a16z: Trustlessness does not mean responsibilitylessness. Web3 governance has entered the era of accountability

Article | a16z

By Miles Jennings

Compiled by Portal Labs

Crypto foundations — nonprofit organizations that support the development of blockchain networks — were once a slick legal path to advance the industry. But today, as any founder who has launched a network will admit, crypto foundations have become the biggest obstacle to development. They create more friction than they contribute to the process of decentralization.

As the new regulatory framework of the U.S. Congress emerges, the crypto industry has a rare opportunity: abandon the crypto foundation model and its derivative frictions, and rebuild the ecosystem with a mechanism with clear responsibilities and expected scale.

After analyzing the origins and flaws of the crypto foundation model below, I will demonstrate how crypto projects can replace the crypto foundation structure with conventional development companies and take advantage of the emerging regulatory framework. The full article will explain the superiority of the corporate system in capital allocation, talent absorption and market responsiveness - only this path can achieve structural synergy, scale growth and substantive impact.

How can an industry that aspires to challenge tech giants, financial giants, and government systems rely on altruism, philanthropic funding, or a vague mission? Scale effects are born from incentive mechanisms. If the crypto industry is to deliver on its promise, it must break free from structural crutches that are no longer applicable.

The Historical Mission and Contemporary Limitations of the Crypto Foundation

Why did the crypto industry choose the crypto foundation model?

The root of this lies in the decentralized idealism of the early founders: non-profit crypto foundations aim to be neutral managers of network resources, and avoid interference from commercial interests by holding tokens and supporting ecological development. In theory, this model can best achieve credible neutrality and long-term public welfare value. Objectively speaking, not all crypto foundations are dysfunctional. For example, the Ethereum Crypto Foundation has promoted network development with its support, and its members have completed valuable pioneering work under strict constraints.

However, over time, regulatory dynamics and intensified market competition have caused the crypto foundation model to deviate from its original intention:

1. SEC Conduct Test Dilemma. The "development-based decentralization test" complicates matters - forcing founders to abandon, obscure, or circumvent their participation in their own networks.
2. Shortcut thinking under competitive pressure. Project owners regard crypto foundations as a quick tool for decentralization.
3. A channel for regulatory evasion. Crypto foundations have become "independent entities" with transferred powers and responsibilities, which in essence has become a roundabout strategy to evade securities regulation.

Although this arrangement made sense during times of legal confrontation, its structural flaws could no longer be ignored:

1. Lack of incentive coordination: lack of a coherent mechanism for coordinating interests
2. Growth optimization failure: structurally unable to achieve scale expansion optimization
3. Solidification of control rights: eventually forming a new type of centralized control

The illusion of separation for crypto foundations is no longer necessary as congressional proposals advance a mature control-based framework that encourages founders to hand over control without giving up building involvement, while providing a clearer (and less abusable) standard for decentralized construction than behavioral testing frameworks.

When this pressure is relieved, the industry can finally abandon stopgap measures and move towards a long-term sustainable structure. Crypto foundations have fulfilled their historical mission, but they are not the best tool for the next stage.

The Myth of Crypto Foundation Incentive Synergy

Supporters claim that crypto foundations can better align the interests of token holders because they have no shareholder interference and are focused on maximizing network value.

However, this theory ignores the actual operation logic of the organization: eliminating corporate equity incentives does not solve the mismatch of interests, but institutionalizes it. The lack of profit motivation makes crypto foundations lack clear feedback mechanisms, direct accountability and market-enforced constraints. Crypto foundation funds are actually a shelter model: after the tokens are distributed and legalized, there is no clear linkage mechanism between expenditures and results.

When other funds are spent in an environment of low accountability, optimizing performance becomes almost impossible.

Corporate structure has built-in accountability mechanisms: companies are subject to market constraints. Capital is allocated for profit, and financial indicators (revenue, profit margin, return on investment) objectively measure performance. When management fails to meet targets, shareholders can assess and pressure them.

Crypto foundations, on the other hand, are often set up to operate at a loss perpetually with no consequences. Mapping crypto foundation efforts and expenditures to value capture is nearly impossible, as blockchain networks are open and permissionless and often lack a clear economic model. Crypto foundations are thus isolated from market realities that require hard decisions.

It is more challenging to successfully synergize crypto foundation employees with the network in the long term: their incentives are weaker than those of corporate employees, because their compensation is only a combination of tokens and cash (derived from the sale of crypto foundation coins), rather than a combination of tokens + cash (derived from equity financing) + equity for corporate employees. This means that crypto foundation employees are subject to extreme fluctuations in token prices and only have short-term incentives, while corporate employees enjoy stable long-term incentives. It is difficult to make up for this shortcoming. Successful companies continue to improve employee benefits through growth, but successful crypto foundations cannot. This makes it difficult to maintain synergy, and crypto foundation employees are prone to seeking external opportunities, which breeds conflicts of interest.

Legal and Economic Constraints of Crypto Foundations

Crypto foundations not only have distorted incentives, but also face capacity constraints at the legal and economic levels.

Most crypto foundations are not legally entitled to develop peripheral products or engage in commercial activities, even if such initiatives can significantly benefit the network. For example, the vast majority of crypto foundations are prohibited from operating a for-profit consumer-facing business, even if that business can generate significant transaction traffic for the network and thus bring value to token holders.

The economic reality faced by crypto foundations also distorts strategic decisions: they bear all the cost of efforts, while the benefits (if any) are dispersed and socialized. This distortion, coupled with the lack of market feedback, leads to inefficient resource allocation, whether it is employee salaries, long-term high-risk projects, or short-term seemingly positive projects.

This is not the way to success. A thriving network relies on a diverse ecosystem of products and services (middleware, compliance services, developer tools, etc.), and companies under market constraints are better at providing such supplies. Even though the Ethereum Crypto Foundation has made great achievements, how could the Ethereum ecosystem be as prosperous as it is today without the products and services built by the for-profit ConsenSys?

The space for crypto foundations to create value may be further compressed. The proposed market structure bill (which is reasonable) focuses on the economic independence of tokens relative to centralized organizations, requiring that value must come from the programmatic functions of the network (such as ETH capturing value through the EIP-1559 mechanism). This means that neither companies nor crypto foundations can support the value of tokens through off-chain profitable businesses, such as FTX, which used exchange profits to repurchase and destroy FTT to raise the price of the currency. This type of centralized value anchoring mechanism triggers trust dependence (which is exactly the sign of securities attributes: the collapse of FTX caused the collapse of FTT prices), so the ban is legitimate; but it also cuts off potential paths based on market accountability (i.e., achieving value constraints through off-chain business revenue generation).

Crypto Foundations Cause Operational Inefficiencies

In addition to legal and economic constraints, crypto foundations also cause significant operational efficiency losses. Any founder who has experienced the crypto foundation structure is well aware of the cost: in order to meet the formal (often performative) separation requirements, efficient collaborative teams have to be dismantled. Engineers who focus on protocol development need to collaborate with business development and marketing teams on a daily basis. But under the crypto foundation structure, these functions are forced to be separated.

When dealing with these kinds of architectural challenges, entrepreneurs often find themselves in an absurd dilemma:

• Can crypto foundation employees and company employees coexist in the same space, such as Slack channels?
• Can the two organizations share development roadmaps?
• Can employees participate in the same offline meeting?

In fact, these problems have nothing to do with the essence of decentralization, but they bring real losses: artificial barriers between functional dependent parties slow down development progress, hinder collaborative efficiency, and ultimately cause all participants to suffer deterioration in product quality.

Crypto Foundations Become Centralized Gatekeepers

The actual functions of crypto foundations have seriously deviated from their initial positioning. Numerous cases show that crypto foundations are no longer focused on decentralized development, but are instead given increasingly expanded control rights - evolving into centralized entities that control treasury keys, key operational functions, and network upgrade permissions. In most cases, crypto foundations lack substantive accountability to token holders; even if token governance can replace the directors of crypto foundations, it only replicates the agency problem of the company's board of directors, and the tools for recourse are even more scarce.

The problem is that most crypto foundations cost more than $500,000 and take months to set up, with a lengthy process involving a team of lawyers and accountants. This not only hinders innovation, but also sets up cost barriers for startups. The situation has worsened to the point that it is increasingly difficult to find lawyers with experience in setting up foreign crypto foundation structures, as many lawyers have given up their practice - they now just charge fees as professional board members in dozens of cryptocurrency crypto foundations.

In summary, many projects are trapped in the "shadow governance" of vested interest groups: the token only symbolizes the nominal ownership of the network, but the actual helmsman is the crypto foundation and its hired directors. This structure is increasingly in conflict with the legislation of emerging market structures, that is, the bill encourages an on-chain accountable system (eliminating control) rather than an off-chain opaque structure that only disperses control (for consumers, eradicating trust dependence is far better than hiding dependence). Mandatory disclosure obligations will also increase the transparency of current governance, forcing project parties to eliminate control rather than entrusting it to a few people with unclear rights and responsibilities.

Better solution: corporate structure

In a scenario where founders do not need to give up or hide their ongoing contributions to the network, but only need to ensure that no one controls the network, crypto foundations will no longer be necessary. This opens the way for a better structure - one that supports long-term development, aligns the incentives of all participants, and meets legal requirements.

Under this new paradigm, conventional development companies (i.e., businesses that build networks from concept to reality) provide a better vehicle for the ongoing construction and maintenance of the network. Unlike crypto foundations, companies can:

• Efficient capital allocation
• Attract top talent by offering incentives beyond tokens
• Responding to market forces through working feedback loops

The company’s structure is inherently aligned with growth and real impact, without reliance on philanthropic funding or a vague mission.

However, concerns about companies and incentive alignment are not unreasonable: when the company continues to operate, the possibility that the increase in network value will benefit both the pass and the company's equity does raise practical complexities. Passholders have reasonable concerns that certain companies may design network upgrades or reserve certain privileges and permissions to benefit their equity before the value of the pass.

The proposed Market Structure Bill provides safeguards against these concerns through its decentralized statutory structure and control mechanisms. However, ensuring incentive alignment will continue to be necessary - especially as projects operate over the long term and the initial token incentives are exhausted. Incentive alignment concerns arising from the lack of formal obligations between companies and token holders will also continue: the legislation neither creates nor allows for statutory fiduciary obligations on token holders, nor does it give token holders enforceable rights against the company for its ongoing efforts.

These concerns can be mitigated, however, and do not justify the continuation of the crypto foundation model. They also do not require that tokens be infused with equity attributes — i.e., a legal claim on the continued efforts of developers — which would undermine the regulatory basis that distinguishes them from ordinary securities. Instead, these concerns highlight the need for tools: the need to continuously coordinate incentives through contractual and programmatic means without compromising execution efficiency and substantive impact.

New applications of existing tools in the crypto space

The good news is that incentive alignment tools already exist. The only reason they are not more prevalent in the crypto industry is that their use would attract greater scrutiny under the SEC’s behavioral testing framework.

However, based on the control framework proposed by the Market Structure Act, the following mature tools will be fully utilized:

Public Benefit Company (PBC) Structure

Development companies can register or convert to a Public Benefit Corporation (PBC), which embeds a dual mission: to make a profit while pursuing a specific public interest – in this case, supporting the growth and health of the network. A PBC gives founders the legal flexibility to prioritize growing the network, even if that may not maximize short-term shareholder value.

Network revenue sharing mechanism

Networks and decentralized autonomous organizations (DAOs) can create sustainable incentive structures for businesses by sharing network revenue.

For example, a network with an inflationary token supply can distribute a portion of the inflationary tokens to businesses as revenue, while calibrating the total supply with a revenue-based buyback and burn mechanism. When designed properly, this type of revenue sharing can direct the majority of value to token holders and establish a lasting direct link between business success and network health.

Milestone vesting mechanism

The company’s token lockup (i.e., transfer restrictions that prevent employees and investors from selling on the secondary market) must and should be tied to meaningful network maturity milestones. Such milestones could include:

• Network usage threshold
• Successful key network upgrades (such as The Merge, etc.)
• Decentralization metrics (such as meeting certain control standards)
• Ecosystem Growth Goals

The current market structure bill proposes such mechanisms: restricting insiders (such as employees and investors) from selling in the secondary market before the tokens achieve economic independence (that is, before the network tokens form their own economic model). These mechanisms ensure that early investors and team members have strong incentives to continue building the network and avoid arbitrage before the network matures.

Contractual protection clause

DAOs should and can negotiate contractual agreements with businesses to prevent exploitative online behavior that harms the interests of token holders. This includes:

• Non-compete clause
• Licensing agreements to ensure open access to intellectual property
• Transparency obligations
• No recourse to tokens
• Payment termination rights in case of network compromise

Programmatic incentive system

When network participants (besides the development company) are properly incentivized, token holders will have stronger protections:

• Client Operator (Network Build/Expand/Diversify)
• Infrastructure providers (maintaining the network)
• Supply and demand providers (improving market depth for all network users)

Incentives should be obtained through programmatic token distribution corresponding to contribution.

Such incentives not only subsidize the contributions of participants, but also prevent the commoditization of the protocol layer (the value of the system is captured by non-protocol layers of the technology stack, such as the client layer). Programmatically solving the incentive problem helps to consolidate the decentralized economy of the entire system.

In summary, these tools provide greater flexibility, accountability, and durability than crypto foundations, while ensuring that DAOs and networks retain true sovereignty.

Implementation: DUNA and BORG architecture

Two emerging solutions, DUNA and BORG, provide an efficient path to implement the above solutions while eliminating the redundant costs and opacity of the crypto foundation structure.

Decentralized Unincorporated Nonprofit Association (DUNA)

DUNA gives DAOs legal entity status, enabling them to enter into contracts, hold assets, and enforce legal rights. These functions are traditionally performed by crypto foundations. But unlike foundations, DUNA does not require distortions such as offshore registered headquarters, discretionary supervisory committees, or complex tax structures.

DUNA creates legal capacity without creating a legal hierarchy, acting purely as a neutral executive agent for the DAO. This minimalist structure reduces administrative burdens and centralized friction while improving legal clarity and decentralization. In addition, DUNA can provide effective limited liability protection for token holders.

Overall, DUNA provides a powerful mechanism to strengthen network incentive alignment: enabling DAOs to contract with development companies for services and enforce rights through recourse, performance payments, and anti-exploitation protections, while ensuring that the DAO always retains ultimate authority.

Cybernetic Organization (BORG) Tools

BORG is an autonomous governance and operations technology that enables DAOs to migrate the "governance facilities" currently handled by crypto foundations, such as funding programs, security committees, and upgrade committees, to the chain. These substructures operate transparently under the rules of smart contracts: permissioned access is set when necessary, but accountability mechanisms are hard-coded. BORG tools can minimize trust assumptions, strengthen liability protection, and support tax optimization architectures.

Together, DUNA and BORG transfer power from informal off-chain institutions such as foundations to more accountable on-chain systems. This is not only a philosophical preference, but also a regulatory advantage. The proposed Market Structure Act requires that "functional, administrative, transactional or procedural actions" must be handled through a decentralized system of rules rather than an opaque centralized entity. Crypto projects and development companies that adopt the DUNA and BORG framework can meet these standards without compromise.

Summarize

Crypto foundations have led the crypto industry through the regulatory winter, promoting technological breakthroughs and achieving unprecedented collaboration. When other structures fail, crypto foundations often fill critical vacuums. Some crypto foundations may continue to exist, but for most projects, their value has become marginalized - just a temporary solution to regulatory hostility.

This era is coming to an end.

Emerging policies, incentive structure transformation and industry maturity all point to the same future:

• Real governance
• Substantial synergy
• Systematic operation

Crypto foundations are unable to meet these demands: they distort incentives, hinder scalability, and entrench centralization.

The survival of the system does not rely on the self-discipline of good people, but requires the deep anchoring of the self-interest motivation of each participant with the overall success. This is the foundation for the prosperity of the company system for centuries. The encryption field urgently needs a similar structure - public and private interests coexist, accountability is internalized, and control is minimized by design.

The new era of crypto will not be built on stopgap measures, but on a scalable system with real incentives, real accountability, and real decentralization.