Written by Miles Jennings, Head of Crypto Policy and General Counsel at a16z
Compiled by: Luffy, Foresight News
Original title: a16z: The end of the era of cryptocurrency foundations
It’s time for the crypto industry to move away from the foundation model. Foundations, nonprofit organizations that support the development of blockchain networks, were once a clever legal way to advance the industry. But today, any founder who has launched a crypto network will tell you: nothing is more of a drag than a foundation. The friction that foundations bring far outweighs the decentralization value they add.
With the introduction of a new regulatory framework by the U.S. Congress, the crypto industry has a rare opportunity: say goodbye to foundations and build a new system with better incentives, accountability, and scale.
After exploring the origins and flaws of foundations, this article will explain how crypto projects are abandoning foundation structures and embracing ordinary development companies to develop with the help of emerging regulatory frameworks. I will explain one by one that companies are better at allocating capital, attracting top talent, and responding to market forces, and are a better vehicle for promoting structural incentive compatibility, growth, and impact.
An industry seeking to challenge Big Tech, Big Banks, and Big Government cannot rely on altruism, philanthropy, or a vague mission. Scaling requires incentives. If crypto wants to deliver on its promise, it must break free from structural crutches that no longer apply.
Foundations were once a necessity
Why did the crypto industry initially choose the foundation model?
In the early days of crypto, many founders sincerely believed that non-profit foundations would help promote decentralization. Foundations are supposed to be neutral stewards of network resources, holding tokens and supporting ecosystem development without direct commercial interests. In theory, foundations are ideal for promoting credible neutrality and long-term public interest. To be fair, not all foundations are problematic. For example, the Ethereum Foundation has made an indelible contribution to the development of the Ethereum network, and its team members have done difficult and extremely valuable work under challenging constraints.
But over time, regulatory dynamics and increased market competition have caused the foundation model to deviate from its original intention. The situation is further complicated by the SEC 's "effort"-based decentralization test , which encourages founders to abandon, conceal, or avoid participating in the network they created. Increased competition has further prompted projects to view foundations as a shortcut to decentralization. In this case, foundations often become a stopgap measure: transferring power and ongoing development work to "independent" entities in an attempt to circumvent securities regulation. Although this approach has its rationale in the face of legal games and regulatory hostility, the shortcomings of foundations can no longer be ignored. They often lack coherent incentive mechanisms, are inherently unable to optimize growth, and solidify centralized control.
With the congressional proposal moving to a maturity framework based on “control,” the separation and fiction of the foundation is no longer necessary. This framework encourages founders to give up control without forcing them to give up or hide the subsequent construction work. It also provides a clearer definition of decentralization than the framework based on “effort.”
As the pressure eases, the industry can finally move away from stopgap measures and toward structures better suited to long-term sustainability. Foundations have their historical role, but they are no longer the best tool for the future.
The Myth of Foundation Incentive Mechanism
Supporters argue that foundations are more aligned with the interests of token holders because they have no shareholders and can focus on maximizing the value of the network.
But this theory ignores the actual operating logic of organizations. Removing equity incentives from companies does not eliminate inconsistencies in interests, but often institutionalizes them. Foundations that lack profit motives lack clear feedback loops, direct accountability mechanisms, and market constraints. The foundation's financing model is a sponsorship model: tokens are sold for fiat currency, but the use of these funds lacks a clear mechanism to link expenditures to results.
Spending other people's money without taking any responsibility rarely produces the best results.
Accountability is an inherent attribute of corporate structure. Businesses are subject to market discipline: capital is spent in pursuit of profits, and financial results (revenue, profit margins, return on investment) are objective measures of the success of the effort. Shareholders can use these to assess management performance and exert pressure when targets are not met.
In contrast, foundations often operate at a loss indefinitely without consequence. Because blockchain networks are open and permissionless, they often lack a clear economic model, making it nearly impossible to tie foundation work and spending to value capture. As a result, crypto foundations are shielded from the realities of market forces.
Aligning foundation members with the long-term success of the network is another challenge. Foundation members have weaker incentives than company employees, and their compensation is typically made up of tokens and cash (from foundation token sales) rather than a combination of tokens, cash (from equity sales), and equity. This means that foundation member incentives are vulnerable to sharp fluctuations in token prices in the short term, while company employee incentives are more stable and long-term. Addressing this shortcoming is not easy, as successful companies grow and provide employees with continuously increasing benefits, while successful foundations cannot do so. This makes it difficult to maintain incentive compatibility and may cause foundation members to seek external opportunities, raising concerns about potential conflicts of interest.
Legal and economic constraints on foundations
The problem for foundations is not just distorted incentives; legal and economic constraints also limit their ability to act.
Many foundations are legally unable to build products or engage in certain commercial activities, even if those activities would significantly benefit the network. For example, most foundations are prohibited from operating a for-profit consumer-facing business, even if that business could drive significant traffic to the network and increase the value of the token.
The economic realities facing foundations also distort strategic decisions. Foundations bear the direct costs of their efforts, while the benefits are diffuse and socialized. This distortion, combined with the lack of clear market feedback, makes it more difficult to allocate resources efficiently (including staff salaries, long-term high-risk projects, and short-term explicit advantage projects).
This is not a recipe for success. A successful network depends on the development of a range of products and services, including middleware, compliance services, developer tools, etc., which companies subject to market discipline are better at providing. Even with all the progress made by the Ethereum Foundation, does anyone think that Ethereum would be better off without the products and services developed by the for-profit company ConsenSys?
The foundation’s opportunities to create value may be further limited. The proposed market structure legislation currently focuses on the economic independence of tokens from any centralized organization, requiring value to derive from the programmatic operation of the network. This means that neither the company nor the foundation may support the value of the token through off-chain profit-making operations, such as FTX’s purchase and burning of FTT through exchange profits to maintain its price. This is reasonable because these mechanisms introduce trust dependence, which is the characteristic of securities.
The Foundation’s operational efficiency is low
In addition to legal and economic constraints, foundations can also create significant 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 typically need to collaborate with business development, marketing, and outreach teams on a daily basis, but under the foundation structure, these functions are isolated.
When grappling with these structural challenges, entrepreneurs are often plagued by absurd questions: Can foundation staff be in the same Slack channel as company staff? Can two organizations share a roadmap? Can they attend the same remote meeting? The truth is, these questions have no real impact on decentralization, but they come with real costs: artificial barriers between interdependent functions slow down development, 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. Numerous cases have shown that foundations are no longer focused on decentralized development, but are instead given more and more control, transforming into centralized roles that control treasury keys, key operational functions, and network upgrades. In many cases, there is a lack of accountability for foundation members; even if token holder governance can replace foundation directors, it simply replicates the principal-agent model in corporate boards.
To make matters worse, most foundations cost more than $500,000 to set up and require months of work with an army of lawyers and accountants. This not only slows down innovation, but is also costly for startups. The situation has become so bad that it is becoming increasingly difficult to find lawyers with experience in setting up foreign foundations, as many have given up their practice to collect fees as board members at dozens of crypto foundations.
In other words, many projects end up with a kind of “shadow governance” dominated by vested interests: tokens may nominally represent “ownership” of the network, but it is the foundation and its hired directors who are actually at the helm. These structures are increasingly in conflict with proposed market structure legislation, which rewards on-chain, more accountable systems that eliminate control rights rather than supporting more opaque off-chain structures. Eliminating trust dependencies is far more beneficial to consumers than hiding them. Mandatory disclosure obligations will also bring greater transparency to current governance structures, creating tremendous market pressure to force projects to eliminate control rights rather than give them to a few people who lack accountability.
A better and simpler alternative: companies
If founders do not need to give up or hide their ongoing efforts on the network, but only need to ensure that no one controls the network, then a foundation is no longer necessary. This opens the door to better structures 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, regular development companies provide a better vehicle for the ongoing construction and maintenance of the network. Unlike foundations, companies can efficiently allocate capital, attract top talent through additional incentives (beyond tokens), and respond to market forces through working feedback loops. Companies are structurally aligned with growth and impact without relying on philanthropic funding or vague mandates.
Of course, concerns about companies and their incentives are not unfounded. The existence of a company creates real complications by making it possible for network value to flow to both tokens and company equity. Token holders have reason to worry that a company could prioritize equity over token value by designing network upgrades or reserving certain privileges.
The proposed market structure legislation provides safeguards against these concerns through its statutory construction of decentralization and control. However, ensuring incentive compatibility will remain necessary, especially if projects operate for a long time and the initial token incentives eventually run out. In addition, concerns about incentive compatibility will persist due to the lack of formal obligations between companies and token holders: the legislation does not impose formal fiduciary duties on token holders, nor does it give token holders enforceable rights to require companies to continue to work hard.
But these concerns can be addressed and are not sufficient to justify the continued use of foundations. Nor do these concerns require tokens to have equity attributes, which would weaken the basis for their different regulatory treatment from ordinary securities. Instead, they highlight the need for tools: to achieve incentive compatibility through contractual and programmatic means without compromising enforcement and impact.
New uses for existing tools in crypto
The good news is that incentive-compatible tools already exist. The only reason they haven’t become more widespread in crypto is that using them would attract more scrutiny under the SEC’s “effort”-based framework.
However, under the framework based on “control rights” proposed by market structure legislation, the power of the following mature tools can be fully unleashed:
Public Benefit Corporations. Development companies may register or convert to public benefit corporations, which have a dual mission: to pursue profits while also achieving a specific public benefit, namely supporting the growth and health of the network. Public benefit corporations give founders the legal flexibility to prioritize network growth, even if that may not maximize short-term shareholder value.
Network Revenue Sharing. Networks and decentralized autonomous organizations (DAOs ) can create and enforce ongoing incentive structures for companies by sharing network revenue. For example, a network with an inflationary token supply could implement revenue sharing by allocating a portion of inflationary tokens to companies, while incorporating a revenue-based buyback mechanism to calibrate the overall supply. A properly designed revenue sharing mechanism can direct the majority of value to token holders while creating a direct, lasting connection between company success and network health.
Milestone token vesting. A company’s token lockups (transfer restrictions that prohibit employees and investors from selling tokens on the secondary market) should be tied to meaningful network maturity milestones. These milestones can include network usage thresholds, successful network upgrades, decentralization measures, or ecosystem growth targets. Current market structure legislation proposes one such mechanism: restricting insiders (such as employees and investors) from selling tokens on the secondary market until the tokens are economically independent (i.e., the network tokens have their own economic model). These mechanisms ensure that early investors and team members have strong incentives to continue building the network and avoid cashing out before the network matures.
Contractual protections. DAOs should negotiate contracts with companies to prevent exploitation of the network in ways that harm the interests of token holders. This includes non-compete clauses, licensing agreements that ensure open access to intellectual property, transparency obligations, and the right to reclaim tokens or stop further payments in the event of misconduct that harms the network.
Programmatic Incentives. Token holders are better protected when network participants are incentivized for their contributions through programmatic allocation of tokens. This incentive mechanism not only helps to fund participant contributions, but also prevents protocol layer commoditization (the flow of system value to non-protocol layers of the technology stack, such as the client layer). Solving the incentive problem programmatically helps to consolidate the decentralized economy of the entire system.
Together, these tools provide greater flexibility, accountability, and permanence than a foundation, while enabling the DAO and the network to retain true sovereignty.
Implementation Path: DUNAs and BORGs
Two emerging schemes (DUNA and BORGs) offer streamlined pathways to implementing these solutions while removing the cumbersomeness and opacity of foundation structures.
Decentralized Unincorporated Nonprofit Association (DUNA)
DUNA gives DAOs legal personality, enabling them to enter into contracts, hold property, and exercise legal rights, functions traditionally performed by foundations. But unlike foundations, DUNAs do not need to establish a foreign headquarters, set up a discretionary oversight committee, or design complex tax structures.
DUNA creates a legal authority that does not require a legal hierarchy, acting purely as a neutral executive agent for the DAO. This structural minimalism reduces administrative burdens and centralized friction while enhancing legal clarity and decentralization. Additionally, DUNA can provide token holders with effective limited liability protection, an area of growing concern.
Overall, DUNA provides a powerful tool for enforcing incentive-compatible mechanisms around a network, enabling DAOs to enter into service contracts with development companies and enforce those rights through token recovery, performance-based payments, and protection against exploitative behavior, while retaining the DAO’s ultimate authority.
BORGs (Cybernetic Organization Tooling)
BORGs technology, developed for autonomous governance and operations, enables DAOs to migrate many of the “governance convenience functions” currently handled by foundations (such as funding programs, security committees, upgrade committees) to the chain. By being on-chain, these substructures can operate transparently under the rules of smart contracts: permission access is set when necessary, but accountability mechanisms must be hard-coded. Overall, BORGs tools minimize trust assumptions, enhance liability protection, and support tax-optimized structures.
Together, DUNA and BORGs shift power from informal off-chain institutions like foundations to more accountable on-chain systems. This is not only a philosophical preference, but also a regulatory advantage. The proposed market structure legislation requires that "functional, administrative, clerical or departmental actions" be handled through a decentralized, rule-based system rather than through opaque, centrally controlled entities. By adopting the DUNA and BORGs framework, crypto projects and development companies can meet these standards without compromise.
Conclusion: Say goodbye to stopgap measures and welcome true decentralization
Foundations have guided the crypto industry through difficult regulatory periods and have facilitated some incredible technological breakthroughs and unprecedented levels of collaboration. In many cases, foundations have filled critical gaps when other governance structures have failed to work, and many foundations may continue to thrive. But for most projects, their role is limited and is only a temporary solution to regulation.
That era is ending.
Emerging policies, changing incentive structures, and industry maturity all point in the same direction: toward real governance, real incentive compatibility, and real systematization. Foundations are unable to meet these needs, distorting incentives, hindering scale, and solidifying centralized power.
The survival of the system does not depend on trusting "good guys" but on ensuring that the self-interest of each participant is meaningfully tied to the success of the whole. This is why the corporate structure has been so successful for hundreds of years. The crypto industry needs a similar structure: public interest coexists with private enterprise, accountability is built in, and control is minimized by design.
The next era of cryptocurrency will not be built on stopgap solutions, but on systems that scale: systems with real incentives, real accountability, and real decentralization.
