a16z: The End of the Crypto Foundation Era

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

It's time for the crypto industry to get rid of the foundation model. As a nonprofit organization supporting the development of blockchain networks, foundations were once a clever and legal path to promote the development of the industry. But now, any founder who has launched an encrypted network will tell you: nothing is more dragging on the back of the foundation. The friction brought by the foundation has far exceeded its additional decentralized value.

With the introduction of a new regulatory framework in the U.S. Congress, the crypto industry has ushered in a rare opportunity: bid farewell to the foundation and instead build a new system with better incentive mechanisms, accountability mechanisms and scale methods.

After exploring the origins and flaws of the foundation, this article will explain how crypto projects abandon the foundation structure and instead embrace ordinary development companies and achieve development with the help of emerging regulatory frameworks. I will explain one by one that companies are better at allocating capital, attracting top talents, and responding to market forces. They are a better carrier for promoting structural incentive compatibility, growth and influence.

An industry that tries to challenge big tech companies, big banks and big governments cannot rely on altruism, charitable funding or ambiguous missions. The industry's large-scale development needs to rely on incentive mechanisms. If the crypto industry wants to fulfill its promise, it must get rid of structural crutches that are no longer applicable.

Foundations were 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 nonprofit foundations would help promote decentralization. The foundation should serve as a neutral manager of network resources, hold tokens and support ecological development without mixing direct commercial interests. In theory, foundations are ideal for promoting credible neutrality and long-term public interest. To be fair, not all foundations have problems. For example, the Ethereum Foundation has made an indelible contribution to the development of the Ethereum network, and its team members have completed arduous and extremely valuable work under challenging constraints.

However, over time, regulatory dynamics and intensified market competition have caused the foundation model to gradually deviate from its original intention. The situation is compounded by the US Securities and Exchange Commission’s decentralized testing based on “level of effort”, encouraging founders to give up, hide or avoid participating in the network they create. Intensified competition further prompted the project to view the foundation as a shortcut to decentralization. In this case, foundations often become a stopgap solution: by transferring power and continuous development to "independent" entities in a bid to circumvent securities regulation. Although this practice is reasonable in the face of legal games and regulatory hostility, the shortcomings of foundations cannot be ignored. They often lack coherent incentive mechanisms, essentially cannot optimize growth, and will solidify centralized control.

As Congressional proposals turn to a maturity framework based on “control”, the separation and fiction of foundations are no longer necessary. This framework encourages founders to give up control without forcing them to give up or conceal subsequent construction work. It also provides a clearer definition of decentralization compared to a framework based on "level of effort".

As the pressure eases, the industry can finally say goodbye to expedient measures and move to a structure that is more suitable for long-term sustainability. The foundation has its historical role, but it is no longer the best tool for the future.

Myths about the incentive mechanism of the foundation

Supporters believe that the interests of foundations are more consistent with token holders because they have no shareholders and can focus on maximizing network value.

But this theory ignores the actual operating logic of the organization. Abolishing the company's equity incentives does not eliminate inconsistencies in interests, but often institutionalizes them. Foundations lack profit motivation, lack clear feedback loops, direct accountability mechanisms and market constraints. The foundation’s financing model is a sponsorship model: selling tokens into fiat currencies, but the use of these funds lacks a clear mechanism to link expenditures to outcomes.

Spending other people 's money without taking any responsibility is rarely a model that can produce the best results.

Accountability mechanisms are inherent attributes of corporate structure. Enterprises are subject to market discipline: they spend capital in pursuit of profits, and financial results (income, profit margin, return on investment) are objective indicators for measuring whether efforts are successful. Shareholders can assess management performance based on this and put pressure on the targets if they are not met.

In contrast, foundations usually operate indefinitely at losses without bearing the consequences. Because blockchain networks are open and license-free and often lack clear economic models, it is almost impossible to link foundation work and expenditure to value capture. The result is that crypto foundations are protected from the reality of market forces.

Aligning foundation members with the network’s long-term success is another challenge. Foundation members have weaker incentives than company employees, and their compensation is usually composed 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 of foundation members are easily affected by violent fluctuations in the token price in the short term, while the incentive mechanism of company employees is more stable and long-term. Solving this flaw is not easy. Successful companies will grow and bring continuous growth benefits to employees, but successful foundations cannot. This makes maintaining incentive compatibility difficult and may lead to Foundation members seeking external opportunities, raising concerns about potential conflicts of interest.

Legal and economic constraints of the foundation

The problem with foundations is not only distorted incentives, but legal and economic restrictions also restrict their ability to act.

Many foundations are legally unable to build related products or engage in certain commercial activities, even if these activities can significantly benefit the network. For example, most foundations are banned from operating profitable consumer-oriented businesses, even if the business can bring a lot of traffic to the network and increase the value of tokens.

The economic reality faced by the foundation also distorts strategic decision-making. The foundation bears the direct cost of efforts, while the benefits are dispersed and socialized. This distortion coupled with the lack of clear market feedback makes it more difficult to effectively allocate resources (including employee compensation, long-term high-risk projects and short-term explicit advantage projects).

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

The opportunity 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 value to stem from the programmatic operation of the network. This means that neither companies nor foundations are allowed to support token value through off-chain profits, such as FTX that has maintained its price through exchange profit purchases and burned FTT. This is reasonable because these mechanisms introduce trust dependencies, which are the characteristics of securities.

The foundation's operational efficiency is inefficient

In addition to legal and economic constraints, the foundation can also cause serious operational inefficiency. Any founder who has managed a foundation knows the price of breaking up high-performance teams to meet formal isolation requirements. Engineers focused on protocol development usually need to collaborate with business development, marketing and marketing teams every day, but under the foundation structure, these functions are isolated.

In dealing with these structural challenges, entrepreneurs are often troubled by ridiculous questions: Can foundation employees be on the same Slack channel as company employees? Can the two organizations share the roadmap? Can you attend the same off-site meeting? The fact is that these problems have no substantial impact on decentralization, but they bring real costs: artificial barriers between interdependent functions slow down development, hinder coordination, and ultimately reduce product quality.

The foundation becomes a centralized gatekeeper

In many cases, the role of the Crypto Foundation has deviated far from its original mission. Countless cases show that the foundation no longer focuses on decentralized development, but has been given more and more control, transforming into a centralized role that controls the keys of the fund bank, key operational functions and network upgrade rights. In many cases, foundation members lack an accountability mechanism; even if token holder governance can replace foundation directors, it simply replicates the agency model in the company's board of directors.

To make matters worse, most foundations cost more than $500,000 to be established and work with a large number of lawyers and accountants for months. This not only slows down the pace of innovation, but also costs high for startups. The situation is already so bad that it is becoming increasingly difficult to find lawyers with experience in setting up foreign foundations, as many lawyers have abandoned their practice and instead charged fees in dozens of crypto foundations as board members.

In other words, many projects ended up forming a kind of "shadow governance" dominated by vested interests: tokens may nominally represent "ownership" of the network, but actually at the helm is the foundation and its hired directors. These structures are increasingly conflicting with the proposed legislation on the market structure, which rewards on-chain, more responsible, eliminating control 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 the current governance structure, creating huge market pressures to force projects to eliminate control rather than to give it to a small number of people who lack responsibility.

Better and simpler alternatives: companies

If the founder does not have to give up or hide his continued efforts for the network, just make sure that no one controls the network, the foundation is no longer necessary. This opens the door to a better structure - it can not only support the long-term development of the network, but also make the incentives of all participants compatible while meeting legal requirements.

In this new context, ordinary development companies provide better carriers for the continuous construction and maintenance of the network . Unlike foundations, companies can efficiently allocate capital, attract top talents through more incentives (except to tokens), and respond to market forces through work feedback loops. Companies are structurally aligned with growth and influence without relying on charitable funds or vague mandates.

Of course, concerns about companies and their incentives are not unfounded. The existence of companies allows network value to flow to both tokens and company equity, which brings real complexity. Token holders have reason to worry that a company may upgrade or retain certain privileges by designing the network, giving equity priority to token value.

The proposed market structure legislation provides guarantees for these concerns through its statutory construction of decentralization and control. But ensuring incentive compatibility is still necessary, especially when the project runs for a long time and the initial token incentives are eventually exhausted. In addition, concerns about incentive compatibility will persist due to the lack of formal obligations between the company and token holders: legislation does not stipulate formal fiduciary responsibilities for token holders, nor does it grant token holders the enforceable rights to require the company to continue to work.

But these concerns can be resolved and are not sufficient to justify continuing to adopt the foundation. These concerns also do not require tokens to have equity attributes, which will weaken their regulatory bases from ordinary securities. Instead, they highlight the need for tools: to achieve incentive compatibility through contractual and programmatic methods without damaging execution and influence.

New uses of existing tools in the field of encryption

The good news is that incentive-compatible tools have long existed. The only reason they haven't become popular in the crypto industry is that using these tools will attract more scrutiny under the SEC's "level of effort" framework.

However, under the framework based on "control" proposed by market structure legislation, the power of the following mature tools can be fully released:

Charity enterprise. Development companies can be registered or transformed into public welfare enterprises. Such companies undertake dual missions: to achieve specific public interests while pursuing profits, that is, to support the development and health of the network. Charity companies give founders legal flexibility to prioritize network development, even if this may not maximize short-term shareholder value.

Online revenue sharing. Networks and decentralized autonomous organizations (DAOs) can create and implement continuous incentive structures for companies by sharing network revenue. For example, a network with an inflation token supply can achieve revenue sharing by allocating some inflation tokens to the company while calibrating the overall supply in conjunction with an income-based repurchase mechanism. A reasonably designed revenue sharing mechanism can direct most of the value to token holders while creating a direct and lasting connection between the company’s success and network health.

Milestone token ownership. The company's token lock-up (the transfer restriction that prohibits employees and investors from selling tokens in the secondary market) should be linked to meaningful network maturity milestones. These milestones can include network usage thresholds, successful network upgrades, decentralized measures or ecological growth goals. Current market structure legislation proposes a mechanism of such a type of mechanism: restricting insiders (such as employees and investors) from selling tokens in the secondary market until they achieve economic independence (i.e., network tokens have their own economic model). These mechanisms ensure that early investors and team members have a strong incentive to continue building the network and avoid cashing out before the network matures.

Contract protection. DAOs should negotiate with the company to sign a contract to prevent the use of the network in a way that harms the interests of token holders. This includes non-compete clauses, licensing agreements to ensure open access to intellectual property, transparency obligations, and the right to recover tokens or stop further payments in the event of misconduct that damages the network.

Programmatic incentives. Token holders will be better protected when network participants are incentivized to their contributions through programmatic allocation of tokens. This incentive mechanism not only helps to fund participants’ contributions, but also prevents the commercialization of the protocol layer (system value flows to non-protocol technology stack layers, such as client layers). Solving incentive problems through programmatic methods will help consolidate the decentralized economy of the entire system.

Together, these tools provide greater flexibility, responsibility and durability than the Foundation, while allowing DAO and the network to retain true sovereignty.

Implementation path: DUNAs and BORGs

Two emerging solutions ( DUNA and BORGs ) provide simplified ways to implement these solutions while eliminating the cumbersome and opaqueness of the foundation structure.

Decentralized Unincorporated Nonprofit Association

DUNA grants DAOs legal persons the ability to sign contracts, hold property and exercise legal rights, functions traditionally undertaken by the Foundation. But unlike the foundation, DUNA does not need to set up a headquarters in a foreign country, establish a discretionary oversight committee, or conduct complex tax structure designs.

DUNA creates a legal right without the legal level, purely as a neutral executive agent for the DAO. This structural minimalism reduces administrative burden and centralized friction, while enhancing legal clarity and decentralization. In addition, DUNA can provide effective limited liability protection for token holders, an area of ​​increasing concern.

Overall, DUNA provides powerful tools for implementing incentive compatibility mechanisms around the network, enabling DAOs to enter into service contracts with development companies and enforce these rights through token retrieval, performance-based payments, and preventing exploitation, while retaining the ultimate authority of DAOs.

BORGs, Cybernetic Organization Tooling

BORGs technology developed for autonomous governance and operations enables DAO to migrate many of the “governance facilitation functions” currently handled by the Foundation (such as funding programs, security committees, upgrade committees) to the chain. By linking, these substructures can operate transparently under smart contract rules: permission access is set if necessary, but the accountability mechanism must be hardcoded. Overall, BORGs tools minimize trust assumptions, enhance liability protection, and support tax optimization architectures.

DUNA and BORGs jointly transfer power from informal off-chain institutions such as foundations to more responsible on-chain systems. This is not only a conceptual preference, but also a regulatory advantage. The proposed market structure legislation requires that “functions, administration, instruments or departmental actions” be handled through a decentralized, rule-based system rather than through an opaque, centrally controlled entity. By adopting DUNA and BORGs architectures, crypto projects and development companies can meet these standards without compromise.

Conclusion: Say goodbye to expedient measures and welcome real

decentralization

The foundation has led the crypto industry through difficult regulatory periods and has also led to some incredible technological breakthroughs and unprecedented levels of collaboration. In many cases, foundations fill key gaps when other governance structures do not work, and many foundations may continue to thrive. But for most projects, their role is limited and they are just temporary solutions to deal with regulation.

Such an era is ending.

Emerging policies, changing incentive structures and industry maturity all point in the same direction: towards real governance, real incentive compatibility and real systematization. Foundations are unable to meet these needs, they distort incentives, hinder scale, and solidify centralized power.

The survival of the system does not depend on trusting "good people", but is about ensuring that each participant's own interests are meaningfully bound to the overall success. This is why the company structure has been prosperous for hundreds of years. The crypto industry needs a similar structure: public interests coexist with private enterprises, accountability systems are embedded in it, and control is minimized by design.

The next era of cryptocurrencies will not be built on expedient measures, but on a scaleable system : a system with real incentives, real accountability mechanisms and real decentralization.

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