The End of the Encryption Foundation: Towards a More Efficient Blockchain Governance Model

The encryption foundation was once an important organizational form for promoting the development of Blockchain networks. However, with the development of the industry, this model has become a hindrance to progress. In the process of decentralization, the problems brought by the encryption foundation far outweigh its contributions.

With the introduction of a new regulatory framework by the U.S. Congress, the cryptocurrency industry has welcomed the opportunity to abandon the cryptocurrency foundation model and establish a more efficient governance mechanism. This article will analyze the origins and flaws of the cryptocurrency foundation model and argue how to replace it with conventional development companies to adapt to the new regulatory environment. Corporate systems have clear advantages in capital allocation, talent attraction, and market response, making them the necessary path for achieving scalable growth and substantial impact.

For an industry committed to challenging tech giants, financial behemoths, and government systems, merely relying on altruism, charitable funding, or vague missions is far from sufficient. Only by establishing the right incentive mechanisms can true economies of scale be achieved. The encryption industry must break free from structural constraints that are no longer applicable to fulfill its promises.

The Historical Mission and Limitations of the Encryption Foundation

The encryption foundation model originates from the decentralized ideals of early founders: as neutral network resource managers, they avoid commercial interference by holding tokens and supporting ecosystem development. Theoretically, this model best achieves credible neutrality and long-term public value. Objectively speaking, not all encryption foundations have failed. For example, the Ethereum Foundation has completed pioneering work under strict constraints, promoting the development of the network.

However, as time goes by, regulatory dynamics and intensified market competition have caused the cryptocurrency foundation model to deviate from its original intention:

1. Regulatory testing dilemma. "Decentralized testing based on development behavior" complicates the situation, forcing founders to abandon or obscure their participation in their own network.

2. Shortcut thinking under competitive pressure. The project party views the encryption foundation as a tool for quickly achieving decentralization.

3. A channel to evade regulation. The encryption foundation has become an "independent entity" for shifting responsibilities, essentially becoming a strategy to evade securities regulation.

Although this arrangement has its rationality during legal confrontations, its structural flaws can no longer be ignored:

1. Lack of incentive cooperation: There is no coherent interest coordination mechanism.
2. Unable to achieve growth optimization: structurally unable to achieve scale expansion.
3. Control solidification: ultimately forming a new centralized control.

With Congress proposing a new framework based on control, the illusion of separation for the encryption foundation is no longer necessary. The new framework encourages founders to relinquish control while continuing to participate in the construction and provides clearer decentralized standards.

In this alleviated pressure situation, the industry can finally abandon expediency and turn to a more sustainable architecture. The encryption foundation once fulfilled its historical mission, but it is no longer the best tool for future development.

The Myth of Incentivizing Collaboration in the Encryption Foundation

Supporters claim that the encryption foundation can better coordinate the interests of token holders because it has no shareholder interference and focuses on maximizing network value.

But this viewpoint ignores the actual operational logic of organizations: eliminating equity incentives in enterprises does not solve the problem of misaligned interests, but rather institutionalizes it. The lack of profit motivation means that encryption foundations lack clear feedback mechanisms, direct accountability, and market constraints. The funding of encryption foundations is essentially a shelter model: after tokens are allocated and exchanged for fiat currency, there is no clear mechanism linking expenditure to outcomes.

When other people's funds are managed in an environment lacking accountability, it is difficult to maximize benefits.

In contrast, the enterprise architecture has built-in accountability mechanisms: companies are constrained by market laws. Capital is allocated for profit, and financial indicators such as revenue, profit margin, and return on investment ( objectively measure effectiveness. When management fails to meet targets, shareholders can assess and exert pressure.

The encryption foundation is usually set up to operate at a perpetual loss without bearing consequences. Because the Blockchain network is open and permissionless and often lacks a clear economic model, it is difficult to connect the efforts and expenditures of the encryption foundation with value capture. This disconnects the encryption foundation from market realities, making it unable to make tough but necessary decisions.

Aligning the long-term success of crypto fund employees with that of the network is more challenging: their incentives are not as strong as those of corporate employees, as their compensation consists only of tokens and cash ) from the foundation's token sales (, rather than a mix of tokens, cash ) from equity financing (, and equity like corporate employees. This means that fund employees are subject to extreme fluctuations in token prices, with only short-term incentives; whereas corporate employees enjoy stable long-term incentives. Bridging this gap is very difficult. Successful companies can continuously improve employee benefits through growth, but successful crypto foundations cannot do the same. This leads to incentives that are difficult to sustain, and crypto fund employees are prone to seek external opportunities, creating potential conflicts of interest.

Legal and Economic Constraints of the Encryption Foundation

In addition to incentive distortions, the encryption foundation also faces capacity limitations at legal and economic levels.

Legally speaking, most cryptocurrency foundations do not have the authority to develop peripheral products or engage in commercial activities, even if these activities may significantly benefit the network. For example, most cryptocurrency foundations are prohibited from operating consumer-facing profit-oriented businesses, even if such businesses could generate considerable transaction volume for the network, thereby creating value for token holders.

The economic reality faced by the encryption foundation also distorts strategic decision-making: it bears the costs of all efforts, but the benefits ), if any, ( are socialized and dispersed. This distortion, combined with a lack of market feedback, leads to inefficient resource allocation, whether for employee compensation, long-term high-risk projects, or short-term superficial beneficial projects.

This is not the path to success. A thriving network requires a diverse ecosystem of products and services such as ) middleware, compliance services, developer tools, etc. (, and companies constrained by the market are better at providing these supplies. Although the Ethereum Foundation has achieved remarkable accomplishments, the Ethereum ecosystem could not have reached its current level of prosperity without the products and services built by the for-profit company ConsenSys.

The space for value creation by the encryption foundation may further shrink. The proposed market structure bill ) is reasonable ( as it focuses on the economic independence of relatively centralized organizations of tokens, 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 enterprises and foundations cannot support the value of tokens through off-chain profit-making businesses, like FTX did by using exchange profits to buy back and destroy FTT to uplift the coin price. This centralized value anchoring mechanism will trigger trust dependency ) which is characteristic of securities: the collapse of FTX led to the collapse of FTT prices (, thus prohibiting it is reasonable; but this also cuts off the potential path of market accountability ) that is to achieve value constraints through off-chain business revenue (.

Encryption Foundation Leads to Operational Inefficiency

In addition to legal and economic constraints, the encryption foundation has also caused significant losses in operational efficiency. Any founder who has experienced the structure of the encryption foundation knows its cost: to meet the formal separation requirements that often have a performative nature, they have to break apart highly collaborative teams. Engineers focused on protocol development should collaborate daily with the business development and marketing teams. However, under the structure of the encryption foundation, these functions are forced to be separated.

When faced with such architectural challenges, entrepreneurs often find themselves in an absurd dilemma:

• Can fund members and company employees be in the same Slack channel?
• Can two organizations share a development roadmap?
• Can employees attend the same offline meeting?

These issues are actually unrelated to the essence of decentralization, but they have resulted in real losses: artificial barriers between functional dependencies have delayed development progress, hindered collaborative efficiency, and ultimately led all participants to bear the consequences of diminished product quality.

Encryption Foundation Becomes a Centralized Gatekeeper

The actual functions of the encryption foundation have seriously deviated from its initial positioning. Numerous cases show that the encryption foundation is no longer focused on promoting decentralization; instead, it has been given increasing control—evolving into a centralized entity that controls treasury keys, key operational functions, and network upgrade permissions. In most cases, the encryption foundation lacks substantive accountability to token holders; even if the foundation's directors can be replaced through token governance, this merely replicates the principal-agent problem of corporate boards, and the recourse mechanisms are even scarcer.

The bigger problem is that establishing most encryption foundations requires spending over $500,000 and takes months, accompanied by lengthy processes with teams of lawyers and accountants. This not only hinders innovation but also sets cost barriers for startups. The situation has worsened to the point where it is increasingly difficult to find experienced lawyers to set up foreign encryption foundation structures, as many have given up their practice—they now simply serve as professional board members, charging fees in dozens of cryptocurrency foundations.

In summary, many projects have fallen into the "shadow governance" of vested interest groups: the tokens merely symbolize nominal ownership of the network, while the actual stewards are the encryption foundations and their hired directors. This structure is becoming increasingly incompatible with emerging market structure legislation, which encourages on-chain accountability systems to eliminate control ), rather than merely decentralizing control through opaque off-chain structures (. For consumers, eradicating trust dependence is far superior to hiding dependencies ). Mandatory disclosure obligations will also enhance the transparency of current governance, forcing projects to eliminate control rather than delegating it to a few individuals with unclear responsibilities.

Better Solution: Corporate Structure

If the founders do not need to give up or hide their ongoing contributions to the network, and just need to ensure that no one controls the network, the encryption foundation will lose its necessity for existence. This paves the way for a better architecture—one that can support long-term development, coordinate the incentives of all participants, and meet legal requirements.

Under this new paradigm, conventional development companies (, which build networks from concept to actual construction, provide a better carrier for the continuous construction and maintenance of the network ). Unlike encryption foundations, companies are able to:

• Efficient Capital Configuration
• Attract top talent by providing incentives beyond tokens.
• Respond to market forces through a feedback loop of work

The company structure is inherently suited for growth and substantial impact, relying neither on charitable funding nor vague missions.

However, concerns about the company's and incentives' synergy are not unfounded: when a company operates continuously, the possibility of network value appreciation benefiting both tokens and equity does indeed raise real complexities. Token holders reasonably worry that a specific company might design network upgrade plans or retain certain privileges and permissions to prioritize its equity over token value gains.

The proposed market structure bill addresses these concerns through its decentralized legal construction and control mechanisms. However, ensuring incentive alignment will still be necessary—especially when the long-term operation of projects leads to the exhaustion of initial token incentives. Concerns about incentive alignment arising from the lack of formal obligations between companies and token holders will also persist: legislation neither creates nor allows for a statutory fiduciary duty to token holders, nor does it grant token holders enforceable rights regarding the company's ongoing efforts.

However, these concerns can be alleviated and do not constitute a legitimate reason to continue the model of the encryption foundation. These concerns also do not require the tokens to possess equity attributes — that is, a legal claim to the developers' continued efforts — otherwise, it would undermine the regulatory basis that distinguishes them from ordinary securities. On the contrary, these worries highlight the demand for tools: there is a need for ongoing coordination of incentives through contractual and programmatic means, without compromising execution efficiency and substantive impact.

New Applications of Existing Tools in the Encryption Field

The good news is that the tools for incentivizing collaboration already exist. The only reason they have not become widespread in the encryption industry is that using these tools would trigger stricter scrutiny under the SEC's Howey test framework.

However, based on the control framework proposed by the market structure bill, the effectiveness of the following mature tools will be fully unleashed:

( Public Welfare Company ) PBC ( Structure

Development companies can register or transform into public benefit companies )PBC###, embedding a dual mission: pursuing profits while also pursuing specific public interests - which here means supporting network development and health.