The End of the Encryption Foundation Model: Towards a New Development Paradigm

The encryption foundation was once an important model for promoting the development of blockchain networks. However, as the industry has evolved, this model has become a major factor hindering progress. In the process of decentralization, the problems brought by the encryption foundation far outweigh its contributions.

With the emergence of a new regulatory framework from the U.S. Congress, the encryption industry has encountered a rare opportunity: to abandon the encryption foundation model and the problems it brings, and to adopt a mechanism with clearer responsibilities and powers, as well as greater scalability potential, to rebuild the ecosystem.

This article will analyze the origins and flaws of the encryption foundation model, and argue how conventional development companies can replace the encryption foundation structure to adapt to the new regulatory framework. The article will elaborate on the advantages of the corporate system in resource allocation, talent attraction, and market response. Only in this way can structural synergy, scale growth, and substantial impact be achieved.

An industry dedicated to challenging tech giants, financial behemoths, and government systems cannot rely on altruism, charitable funding, or vague missions. Economies of scale stem from incentive mechanisms. If the encryption industry is to fulfill its promises, it must break free from outdated structural dependencies.

The Historical Mission and Limitations of the Encryption Foundation

Why did the encryption industry choose the encryption foundation model?

This stems from the early founders' ideals of decentralization: the non-profit encryption foundation aims to serve as a neutral manager of network resources, avoiding commercial interests' interference by holding tokens and supporting ecosystem development. Theoretically, this model can maximize trusted neutrality and long-term public value. Objectively speaking, not all encryption foundations have failed. For example, the Ethereum Foundation has promoted network development with its support, and its members have accomplished highly valuable pioneering work under strict constraints.

But over time, the regulatory landscape and increased market competition have caused the encryption foundation model to deviate from its original intention:

1. The dilemma of SEC behavior testing. "Decentralized testing based on development behavior" complicates the situation, forcing founders to abandon, obscure, or evade participation in their own networks.
2. Shortcut thinking under competitive pressure. Project parties view the encryption foundation as a tool for quickly achieving decentralization.
3. Ways to evade regulation. The encryption foundation becomes an "independent entity" for the transfer of rights and responsibilities, essentially becoming a circumvention strategy to escape securities regulation.

Although this arrangement is reasonable during legal confrontation periods, its structural flaws can no longer be ignored:

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

As the congressional proposal advances a mature framework based on control, the illusion of separation of the encryption foundation is no longer necessary. This framework encourages founders to hand over control while not having to give up participation in construction, and provides clearer ( and less prone to abuse ) decentralized building standards than the behavioral testing framework.

With the easing of this pressure, the industry can finally abandon expedient measures and shift towards a long-term sustainable framework. The encryption foundation has fulfilled its historical mission, but it is not the best tool for the next phase.

The Myth of Incentivizing Collaboration in the Encryption Foundation

Supporters claim that the encryption foundation can better coordinate the interests of token holders, as it is free from shareholder interference and can focus on maximizing network value.

However, this theory overlooks the actual operational logic of organizations: eliminating equity incentives does not solve the problem of misalignment of interests, but rather institutionalizes it. The lack of profit motivation leads to the absence of clear feedback mechanisms, direct accountability, and market constraints for the encryption foundation. The funding of the encryption foundation is essentially a sheltering model: after tokens are allocated and converted into fiat currency, there is no clear mechanism linking expenditure to outcomes.

When others' funds are allocated in a low accountability environment, it is nearly impossible to achieve efficiency optimization.

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

On the contrary, encryption foundations are often set up to operate at perpetual losses with no consequences. Due to the open and permissionless nature of blockchain networks and the often lack of clear economic models, mapping the efforts and expenditures of encryption foundations to value capture is almost impossible. This isolates encryption foundations from the market realities that require tough decision-making.

Aligning the long-term success of encryption fund employees with the network is more challenging: their incentives are weaker than those of corporate employees, as their compensation consists only of tokens and cash ( from the foundation's token sales ), rather than the tokens + cash ( from equity financing ) + equity portfolio that corporate employees receive. This means that fund employees are subject to extreme fluctuations in token prices and only have short-term incentives; whereas corporate employees enjoy stable long-term incentives. Bridging this gap is quite difficult. Successful companies can continuously improve employee benefits through growth, but successful foundations cannot. This leads to difficulties in maintaining synergy, and fund employees are more likely to seek external opportunities, fostering potential conflicts of interest.

The Legal and Economic Constraints of the Encryption Foundation

The encryption foundation not only faces incentive distortions but also encounters capacity limitations on legal and economic levels.

Legally, most encryption foundations do not have the authority to develop peripheral products or engage in commercial activities, even if these initiatives could significantly benefit the network. For example, the vast majority of foundations are prohibited from operating consumer-facing profit-making businesses, even if such businesses could bring considerable transaction volume to the network, thereby creating value for token holders.

The economic realities faced by encryption foundations have similarly distorted strategic decision-making: they bear all the costs of effort, while the benefits (, if any, ) are socially distributed. This distortion, combined with a lack of market feedback, leads to inefficient resource allocation, whether in employee compensation, long-term high-risk projects, or short-term superficial benefits.

This is not a path to success. A thriving network relies on a diversified product service ecosystem, including middleware, compliance services, developer tools, etc. (. Companies constrained by the market are better at providing these supplies. Despite the remarkable achievements of the Ethereum Foundation, would the Ethereum ecosystem have the prosperity it has today without the profit-driven products and services built by ConsenSys?

The space for value creation by the encryption foundation may further shrink. The proposed market structure bill ) is reasonable ( focusing on the economic independence of tokens relative to centralized organizations, requiring that value must originate from the network's programmatic functions ) such as ETH capturing value through the EIP-1559 mechanism (. This means that enterprises and foundations must not support token value through off-chain profit-making businesses, such as FTX once used exchange profits to buy back and burn FTT to raise the coin price. Such centralized value anchoring mechanisms trigger trust dependence ) which is a hallmark of securities attributes: the collapse of FTX led to the plummeting of FTT prices (, thus the ban is reasonable; but at the same time, it also cuts off potential paths based on market accountability ) that is to achieve value constraints through off-chain business revenue (.

Encryption Foundation Causes Operational Inefficiency

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

When dealing with these architectural challenges, entrepreneurs often fall into an absurd dilemma:

• Can fund employees and company employees coexist in the same space, such as a Slack channel?
• Can two organizations share a development roadmap?
• Can employees attend the same offline meeting?

In fact, these issues are unrelated to the essence of decentralization, but they bring real losses: artificial barriers between functional dependencies delay development progress and hinder collaborative efficiency, ultimately leading all participants to endure a decline in product quality.

Encryption Foundation Becomes an Authoritarian Gatekeeper

The actual functions of the encryption foundation have seriously deviated from its initial positioning. Countless cases show that the foundation is no longer focused on decentralized development; instead, it has been endowed with increasingly expanding powers, evolving into a centralized entity that controls the treasury keys, key operational functions, and network upgrade permissions. In most cases, the foundation lacks substantial accountability to token holders; even if token governance can replace the foundation's directors, it merely replicates the agency problem of corporate boards, and the means of recourse are even scarcer.

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

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

Better Solution: Corporate Structure

In a scenario where founders do not need to give up or hide their continued contributions to the network, and where no one controls the network, the encryption foundation will lose its necessity for existence. This opens the way for a better architecture that can support long-term development, align incentives for all participants, and meet legal requirements.

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

• Efficient Capital Allocation
• Attract top talent by providing incentives beyond tokens.
• Leverage work feedback loops to respond to market forces

The company structure inherently aligns growth with substantial impact, without relying on charitable funding or vague missions.

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

The proposed market structure bill addresses these concerns through its decentralized legal constructs and control mechanisms. However, ensuring that incentive alignment continues to 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: the legislation neither creates nor permits legal fiduciary duties towards 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 foundation model. These concerns also do not require tokens to be infused with equity attributes, that is, a legal claim to the developers' ongoing efforts, otherwise, it would undermine the regulatory basis distinguishing them from ordinary securities. On the contrary, these worries highlight the demand for tools: the need for continuous collaborative 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 incentive collaboration tools already exist. The only reason they have not been widely adopted in the encryption industry is that using these tools will trigger more stringent scrutiny under the SEC's Howey Test framework.

However, the effectiveness of the following mature tools will be fully unleashed under the control framework proposed by the Market Structure Bill.

( Public Welfare Company ) PBC ( Architecture

Development companies can register or transform into public benefit corporations )PBC(, which embed a dual mission: to pursue profit while simultaneously seeking specific public benefits, namely supporting network development and health. PBC grants founders legal flexibility.