This article is from: a16z Crypto
Translated by: Odaily Planet Daily (@OdailyChina); Translator: Azuma (@azuma_eth)
The cryptocurrency industry is ready to abandon the foundation model. Foundations—non-profit organizations that support the development of blockchain networks—were once a clever legal avenue for advancing the industry. But today, any founder who has initiated a network project will tell you: "Nothing holds you back more than this."
The obstacles created by the foundation model today far outweigh the decentralization conveniences it brings.
With the U.S. Congress proposing a new regulatory framework, the cryptocurrency industry has a rare opportunity to discard foundations and their hindrances—this is a chance to build with better consistency, accountability, and scalability in mind.
After analyzing the origins and flaws of foundations, I will explore how crypto projects can abandon the foundation structure in favor of ordinary development companies to adapt to emerging regulatory frameworks and approaches. I will explain why companies can more effectively allocate capital, attract top talent, and respond to market forces, thus becoming a better vehicle for driving structural consistency, growth, and impact.
An industry aimed at challenging tech giants, large banks, and government regulation cannot rely on altruism, charitable funding, or vague missions. Scaling the industry relies on incentive mechanisms. If the crypto industry is to fulfill its promises, it must rid itself of those structural crutches that are no longer applicable.
Foundations: Once a Necessary Choice
So, why did cryptocurrency initially adopt the foundation model?
In the early days of the crypto industry, many founders chose non-profit foundations out of belief that these entities could promote the decentralization of projects. Foundations were supposed to be neutral managers of network resources, holding tokens and supporting ecological development without direct commercial interests. Theoretically, foundations help achieve credible neutrality and long-term public interest. Fairly speaking, not all foundations have issues. For example, the Ethereum Foundation has played a positive role in the growth and development of the network it supports, with its members accomplishing valuable work under difficult conditions.
But over time, the regulatory landscape and increasingly fierce market competition have caused the foundation model to deviate from its original intent. The U.S. Securities and Exchange Commission (SEC) has complicated matters with its "development efforts" decentralization test—it encourages founders to abandon, obscure, or evade their involvement in creating the network; fierce competition further drives projects to view foundations as a shortcut to decentralization. Under these conditions, foundations often become a roundabout workaround: transferring power and ongoing development work to an "independent" entity in hopes of evading securities regulation. While this approach is understandable in the face of legal pressure and regulatory hostility, it also exposes the flaws of foundations—they often lack consistent incentive mechanisms, structurally fail to optimize growth, and instead reinforce centralized control.
As U.S. congressional proposals shift toward a mature framework based on "control," the separation and fictitious nature of foundations are no longer necessary. The "control" framework encourages founders to relinquish control over projects without being forced to evade or obscure their ongoing contributions. Compared to the "development efforts" framework, it provides a clearer (and less easily abused) definition of decentralization as a construction goal.
With this pressure lifted, the industry can finally shed its previous makeshift solutions and move toward structures better suited for long-term sustainable development. Foundations did indeed have a role, but they are no longer the best tool for the future.
Can Foundations Really Align Interests with Token Holders?
Supporters of the foundation model argue that foundations can better align with the interests of token holders because they have no shareholders and can focus on maximizing network value.
However, this theory overlooks how foundations actually operate. Foundations, lacking profit motives, have neither clear feedback mechanisms nor direct accountability and market constraints. The funding model of foundations is essentially sponsorship-based—after distributing tokens, they are exchanged for fiat currency, and there is no clear linkage between the expenditure of these funds and the outcomes.
When spending other people's money without accountability, few will pursue maximization of benefits.
Corporate structures inherently possess accountability mechanisms; companies are constrained by market forces: they allocate capital in pursuit of profit, and financial performance (revenue, profit margins, and return on investment) objectively reflects operational effectiveness. When management fails to meet clear goals, shareholders can assess performance and apply pressure.
In contrast, foundations are often set up to operate indefinitely at a loss without facing consequences. Due to the open and permissionless nature of blockchain networks, and often lacking clear economic models, it is nearly impossible to link the investments of foundations to value capture. In this situation, crypto foundations can evade the difficult choices required by market realities.
Binding foundation employees' interests to the long-term success of the network is even more challenging. The incentives for foundation employees are weaker than those for corporate employees; they typically receive a combination of tokens and cash (funded by foundation token sales), rather than the "tokens + cash (from equity financing) + equity" combination enjoyed by corporate employees. This means foundation employees are subject to the volatile fluctuations of token prices, with shorter incentive cycles; corporate employees, on the other hand, enjoy more stable long-term incentives. However, remedying this flaw is very difficult—successful companies continue to grow and create more value for employees, while successful foundations cannot. This difference makes it hard to maintain alignment of interests, potentially prompting foundation employees to seek external opportunities, raising concerns about conflicts of interest.
Legal and Economic Constraints of Foundations
Foundations not only face incentive distortions but also legal and economic limitations that restrict their ability to act.
Most foundations are prohibited from developing derivative products or engaging in commercial activities—even if these actions could significantly enhance network value. For example, even if a profitable terminal business could bring substantial transaction flow to the network and increase token value, the vast majority of foundations are still prohibited from operating such businesses.
The economic realities faced by foundations can also distort strategic decision-making. They must directly bear costs, while any revenue (if it exists) is dispersed and shared across the entire network. This distortion, combined with a lack of market feedback, leads to inefficient resource allocation—whether it be employee compensation, long-term high-risk projects, or short-term image projects.
This is not a path to success. A successful network ecosystem requires the development of a wide range of products and services (middleware, compliance tools, developer kits, etc.), and companies constrained by market forces are better suited to provide these. Even if the Ethereum Foundation has achieved remarkable success, would the Ethereum ecosystem have developed to its current height without the various products built by the profitable entity ConsenSys?
The space for value creation by foundations may be further compressed. The proposed market structure legislation focuses on the economic independence of tokens from centralized organizations, requiring that value must derive from the network's programmatic functions (such as the value accumulation of ETH under the EIP-1559 mechanism). This means that neither companies nor foundations can support token value through off-chain profitable businesses—for example, FTX once used exchange profits to buy back and burn FTT to maintain its price. This restriction is reasonable, as centralized control mechanisms introduce trust dependencies unique to securities (the collapse of FTX led to a dramatic drop in FTT prices). However, prohibiting such mechanisms also closes off market-based accountability pathways (through off-chain business revenue).
Inefficient Operations Caused by Foundations
In addition to legal and economic constraints, foundations also cause severe operational inefficiencies. Any founder who has dealt with a foundation knows well: to meet formal (often performative) separation requirements, they have to dismantle efficiently collaborating teams. Engineers focused on protocol development need to maintain daily collaboration with business development and marketing teams—but under the foundation structure, these functions are artificially severed.
Faced with these structural challenges, entrepreneurs are often forced to deal with absurd questions that should not be obstacles: Can foundation employees share Slack channels with company employees? Can the two organizations share development roadmaps? Can employees participate in the same team-building activities? In fact, these questions have nothing to do with decentralization, yet they come at a real cost: artificially imposed functional barriers slow down development progress, hinder collaboration, and ultimately harm the product experience for all users.
Foundations Become "Centralized Gatekeepers"
In many cases, the actual role of cryptocurrency foundations has significantly deviated from their original intent. Many foundations no longer focus on decentralized development but instead wield increasing power—they control treasury keys, key operational functions, and network upgrade permissions, evolving into new centralized entities. In most cases, foundations lack substantial accountability derived from token holders; even if there are governance mechanisms for token holders to replace foundation directors, it merely replicates the principal-agent problem found in corporate boards, with even fewer means of accountability.
Worse still, establishing a foundation typically requires over $500,000 in funding and months of time costs, along with hiring a large number of lawyers and accountants. This not only stifles innovation but also keeps small teams at bay. The situation has deteriorated to the point where even lawyers familiar with overseas foundation structures are hard to find—many have already switched careers. Why? Because they now prefer to serve as nominal directors for dozens of crypto foundations and easily earn consulting fees.
Ultimately, many projects have formed a "shadow governance" model of vested interests—tokens may symbolize the "nominal ownership" of the network, but the helm is still held by the foundation and its hired directors. This structure contradicts the spirit of emerging market structure legislation, which encourages the elimination of control through on-chain accountability mechanisms rather than merely dispersing control through opaque off-chain structures. For users, completely eliminating trust dependencies is far better than hiding the controllers. Mandatory disclosure obligations will also enhance the transparency of existing governance structures, exerting significant market pressure on projects to eliminate control rather than hand it over to a few irresponsible individuals.
A Better Solution: Ordinary Corporate Structure
When founders no longer need to abandon or hide their ongoing contributions to the network, but only need to ensure that no one can control the network alone, the foundation loses its necessity. This paves the way for a better structure—one that can support long-term development, coordinate various incentives, and meet legal requirements.
In the new regulatory environment, ordinary development companies (the builders from conception to realization of the network) are the better vehicle for the ongoing construction and maintenance of the network. Compared to foundations, companies can efficiently allocate capital, attract top talent through a "tokens + equity" combination, and adjust strategies in a timely manner based on market feedback. Corporate structures inherently pursue growth and impact without relying on charitable funding or vague missions.
Of course, concerns about corporate incentive mechanisms are not without merit. When development companies persist, network value may flow simultaneously to both tokens and company equity, which indeed brings more complexity. Token holders have legitimate concerns that development companies might design network upgrades favoring their own equity or retain certain privileges.
The proposed market structure legislation provides safeguards through a legal definition of "decentralization and control," but ensuring incentive alignment remains a long-term issue, especially as projects mature and initial token incentives are exhausted. Due to the lack of legal obligations between companies and token holders, concerns about incentive distortions will persist—laws neither stipulate fiduciary duties of companies to token holders nor grant token holders the right to compel companies to continue contributing.
However, these concerns can be addressed through technical means, and this cannot serve as a justification for perpetuating the foundation model. We also do not need to endow tokens with equity attributes, as this would blur the regulatory boundaries between tokens and securities. The real solution is to continuously calibrate incentives through contracts and programmatic tools without compromising execution efficiency and impact.
New Opportunities with Existing Tools
Although the cryptocurrency industry is not yet mainstream, incentive alignment tools have long existed. The only reason these tools have not been widely adopted is that the SEC's regulatory framework based on "development efforts" imposes stricter scrutiny on them.
Under the "control" framework proposed by market structure legislation, the following mature tools can be fully leveraged:
Public Benefit Corporation (PBC) Structure
Development companies can register or transform into public benefit corporations—these entities have dual missions of profit generation and promoting specific public interests (in this case, supporting network development and health). PBCs provide founders with legal flexibility, allowing them to prioritize network development even at the potential expense of short-term shareholder interests.
Network Revenue Sharing Mechanism
Networks and decentralized autonomous organizations (DAOs) can establish ongoing incentives through revenue sharing. For example, networks using inflationary token mechanisms can allocate a portion of newly minted tokens to development companies while implementing a revenue-based buyback and burn mechanism to regulate total supply. A well-designed revenue-sharing scheme can direct most value to token holders while establishing a lasting bond between corporate growth and network health.
Milestone Unlock Mechanism
Token lock-ups for employees and investors should be tied to key milestones in network development. These milestones include: usage thresholds, major upgrades (such as The Merge), decentralization metrics (meeting specific control standards), ecological growth targets, etc. Current market structure legislation has proposed similar mechanisms, prohibiting insiders (employees/investors) from secondary market sales until the network tokens form an independent economic model. Such designs ensure that early contributors continue to build the network rather than cash out while the ecosystem is still immature.
Contractual Safeguards
DAOs should enter agreements with companies to prevent actions that harm the interests of token holders, including: non-compete clauses, licensing agreements that ensure open intellectual property, transparency obligations, and rights to reclaim unredeemed tokens or halt payments.
Programmatic Incentive Systems
When network participants (such as client operators based on protocols, infrastructure maintainers, liquidity providers, etc.) receive contribution rewards through on-chain distribution mechanisms, token holders will be better protected. This design not only funds ecological contributions but also prevents the value of the protocol layer from being captured by other layers of the tech stack (such as the client layer). Programmatic incentives can strengthen the decentralized economy of the entire system.
Overall, these tools offer greater flexibility, accountability, and durability than foundations while ensuring that DAOs and networks maintain true sovereignty.
Implementation Path: DUNA and BORG Structures
Two emerging solutions—DUNA and BORG—provide lightweight implementation paths for the above proposals while avoiding the redundancy and opacity of foundations:
Decentralized Unincorporated Nonprofit Association (DUNA)
This structure grants DAOs legal entity status, allowing them to sign contracts, hold assets, and exercise legal rights (previously handled by foundations). However, unlike foundations, DUNA does not require establishing a foreign headquarters, forming discretionary supervisory committees, or designing complex tax structures.
DUNA creates a legal authority without a legal hierarchy—purely as a neutral executing agent for the DAO. This minimalist structure reduces administrative burdens and centralization friction while enhancing legal clarity and decentralization. Additionally, DUNA can provide effective limited liability protection for token holders, which is becoming an increasingly important need.
Overall, DUNA offers a powerful mechanism for network incentive alignment, enabling DAOs to enter service agreements with development companies and implement these rights through token reclamation, performance payments, and anti-exploitation clauses—while always ensuring the DAO's status as the highest decision-making body.
Cybernetic Organizational Tools (BORG)
These governance technologies can migrate the "governance convenience" functions of foundations (funding plans, security committees, upgrade committees) on-chain. Through smart contract rules, these substructures can set permissions as needed while incorporating accountability mechanisms. BORG tools minimize trust assumptions, enhance responsibility isolation, and optimize tax structures.
The combination of DUNA and BORG shifts power from off-chain informal entities like foundations to more accountable on-chain systems. This is not only a conceptual advancement but also a regulatory advantage. Proposed legislation requires that "functional, administrative, and transactional work" must be handled through decentralized rule systems rather than opaque centralized entities. Projects adopting the DUNA+BORG structure can meet these standards without compromise.
The End of the Foundation Era
Foundations once guided the cryptocurrency industry through regulatory winters and facilitated remarkable technological breakthroughs and unprecedented levels of collaboration. In many cases, when other structures were powerless, foundations filled critical gaps. Some foundations may continue to thrive, but for most projects, the role of foundations has always been limited—merely a temporary solution to regulatory hostility.
The era of foundations is coming to an end.
Emerging policies, the evolution of incentive mechanisms, and the maturity of the industry all point in the same direction: true governance, genuine interest alignment, and authentic system architecture. Foundations can no longer meet these demands—they distort incentives, hinder scalability, and entrench centralized power.
The maintenance of a lasting system does not rely on trust in well-meaning actors but on ensuring that the interests of every participant are deeply tied to the overall success. This is precisely why corporate structures have endured for centuries. The cryptocurrency industry needs a similar architecture: aligning public goals with commercial interests, embedding accountability mechanisms, and allowing for proactive limitations on control.
The next chapter of cryptocurrency will not be built on makeshift solutions but will rely on scalable systems—systems with real incentives, genuine accountability, and true decentralization.
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