a16z: Dispute Analysis on the "End of the Crypto Foundation Era"

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

In the article “ The End of the Crypto Foundation Era ,” the call for the end of offshoring of cryptocurrencies has sparked some controversy. I want to answer five of the most common questions about taxation, public welfare institutions, the future role of foundations, and the limitations of the “pure foundation” model. As more questions emerge, we will update this FAQ.

1. How about taxes?

Offshore foundations can offer tax benefits, but the risks are greater than many think (and greater than consultants are willing to admit). In addition, to reap these benefits, U.S. projects must introduce significant operational complexity and structural inefficiency—such as finding offshore employees, and maintaining strict independence between foundations and development companies (DevCo), among others. Every minute spent managing these restrictions is tantamount to every minute spent on shipping.

Or to put it more bluntly: Founders should focus on maximizing opportunities for success, rather than those collateral benefits that only success can bring. Startups won't fail because they don't optimize taxes.

In retrospect, most of the founders I interviewed were happy to give up on the tax benefits obtained through offshore outsourcing to eliminate the overheads brought by these architectures. They often say that the main reason is that the regulatory environment is relatively harsh, and as the regulatory environment gradually weakens, this complexity is no longer worth it. Finding the fit between products and markets is far more important than tax planning.

Furthermore, if structured correctly, DUNA can improve tax efficiency, so tax concerns should not be a barrier to onshore operations.

2. Are public welfare legal persons (PBCs) different from foundations?

no. PBCs have fiduciary obligations to shareholders, but they are allowed to balance those obligations with the public interest. This means they can operate like a regular company—competition, raise funds, pursue profits, and so on—including situations in which these businesses provide intersect benefits to agreements and token holders.

On the other hand, the foundation distorts the incentive mechanism and is at a disadvantage in competition. Even where commercial activities are allowed, foundations rarely operate effectively. When they try to operate like a company, they often cause tax, legal and governance contradictions that are exactly what they meant to avoid.

This is especially problematic for networks that need to build their business on them. These networks require synchronous efforts in marketing, engineering and marketing to attract third-party businesses. Nonprofits are simply not suitable for doing this. And when they are equipped with overseas lawyers, they are simply not competitive.

There is a reason why only a few successful consumer Internet products and services are established and operated by foundations.

3. What role can the foundation play in the future?

Absolutely true. The focus of my article is not “Never Don’t Have Foundations” – it’s that we should stop using them to create decentralized performances. It is a good thing that market structure legislation enforces such changes.

Foundations (especially domestic foundations) with specific missions (such as the implementation of grant programs and the coordination of the work of individual ecosystems) will continue to play a role. Token holders can provide supervision but cannot directly manage these functions. Uniswap Foundation and Compound’s new foundation proposals are great examples. The foundation operates independently, but is responsible to the token holders through funds: If the token holders do not like the foundation’s decision, they can stop funding. For mature projects, foundations may also be a better place to carry out protocol development work, as we have seen at the Ethereum Foundation.

Importantly, the control-based framework proposed in the legislation of market structures not only contributes to DevCos, but also legalizes these purpose- driven, narrow-scoped foundations.

4. So how about the "Fundament Only" model? That is, DevCo disappears and

the foundation builds an ecosystem?

Contrary to intuition, for early stage projects, eliminating DevCo and relying entirely on foundations to build an ecosystem could actually undermine decentralization. The reasons are as follows.

To implement and maintain decentralization in the network, third parties (not just insiders) need to participate and build on the network. But unless third parties can get value from participation, they won’t participate. This is already obvious in the context of some network players (such as validators) – no one wants them to operate indefinitely. But the same logic applies to application developers, such as those running the front-end for DeFi, social media, or messaging protocols.

While foundations can promote credible neutrality, the pure foundation model faces unique challenges in nurturing diverse and durable application layers:

• As a nonprofit, the foundation cannot well assess the necessary conditions required to ensure network participation is profitable for developers. Foundations that operate applications in charitable rather than commercial form lack structural incentives to care whether application developers can continue to make profits. This increases the risk that the protocol itself is designed to not support profitable third-party application development.

• When the application run by the foundation loses money and is funded indefinitely by the network, it creates a distorted competitive environment. Third-party applications are subject to market constraints, while applications operated by foundations are not subject to restrictions. This imbalance can hinder independent developers (who ultimately have to be profitable) and inhibit organic growth of the ecosystem.

• In systems where neither developer companies nor foundations operate applications, trustworthy neutrality may be possible—but this comes at the expense of real-time product learning. If entrepreneurs cannot "dog food test" their products, they will be at a competitive disadvantage when it comes to understanding user needs.

For emerging projects, tight feedback loops and market signals are crucial to going from 0 to 1. Entrepreneurs need to know in real time what methods work and what are not. Indirect or distorted signals can endanger success.

For mature projects with strong and diverse network participation, trust neutrality will be an effective tool to scale from 1 to 100. In this case, it would be wise to move to a foundation-led model, albeit with some inefficiency issues. Mature projects with mature market participants and user behaviors are also more capable of understanding the incentives needed to operate profitably and maintain a level playing field. Morpho's reorganization is a good example. But even for mature projects, giving up direct profit motivation is not without risks.

Furthermore, projects that adopt this strategy should be careful not to convert their tokens into functional equivalents of foundation stocks. The existing securities laws and market structure legislation do not allow tokens to be the rights and interests of centralized organizations (including the economic rights and interests of off-chain businesses operated by foundations). Network tokens represent ownership of the network, not ownership of a company or foundation.

In short, the foundation-led network has its presence, but timing is crucial. Deploy too early, they may hinder rather than promote decentralization.

5. Does DUNA face the same "non-profit" problem as the foundation?

No. DUNA is a “non-profit association”, but you shouldn’t confuse them with the foundation. DUNAs are by definition well-targeted organizations with a narrow scope – they are just packaging for token governance. They are not hierarchical organizations, have no product teams, and do not operate any business.

Just as a foundation focused on funding can avoid the incentive misalignment that nonprofits try to build products, DUNA avoids this through design. They exist to reflect governance outcomes, not managers’ operations.

In addition, "non-profit" does not mean "tax exemption". DUNA can engage in for-profit activities, including earning revenue from protocol operations (such as decentralized exchange fees, decentralized social media fees, etc.). Wyoming’s DUNA regulations explicitly allow reasonable remuneration for any services provided by the DUNA ecosystem, including token holders. DUNA can even be used for token-based governance for those protocols that adopt programmatic buying and destroying economic models. (For more information about DUNA, please read this article .)

Therefore, DUNA will not inherit the structural drawbacks of the massive nonprofit foundations – they provide a clear, targeted legal interface for networks that want to stay at home without compromising decentralization.

In short, if you build a network using network tokens, then:

• If your network requires a funding program, please use the Foundation.

• If your network requires development and products, use a company.

• If your network needs governance, use DUNA for token governance and use the BORG tool to transfer permissions to the chain.

If you do not build a network, none of the above content applies.