a16z: The End of the Cryptocurrency Foundation Era

Author: Miles Jennings (a16z crypto), Luffy ( Foresight News)

The crypto industry is time to move away from the foundation model. As non-profit organizations supporting the development of blockchain networks, foundations were once a clever legitimate path to drive industry growth. But today, any founder who has launched a crypto network will tell you: nothing holds you back more than a foundation. The friction brought by foundations far outweighs their added value of decentralization.

With the introduction of a new regulatory framework by the U.S. Congress, the crypto industry has a rare opportunity: to say goodbye to foundations and instead build a new system with better incentive mechanisms, accountability, and scalability.

After discussing the origins and flaws of foundations, this article will explain how crypto projects can abandon the foundation structure and embrace ordinary development companies, leveraging the emerging regulatory framework for growth. I will explain one by one why companies are better at allocating capital, attracting top talent, and responding to market forces, making them a superior vehicle for driving structural incentive alignment, growth, and impact.

An industry attempting to challenge big tech companies, big banks, and big government cannot rely on altruism, charitable funding, or vague missions. The scalable development of the industry needs to rely on incentive mechanisms. If the crypto industry wants to deliver on its promises, it must shed the structural crutches that are no longer applicable.

Foundations: Once a Necessary Choice

Why did the crypto industry initially choose the foundation model?

In the early days of the crypto industry, many founders sincerely believed that non-profit foundations would help promote decentralization. Foundations were supposed to act as neutral managers of network resources, holding tokens and supporting ecological development without mixing in direct commercial interests. Theoretically, foundations are an ideal choice for promoting trusted neutrality and long-term public interest. To be fair, not all foundations have issues. For example, the Ethereum Foundation has played a crucial role in the development of the Ethereum network, with its team members accomplishing challenging and highly valuable work under difficult constraints.

However, over time, regulatory dynamics and intensified market competition have caused the foundation model to gradually deviate from its original intent. The SEC's decentralization test based on "effort" has complicated matters, encouraging founders to abandon, conceal, or avoid participating in the networks they created. Increased competition further prompted projects to view foundations as a shortcut to decentralization. In this context, foundations often become a stopgap: transferring power and ongoing development work to "independent" entities in hopes of evading securities regulation. While this approach has its rationale in the face of legal battles and regulatory hostility, the flaws of foundations can no longer be ignored; they often lack coherent incentive mechanisms, are fundamentally unable to optimize growth, and can entrench centralized control.

As Congress shifts to a maturity framework based on "control," the separation and fiction of foundations are no longer necessary. This framework encourages founders to relinquish control without forcing them to abandon or conceal subsequent development work. Compared to the "effort" based framework, it also provides a clearer definition of decentralization.

With the pressure eased, the industry can finally say goodbye to stopgap measures and turn to structures more suited for long-term sustainability. Foundations have their historical role, but they are no longer the best tool for the future.

The Myth of Foundation Incentive Mechanisms

Supporters argue that foundations align more closely with the interests of token holders because they have no shareholders and can focus on maximizing network value.

But this theory overlooks the actual operational logic of organizations. Eliminating equity incentives in companies does not eliminate misaligned interests; it often institutionalizes them. Foundations lacking profit motives miss clear feedback loops, direct accountability mechanisms, and market constraints. The funding model of foundations is a sponsorship model: selling tokens for fiat currency, but the use of these funds lacks a clear mechanism linking expenditures to outcomes.

Spending other people's money without bearing any responsibility rarely produces optimal results.

Accountability mechanisms are intrinsic to company structures. Enterprises are constrained by market discipline: spending capital to pursue profits, with financial results (revenue, profit margins, return on investment) serving as objective indicators of whether efforts are successful. Shareholders can evaluate management performance based on this and exert pressure when targets are not met.

In contrast, foundations typically operate at a loss indefinitely without facing consequences. Since blockchain networks are open and permissionless, they often lack clear economic models, making it nearly impossible to link the work and expenditures of foundations to value capture. The result is that crypto foundations are shielded from the real tests of market forces.

Aligning foundation members with the long-term success of the network is another challenge. The incentive mechanisms for foundation members are weaker than those for company employees; their compensation typically consists of tokens and cash (from foundation token sales), rather than a combination of tokens, cash (from equity sales), and equity. This means that the incentives for foundation members are more susceptible to short-term fluctuations in token prices, while the incentive mechanisms for company employees are more stable and long-term. Addressing this flaw is not easy; successful companies grow and provide employees with continuously increasing benefits, while successful foundations cannot achieve this. This makes maintaining incentive alignment difficult and may lead foundation members to seek external opportunities, raising concerns about potential conflicts of interest.

Legal and Economic Constraints of Foundations

The problems with foundations are not only due to distorted incentive mechanisms; legal and economic constraints also limit their ability to act.

Many foundations are legally unable to build relevant products or engage in certain commercial activities, even if these activities could significantly benefit the network. For example, most foundations are prohibited from operating profit-oriented consumer-facing businesses, even if such businesses could bring substantial traffic to the network and enhance token value.

The economic realities faced by foundations also distort strategic decision-making. Foundations bear the direct costs of efforts, while the benefits are dispersed and socialized. This distortion, combined with a lack of clear market feedback, makes it even more difficult to allocate resources effectively (including employee compensation, long-term high-risk projects, and short-term visible advantage projects).

This is not a path to success. Successful networks rely on the development of a range of products and services, including middleware, compliance services, developer tools, etc.; companies constrained by market discipline are better at providing these. Even if the Ethereum Foundation has made significant progress, who would argue that Ethereum would have developed better without the products and services developed by the profit-oriented company ConsenSys?

The opportunities for foundations to create value may be further limited. The proposed market structure legislation currently focuses on the economic independence of tokens relative to any centralized organization, requiring that value stems from the programmatic operation of the network. This means that neither companies nor foundations can support token value through off-chain profit-making businesses, as FTX did by buying and burning FTT to maintain its price. This is reasonable because these mechanisms introduce trust dependencies, which are characteristic of securities.

Inefficiency of Foundation Operations

In addition to legal and economic constraints, foundations can also cause severe operational inefficiencies. Any founder who has managed a foundation knows the cost of breaking up high-performing teams to meet formal isolation requirements. Engineers focused on protocol development often need to collaborate daily with business development, marketing, and promotional teams, but under the foundation structure, these functions are isolated.

When facing these structural challenges, entrepreneurs are often troubled by some absurd questions: Can foundation employees be in the same Slack channel as company employees? Can the two organizations share roadmaps? Can they attend the same off-site meeting? The fact is that these questions have no substantive impact on decentralization, but they do incur real costs: artificial barriers between interdependent functions slow down development speed, hinder coordination, and ultimately reduce product quality.

Foundations Become Centralized Gatekeepers

In many cases, the role of crypto foundations has strayed far from their original mission. Countless examples show that foundations are no longer focused on decentralized development but are instead granted increasing control, transforming into centralized roles that control the keys to the treasury, key operational functions, and network upgrade rights. In many cases, foundation members lack accountability mechanisms; even if token holder governance could replace foundation directors, it merely replicates the principal-agent model found in corporate boards.

To make matters worse, establishing most foundations costs over $500,000 and involves months of collaboration with a large number of lawyers and accountants. This not only slows down the pace of innovation but is also prohibitively expensive for startups. The situation has become so dire that it is increasingly difficult to find lawyers with experience in setting up foreign foundations, as many have abandoned their practices to serve as board members in dozens of crypto foundations for fees.

In other words, many projects end up forming a "shadow governance" dominated by vested interests: tokens may nominally represent "ownership" of the network, but the actual steering is done by the foundation and its hired directors. These structures increasingly conflict with the proposed market structure legislation, which rewards on-chain, more responsible, and control-eliminating systems rather than supporting more opaque off-chain structures. For consumers, eliminating trust dependencies is far more beneficial than hiding them. Mandatory disclosure obligations will also bring greater transparency to current governance structures, creating immense market pressure to eliminate control rather than confer it to a few unaccountable individuals.

A Better and Simpler Alternative: Companies

If founders do not need to abandon or conceal their ongoing efforts for the network, but only ensure that no one controls the network, then foundations are no longer necessary. This opens the door to better structures—ones that can support the long-term development of the network while aligning the incentives of all participants and meeting legal requirements.

In this new context, ordinary development companies provide a superior vehicle for the ongoing construction and maintenance of the network. Unlike foundations, companies can efficiently allocate capital, attract top talent through (non-token) incentives, and respond to market forces through feedback loops. Companies structurally align with growth and impact without relying on charitable funding or vague mandates.

Of course, concerns about companies and their incentive mechanisms are not unfounded. The existence of companies means that network value could flow to both tokens and company equity simultaneously, creating real complexity. Token holders have reason to worry that a company might design network upgrades or retain certain privileges that prioritize equity over token value.

The proposed market structure legislation provides assurances for these concerns through its statutory construction of decentralization and control. However, ensuring incentive alignment remains necessary, especially in cases where projects have been operating for a long time and initial token incentives have ultimately been exhausted. Furthermore, due to the lack of formal obligations between companies and token holders, concerns about incentive alignment will persist: legislation does not impose formal fiduciary duties to token holders nor grant token holders enforceable rights to demand ongoing efforts from companies.

But these concerns can be addressed and are not sufficient reasons to continue using foundations. These concerns do not require tokens to possess equity attributes, which would undermine their basis for different regulatory treatment from ordinary securities. Instead, they highlight the need for tools: to achieve incentive alignment through contracts and programmatic means without compromising execution and impact.

New Uses for Existing Tools in the Crypto Space

The good news is that tools for incentive alignment already exist. The only reason they have not been widely adopted in the crypto industry is that using these tools under the SEC's "effort" framework would invite more scrutiny.

However, under the proposed market structure legislation's "control" framework, the power of the following mature tools can be fully unleashed:

Public Benefit Corporations. Development companies can register or convert to public benefit corporations, which have a dual mission: to pursue profits while achieving specific public benefits, namely supporting the development and health of the network. Public benefit corporations provide founders with legal flexibility to prioritize network development, even if this may not maximize short-term shareholder value.

Network Revenue Sharing. Networks and decentralized autonomous organizations (DAOs) can create and implement ongoing incentive structures for companies through revenue sharing. For example, a network with an inflationary token supply can achieve revenue sharing by allocating a portion of inflationary tokens to the company while combining it with a revenue-based buyback mechanism to calibrate overall supply. A well-designed revenue-sharing mechanism can direct most of the value to token holders while establishing a direct and lasting connection between the success of the company and the health of the network.

Milestone-Based Token Vesting. The token vesting of companies (restrictions on employees and investors from selling tokens in secondary markets) should be tied to meaningful network maturity milestones. These milestones could include usage thresholds, successful network upgrades, decentralization measures, or ecological growth targets. The current market structure legislation proposes such a mechanism: restricting insiders (such as employees and investors) from selling tokens in secondary markets until the tokens achieve economic independence (i.e., the network tokens have their own economic model). These mechanisms can ensure that early investors and team members have strong incentives to continue building the network, avoiding cashing out before the network matures.

Contractual Protections. DAOs should negotiate contracts with companies to prevent the exploitation of networks in ways that harm token holders' interests. This includes non-compete clauses, licensing agreements ensuring open access to intellectual property, transparency obligations, and rights to reclaim tokens or halt further payments in the event of misconduct harming the network.

Programmatic Incentives. When network participants are incentivized through the programmatic distribution of tokens for their contributions, token holders will receive better protection. This incentive mechanism not only helps fund participants' contributions but also prevents the commodification of protocol layers (where system value flows to non-protocol technology stack layers, such as client layers). Addressing incentive issues programmatically helps solidify the decentralized economy of the entire system.

These tools collectively offer greater flexibility, accountability, and durability than foundations while allowing DAOs and networks to retain true sovereignty.

Implementation Path: DUNAs and BORGs

Two emerging solutions (DUNA and BORGs) provide simplified pathways for implementing these solutions while eliminating the cumbersome and opaque structure of foundations.

Decentralized Unincorporated Nonprofit Association (DUNA)

DUNA grants DAOs legal personality, enabling them to enter into contracts, hold property, and exercise legal rights, functions traditionally handled by foundations. However, unlike foundations, DUNA does not require establishing a foreign headquarters, setting up discretionary oversight committees, or complex tax structuring.

DUNA creates a legal authority without a legal hierarchy, purely serving as a neutral execution agent for the DAO. This minimalist structure reduces administrative burdens and centralized friction while enhancing legal clarity and decentralization. Additionally, DUNA can provide effective limited liability protection for token holders, an area of increasing concern.

Overall, DUNA provides a powerful tool for executing incentive alignment mechanisms around the network, allowing DAOs to enter into service contracts with development companies and enforce these rights through token reclamation, performance-based payments, and preventing exploitative behavior while retaining the ultimate authority of the DAO.

Cybernetic Organization Tooling (BORGs)

The BORGs technology developed for autonomous governance and operations allows DAOs to migrate many "governance facilitation functions" currently handled by foundations (such as funding programs, security committees, upgrade committees) on-chain. By moving on-chain, these substructures can operate transparently under smart contract rules: permissions can be set as needed, but accountability mechanisms must be hard-coded. Overall, BORGs tools can minimize trust assumptions, enhance accountability protection, and support tax-optimized structures.

DUNA and BORGs together transfer power from informal off-chain entities like foundations to more responsible on-chain systems. This is not just a preference for ideology but a regulatory advantage. The proposed market structure legislation requires that "functional, administrative, clerical, or departmental actions" be handled through decentralized, rule-based systems rather than opaque, centralized-controlled entities. By adopting DUNA and BORGs structures, crypto projects and development companies can uncompromisingly meet these standards.

Conclusion: Saying Goodbye to Stopgap Measures and Embracing True Decentralization

Foundations have guided the crypto industry through difficult regulatory times and facilitated some incredible technological breakthroughs and unprecedented levels of collaboration. In many cases, foundations have filled critical gaps where other governance structures could not function, and many foundations may continue to thrive. However, for most projects, their role is limited, serving merely as a temporary solution to regulatory challenges.

Such an era is coming to an end.

Emerging policies, changing incentive structures, and industry maturity all point in the same direction: towards true governance, true incentive alignment, and true systematization. Foundations are unable to meet these needs; they distort incentives, hinder scalability, and entrench centralized power.

The survival of systems does not depend on trusting "good people," but on ensuring that the self-interests of each participant are meaningfully tied to the overall success. This is why the corporate structure has thrived for centuries. The crypto industry needs a similar structure: one where public interest coexists with private enterprise, accountability is embedded, and control is minimized by design.

The next era of cryptocurrency will not be built on stopgap measures but on scalable systems: systems with real incentives, real accountability mechanisms, and real decentralization.

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