethereum Foundation has been working with the Devfolio team since 2019, with Devfolio helping to guide the Ethereum Foundation’s work in supporting the Indian Ethereum ecosystem, providing grants, running scholarship programs, etc.

• Third-party funding

As the ecosystem matures, the Ethereum Foundation has begun to reallocate more and more funds to independent third-party organizations to work together to support the ecosystem and fund public goods. To this end, the Ethereum Foundation has worked with organizations such as 0xPARC, Nomic Foundation, ETHGlobal, and used on-chain applications such as CLR/Quadratic Funding to put power in the hands of the community.

• Example 1: CLR / Quadratic Funding

Quadratic Funding is a democratic mechanism for funding public goods. Since 2019, the Ethereum Foundation has worked with organizations such as Gitcoin and CLR.FUND to allocate large amounts of funds and then match them with individual donations from the Ethereum community. The Ethereum Foundation will continue to invest in making Quadratic Funding scalable and secure so that the community can use these tools to allocate funds.

• Example 2: 0xPARC

0xPARC is a new organization dedicated to supporting the development of decentralized applications. In 2021, the Ethereum Foundation provided 0xPARC with a large grant, which the new organization will use to fund its own activities and distribute it to the ecosystem through grants and other initiatives.

• Example 3: Nomic Foundation

In 2021, Nomic Labs announced its transition to the Nomic Foundation, a new non-profit foundation that will focus on improving the Ethereum developer platform by building tools and infrastructure. The Ethereum Foundation provided an $8 million grant to the new organization, and further grants will be provided to support its mission.

Analysis of the Ethereum Foundation’s Financial Situation

Ethereum Foundation Reserve

As of March 31, 2022, the Ethereum Foundation's reserves are approximately $1.6 billion, including approximately $1.3 billion in cryptocurrencies and $300 million in non-crypto investments and assets. The vast majority of cryptocurrencies held by the Ethereum Foundation are ETH, accounting for 99.1% and 0.297% of the total ETH supply.

The Ethereum Foundation follows a conservative financial management policy, ensuring that there are sufficient resources to fund the core goals of the Ethereum Foundation even in the face of multi-year market downturns. The funds held by the Ethereum Foundation show that they have a sufficient budget and are basically not affected by ETH price fluctuations.

In order to avoid over-reliance on ETH, the Ethereum Foundation has also increased its non-cryptocurrency reserves, providing a greater safety margin to ensure continued funding for non-core but highly leveraged projects during market downturns. The reason why most of the funds are "placed" on ETH is because the Ethereum Foundation believes in the potential of Ethereum, and holding ETH also represents confidence in the long-term development of Ethereum. (Note: The ETH held by the Ethereum Foundation includes 39,168 ETH that has been committed to the client incentive plan. These ETH will be distributed to the relevant client development teams according to the previously disclosed schedule.)

Above: Ethereum Foundation reserve distribution (as of March 31, 2022)

Ethereum Foundation spending in 2021

In 2021, the Ethereum Foundation's expenses reached $48 million , of which approximately $20 million was used for external expenses, mainly including grants, authorized domain name allocations, third-party funding, bounties and sponsorships. The remaining funds were mainly used to fund teams and projects within the Ethereum Foundation community, including:

• Layer 1 R&D: $21.8 million;

• Layer 2 R&D: $1.9 million;

• Applied Zero Knowledge (ZK) R&D: $3.6 million;

• Developer Platform: $5.9 million;

• community development: $9.7 million;

• Internal operations and support: $5.1 million.

Layer 1 R&D: $21.8 million

Layer 1 R&D work mainly includes: mainnet upgrades, Geth, internal security research, cryptography R&D, economic modeling and mechanism design, long-term research to implement the Ethereum community roadmap, and external execution and consensus layer client-related R&D. This category also includes grants to external parties, such as network stress testing and professional cryptography external research. Client incentive program funds are not included, and the client team will unlock funds according to the previously agreed schedule. As of March 31, 2022, there are a total of 39,168 ETH in the client incentive program, worth approximately US$132.5 million.

Layer 2 R&D: $1.9 million

Layer 2 R&D expenses mainly involve teams that contribute to Ethereum Layer 2 R&D and parties that work to improve the Layer 2 ecosystem. Related work includes: educational resources, stress testing and monitoring tools, L2 SDK and other developer tools, security reviews of external projects, etc.

Applied Zero Knowledge R&D: $3.6 million

This expenditure mainly includes funding for teams working on projects such as MACI, ZKEVM, UniRep and others, and also involves other donations such as ZK developer tools, ZK ceremony design UX, ZK application proof of concept, etc., as well as a grant given to the 0xPARC Foundation in October 2021.

Developer Platform: $5.9 million

This category includes all work related to improving Ethereum as a developer platform, such as supporting teams such as Solidity, Remix and the Python ecosystem, Zokrates, and donations to third parties such as Nomic Labs. (Note: The $8 million grant to the Nomic Foundation in 2022 is not included)

Community development: $9.7 million

This category includes a variety of efforts to support different parts of the Ethereum community, such as engagement with the core protocol community (such as support for the staking community), Next Billion, Devcon, and Ethereum.org and other educational resources. It also includes many grants, such as grants to educational campaigns in specific regions such as Honduras and Colombia, as well as the $1 million announced in November 2021 to advocacy organizations and the $1 million staking community grant announced in February 2021.

Internal operations: $5.1 million

Internal operations primarily include general expenses to support the operations of the Ethereum Foundation team, including: all costs related to internal and external legal, accounting and financial services, as well as organization-wide subscriptions and services, such as data services, operational tools and technical infrastructure. In addition, internal operating expenses also include all expenses related to personal investments in fund management strategies, as well as salaries for all operational and administrative staff.