a16z: The encryption industry is time to move away from the foundation model.

Author: Miles Jennings, Head of Policy and General Counsel at a16z crypto; Translated by: AIMan@Golden Finance

It's time for the crypto industry to move away from its foundation model. Foundations—non-profit organizations that support the development of blockchain networks—used to be a smart and legitimate path to progress. But today, ask any founder who has created a blockchain network, and they will tell you: nothing slows you down more than a foundation. Nowadays, the friction brought by foundations is greater than that of decentralization.

With the U.S. Congress introducing a new regulatory framework, the cryptocurrency industry has welcomed a rare opportunity to break free from its fundamentals and friction, allowing for better coordination, accountability, and scalability in its development.

After discussing the origins and shortcomings of foundations in the text below, I will explore how cryptocurrency projects have abandoned the foundation structure in favor of utilizing regular developer companies to leverage emerging regulatory frameworks and approaches. Throughout the article, I will explain how companies can better allocate capital, attract top talent, and respond to market forces, making them a better vehicle for driving structural adjustments, growth, and influence.

An industry seeking to scale and challenge large tech companies, big banks, and major governments cannot rely on altruism, charitable funding, or vague directives. The scaling of the industry depends on incentive mechanisms. If the cryptocurrency industry wants to fulfill its promises, it must mature and move away from those structural crutches that are no longer applicable.

Foundation: So far it has been necessary

So, how did cryptocurrencies originally form the foundation model?

In the early days of cryptocurrency, many founders turned to nonprofit foundations out of sincere belief that these entities would help promote decentralization. The purpose of the foundation is to act as a neutral manager of network resources, holding tokens and supporting ecosystem development without engaging in direct commercial interests. Theoretically, foundations are best suited to promote credible neutrality and long-term public interest. Fairly speaking, not all foundations have issues. Some foundations, such as the Ethereum Foundation, have brought blessings to the growth and development of the networks they support, with members being dedicated employees engaged in challenging and highly valuable work under restrictive conditions.

But over time, regulatory dynamics and increasing market competition have deviated from the original vision of the foundation model. Things are complicated by the SEC's effort-based decentralized testing – encouraging founders to abstain, obscure, or otherwise abstain from participating in the networks they create. Increasing competition further incentivizes projects to see foundations as a shortcut to decentralization. In this context, foundations today are often just a complex workaround: transferring power and ongoing development efforts to a "separate" entity in the hope of circumventing securities regulation. While this makes sense in the face of legal warfare and regulatory hostility, it also makes foundations' shortcomings impossible to ignore—they often lack coherent incentives, are structurally incapable of optimizing growth, and entrench centralized control.

As congressional proposals gradually shift towards a control-based maturity framework, the separation and fiction of the foundation are no longer necessary. The control-based framework encourages founders to relinquish control but does not force them to abandon or conceal their ongoing construction. Compared to the effort-based framework, it also provides a clearer (and more easily abused) definition of decentralization for building.

With the easing of pressure, the industry can finally move away from stopgap measures and build structures that are more conducive to long-term sustainable development. Foundations are certainly useful, but they are no longer the best tools for addressing the future.

The Myth of Coordinating Incentive Mechanisms in Foundations

Supporters believe that the connection between the foundation and token holders is closer, as the foundation does not have shareholders and can focus on maximizing network value.

However, this theory ignores the actual operational mode of organizations. Eliminating equity-based incentive mechanisms in companies does not eliminate misalignment; rather, it often institutionalizes it. Foundations that lack profit motives lack clear feedback loops, direct accountability, and market constraints. The funding model of foundations is a sponsorship model: tokens are distributed and then sold for fiat currency, but there is a lack of clear mechanisms to link expenditures with outcomes.

People spend other people's money without bearing any responsibility, which rarely produces the best results.

Accountability has been integrated into the company's structure. Companies are constrained by market laws: they invest capital in pursuit of profits, and financial results—revenue, profit margin, and return on investment—are objective indicators of whether these efforts are successful. In turn, shareholders can assess performance and apply pressure when management fails to achieve clear objectives.

In contrast, the purpose of a foundation is usually to operate indefinitely, incur losses, and not bear any consequences. Due to the open and permissionless nature of blockchain networks, and often a lack of clear economic models, it is almost impossible to translate the efforts and expenditures of the foundation into value acquisition. Therefore, crypto foundations cannot respond to market forces that require difficult decision-making.

Aligning the incentives of fund employees with the long-term success of the network is another challenge. The incentive mechanisms for fund employees are weaker than those for company employees because they typically receive a combination of tokens and cash (funded by the sale of foundation tokens) rather than a combination of tokens, cash (funded by equity sales), and equity. This means that the incentive mechanisms for fund employees are more susceptible to the short-term fluctuations in the public token price, while those for company employees are more stable and long-term. However, bridging this gap is not easy—successful companies are able to grow continuously and provide employees with steadily increasing benefits, but successful foundations do not necessarily do the same. This makes alignment difficult and may lead fund employees to seek external opportunities, raising concerns about potential conflicts of interest.

The foundation is subject to legal and economic restrictions

The foundation not only has distorted incentive mechanisms, but legal and economic restrictions also limit its ability to act.

Many foundations are legally unable to build related products or engage in various commercial activities—even if these activities could significantly promote network development. For example, most foundations are prohibited from operating consumer-facing profit-making businesses, even if such businesses bring a large volume of transactions to the network and create value for token holders.

The economic realities faced by foundations also distort strategic decision-making. Foundations bear the direct costs of their efforts, while their returns (if any) are dispersed and socialized. This distortion, coupled with a lack of clear market feedback, makes it more difficult to allocate resources effectively, including for employee compensation, long-term risky projects, and short-term seemingly advantageous projects.

This is not the secret to success. A successful network relies on the development of a range of products and services—middleware, compliance services, developer tools, and so on—that can only be better provided by companies that operate in a market-oriented manner. Even though the Ethereum Foundation has made significant progress, who would think that Ethereum would be better off without all the products and services developed by the for-profit company ConsenSys?

The opportunities for the foundation to promote value may become more limited. Currently (and understandably), the proposed market structure legislation focuses on the economic independence of tokens relative to any centralized organization, requiring value to come from the programmatic operations of the network (for example, the way ETH appreciates under EIP-1559). This means that both companies and foundations cannot support token value through off-chain profit-generating businesses—such as FTX supporting the value of FTT by using profits from its exchange to buy and burn FTT. This makes sense, as these centralized control mechanisms for binding value introduce trust dependencies, which are a hallmark of securities (when FTX collapsed, the price of FTT fell as well). However, banning such mechanisms also eliminates potential pathways for market-based accountability (through off-chain business revenue).

The foundation leads to low operational efficiency

In addition to legal and economic constraints, the foundation also causes serious operational inefficiencies. Any founder of a foundation knows that disbanding a well-functioning team to meet formal, often executive separation requirements comes at a high cost. Engineers focused on protocol development typically work daily with business development, listing, and marketing teams—however, under the foundation structure, these functions operate independently.

When facing these structural challenges, entrepreneurs are often troubled by some absurd issues they never thought would become a problem: Can fund members and company employees use the same Slack channel? Can roadmaps be shared between organizations? Can employees even attend the same offsite meeting? In fact, these issues are not important for decentralization, but they bring real costs: artificial barriers between interdependent functional departments slow down development speed, suppress coordination, and ultimately reduce product quality for everyone.

The foundation has become a centralized gatekeeper.

In many cases, the intended role of the crypto foundation has strayed far from its original mission. There are countless examples of foundations that are no longer focused on decentralized development, but are being given more and more control – turning them into centralized players who control funding keys, key operational functions, and network upgrades. In many cases, foundations lack real accountability for token holders; Even though token holder governance could replace foundation directors, it would only replicate the principal-agent problem common in corporate boards, only with fewer recourse tools.

What makes matters worse is that establishing most foundations requires up to $500,000 and takes months of collaboration with a large number of lawyers and accountants. This not only slows down innovation but also makes costs prohibitively high for small startups. The situation has become so dire that it is now increasingly difficult to find lawyers with experience in establishing foreign foundations, as many have abandoned their practice. Why? Because they are now just charging fees as professional board members for dozens of cryptocurrency foundations.

Read it again.

All in all, many projects end up in a kind of "shadow governance" of vested interests: tokens may represent nominal "ownership" of the network, but the real ones are at the helm of the foundation and the directors it employs. These structures are increasingly incompatible with proposed market structure legislation, which encourages on-chain, more responsible, control-free systems, rather than more opaque, off-chain structures that merely decentralize control – far better for consumers than just hiding trust dependencies. Mandatory disclosure obligations would also increase the transparency of existing governance structures, exerting significant market pressure on projects to remove control rather than handing it over to a few unaccountable individuals.

Better and simpler alternatives: Company

In a world where a founder no longer needs to give up or hide their ongoing efforts for the network, ensuring that the network is not under any individual's control, the foundation will no longer be necessary. This will open the door to better architecture – supporting long-term development, coordinating the incentive mechanisms of all participants, while also meeting legal requirements.

In this new environment, ordinary development companies—those that build networks from concept to reality—provide a superior vehicle for the ongoing construction and maintenance of the network. Unlike foundations, companies can efficiently allocate capital, attract top talent through means other than offering tokens, and respond to market forces through feedback loops on their work. Companies are structurally aligned with growth and influence, without relying on charitable funding or vague mandates.

That said, concerns about the company and its incentive mechanisms are not unfounded. If the company continues to exist, the network's potential for accumulating value in tokens and company equity will introduce real complexities. Token holders have reason to worry that a company might design network upgrades in a way that benefits its own equity rather than the value of the tokens, or retain certain privileges and permissions.

The proposed market structure legislation provides assurances to these concerns through its statutory construction of decentralization and control. However, ensuring the coordination of incentive mechanisms remains crucial, especially in cases where the project has been operating for a longer period and the initial token incentive mechanisms eventually deplete. Moreover, due to the lack of formal obligations between companies and token holders, concerns about the coordination of incentive mechanisms will persist: the legislation does not set or allow for formal fiduciary duties to be imposed on token holders, nor does it grant token holders enforceable rights regarding the company's continued operation.

But these concerns can be addressed and do not justify the continued use of the foundation. These concerns do not require that tokens must possess the characteristics of equity—that is, statutory rights to the developers' continued efforts—otherwise, it would undermine the regulatory basis that distinguishes them from ordinary securities. On the contrary, these concerns highlight the need for tools that can continuously coordinate incentive mechanisms in a contractual and programmatic manner without compromising enforceability and influence.

Existing Tools, New Tools in the Cryptocurrency Field

The good news is that tools for coordinating incentive mechanisms already exist. The only reason these tools have not been widely adopted in the cryptocurrency industry is that using them under the framework of effort levels set by the SEC in the United States would lead to stricter scrutiny.

However, under the regulatory framework proposed by the market structure legislation, the power of several mature tools can be fully unleashed.

Public Benefit Corporation. Development companies can merge or transform into Public Benefit Corporations (Public Benefit Corporation, PBC), PBC has a dual mission: to create profits while pursuing specific public benefits - in this case, supporting the growth and health of the network. PBC gives founders 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 recurring incentive structures for businesses by sharing network revenue.

For example, a network with an inflationary token supply can share profits with a company by rewarding part of the inflationary token supply to it, while balancing this with a revenue-based buyback and burn mechanism, in order to calibrate the overall supply. If designed properly, this profit-sharing mechanism can drive token holders to capture the majority of the value, while establishing a direct and lasting connection between the company's success and the health of the network.

Milestone Unlocking. The token lock-up period for the company (i.e., the transfer restriction that prohibits company employees and investors from selling their tokens on the secondary market) can and should be tied to meaningful network maturity milestones. These milestones can include network usage thresholds; successful network upgrades (such as "the Merge" etc.); decentralization measures, such as meeting specific governance standards; or ecosystem growth targets.

The current market structure legislation proposes a mechanism that restricts insiders (such as employees and investors) from selling their tokens on the secondary market until these tokens are economically independent from the company (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 without pocketing profits before the network matures.

Contract Protection. The DAO can and should negotiate and enter into contractual agreements with companies to prevent the exploitation of the network in ways that are detrimental to token holders. This includes non-compete clauses, licensing agreements ensuring open access to intellectual property, obligations of transparency, and the right to reclaim unearned tokens—or to stop further payments in the event of misconduct that damages the network.

Programmatic Incentives. When network participants outside of the development company (such as customer operators building, expanding, and diversifying the network; infrastructure providers helping to maintain the network; or supply and demand providers offering meaningful network depth for all users) receive appropriate incentives through programmatic token distribution in exchange for their contributions, token holders can also be better protected.

This incentive mechanism not only helps to fund participants' contributions but also prevents the protocol layer from being commoditized (where the value of the system accumulates to technology stack levels outside the protocol, such as the client layer). Solving incentive issues programmatically helps to enhance the decentralized economy of the entire system.

In summary, these tools provide more flexibility, accountability, and durability than what the foundation offers, while allowing DAOs and networks to retain true sovereignty.

Implementation: DUNA and BORG

Two emerging methods—DUNA and BORG—offer simplified pathways for implementing these solutions while eliminating the overhead and opacity of the underlying infrastructure.

Decentralized Unincorporated Nonprofit Association (Decentralized Unincorporated Nonprofit Association, DUNA) grants DAO legal person status, enabling it to enter into contracts, hold property, and exercise legal rights—functions traditionally performed by foundations. However, unlike foundations, DUNA does not require cumbersome procedures such as establishing a headquarters abroad, setting up an independent supervisory committee, or creating complex tax structures.

DUNA has created a legal power that does not require a legal hierarchy - purely serving as a neutral execution agent for the DAO. This minimalist structure reduces administrative costs and centralized friction while enhancing legal clarity and the degree of decentralization. In addition, DUNA can also provide effective limited liability protection for token holders, which is an increasingly focused area.

In summary, DUNA provides a powerful mechanism to enforce incentive mechanisms within the network, allowing DAOs to contract with development companies to provide services. It also enables DAOs to exercise these rights through recapture, performance-based payments, and prevention of exploitative behavior—while maintaining the DAO's position as the ultimate authority.

Cybernetic organization (BORG) tools, are technologies developed for self-governance and operation, enabling DAOs to migrate many "governance conveniences" currently handled by foundations—such as grant programs, security committees, and upgrade committees—onto chain operations. Through on-chain operations, these substructures can operate transparently under smart contract rules: providing permissioned access when necessary, but accountability mechanisms must be hard-coded. Overall, BORG tools can minimize trust assumptions, enhance accountability protections, and support tax efficiency structures.

DUNA and BORG jointly transfer power from informal off-chain entities such as foundations to more accountable on-chain systems. This is not just a preference in ideology but also a regulatory advantage. The proposed market structure legislation requires that "functional, administrative, documentary, or departmental actions" be handled through decentralized, rules-based systems rather than through opaque, centrally controlled entities. By adopting the DUNA and BORG structure, crypto projects and development companies can uncompromisingly meet these standards.

The foundation has led the cryptocurrency industry through a period of strict regulation. They have also facilitated some incredible technological breakthroughs and achieved an unprecedented level of coordination. In many cases, the foundation has filled critical gaps that other institutions could not. Many foundations may continue to thrive. However, for most projects, their utility is limited – merely a stopgap measure in response to regulatory hostility.

That era is coming to an end.

Emerging policies, changes in incentive mechanisms, and the maturity of the industry all point in the same direction: true governance, true collaboration, and a true system. The foundation lacks the capacity to meet these demands. They distort incentive mechanisms, hinder scalable development, and consolidate centralized power.

The persistence of the system does not stem from trust in good actors, but from ensuring that each actor's self-interest is closely tied to the overall success. It is for this reason that enterprise architecture has thrived for centuries. In the field of cryptocurrency, we also need a similar architecture that allows for the coexistence of public interest and private enterprises, embeds accountability, and minimizes control through design.

The next era of cryptocurrency will not be built on expediency. It will be built on scalable systems—systems with real incentives, real accountability, and true decentralization.