a16z: Analysis of the "End of the Era of Crypto Foundations" Controversy

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

In the article "The End of the Cryptocurrency Foundation Era", the call to terminate the offshore outsourcing of cryptocurrencies has sparked some controversy. I would like to address the five most common questions related to taxation, public welfare organizations, the future role of foundations, and the limitations of the "pure foundation" model. As more questions arise, we will update this FAQ.

1. How is the taxation?

Offshore foundations can offer tax benefits, but the risks involved are greater than many people imagine (and greater than advisors are willing to admit). Additionally, to obtain these benefits, U.S. projects must introduce significant operational complexity and structural inefficiencies—such as finding offshore employees and maintaining strict independence between the foundation and the development company (DevCo), among others. Every minute spent managing these restrictions is no different from wasting every minute on transportation.

Or more bluntly, founders should focus on maximizing the chances of success, rather than on the ancillary benefits that can only come from success. Startups do not fail because they have not optimized their taxes.

In retrospect, most of the founders I interviewed were willing to give up the tax benefits gained through offshore outsourcing to eliminate the costs associated with those structures. They often said the main reason was the harsh regulatory environment, and as the regulatory environment gradually weakened, such complexity was no longer worth it. Finding product-market fit is far more important than tax planning.

In addition, if structured correctly, DUNA can improve tax efficiency, so concerns about taxation should not be an obstacle to onshore business.

2. Is a Public Welfare Legal Person (PBC) different from a Foundation?

No. PBC has a fiduciary duty to its shareholders, but they are allowed to balance these obligations with the public interest. This means they can operate like ordinary companies—competing, raising funds, pursuing profits, and so on—including situations where these businesses provide ancillary benefits to agreement and token holders.

On the other hand, the foundation distorts the incentive mechanism and is at a disadvantage in competition. Even in places where commercial activities are allowed, the foundation can rarely operate effectively. When they attempt to operate like a company, it often leads to conflicts in taxation, legal issues, and governance, which are precisely what they intended to avoid.

This is particularly problematic for networks that need to build businesses on them. These networks require synchronized efforts in various aspects such as marketing, engineering design, and promotion to attract third-party businesses. Non-profit organizations are simply not suited to do these things. And when they are equipped with overseas lawyers, they are completely uncompetitive.

Only a few successful consumer internet products and services are established and operated by foundations, and there is a reason for that.

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

Absolutely right. The focus of my article is not "never have a foundation"—but rather that we should stop using them for decentralized performances. It's a good thing that market structure legislation enforces this change.

Foundations with specific missions (such as executing grant programs and coordinating work across the ecosystem) will continue to play a role, especially domestic foundations. Token holders can provide oversight but cannot directly manage these functions. The new foundation proposals from Uniswap and Compound are good examples. Foundations operate independently but are accountable to token holders through funding: if token holders do not like the foundation's decisions, they can stop funding. For mature projects, foundations may also be a better place to carry out protocol development work, as we see with the Ethereum Foundation.

Importantly, the control-based framework proposed in the market structure legislation not only assists DevCos but also legitimizes these purpose-driven, narrowly scoped foundations.

4. So how about the "Foundation Only" model? That is, DevCo disappears, and the foundation builds the ecosystem?

Contrary to intuition, for early projects, canceling DevCo and relying entirely on the foundation to build the ecosystem may actually undermine decentralization. The reasons are as follows.

To achieve and maintain decentralization in a network, third parties (not just internal personnel) need to participate and build on the network. However, unless third parties can derive value from their participation, they will not engage. This is already evident in the context of certain network participants, such as validators—no one wants to operate at a loss indefinitely. The same logic applies to application developers, such as those running frontends for DeFi, social media, or messaging protocols.

While a foundation can promote credible neutrality, the pure foundation model faces unique challenges in fostering a diverse and sustainable application layer:

• As a non-profit organization, the foundation is unable to adequately assess the necessary conditions required to ensure that network participation is profitable for developers. The foundation, which operates applications in a charitable rather than commercial form, lacks structural incentives to care whether application developers can achieve sustained profitability. This increases the risk that the design of the protocol itself cannot support the development of profitable third-party applications.
• When applications operated by the foundation incur losses and are indefinitely funded by the network, it creates a distorted competitive environment. Third-party applications are constrained by the market, while applications operated by the foundation are not. This imbalance hinders independent developers (who ultimately must be profitable) and stifles the organic growth of the ecosystem.
• In a system where there is neither a developer company nor a foundation operating the application, trusted neutrality may be achievable—but at the cost of real-time product learning. If entrepreneurs cannot conduct "dog food testing" on their own products, they will be at a competitive disadvantage in understanding user needs.

For emerging projects, a tight feedback loop and market signals are crucial for moving from 0 to 1. Entrepreneurs need to understand in real-time which methods are effective and which are not. Indirect or distorted signals can jeopardize success.

For mature projects with a strong and diverse network of participants, credible neutrality will become an effective tool for scaling from 1 to 100. In this case, transitioning to a foundation-led model is a wise move, despite some inefficiencies. Mature projects with established market participants and user behaviors are also better equipped to understand the incentives needed for participants to operate profitably and maintain a fair competitive environment. The restructuring of Morpho is a great example. However, even for mature projects, abandoning direct profit motives is not without risk.

In addition, projects adopting this strategy should be aware that the functionality of converting their tokens into foundation shares is not equivalent. Existing securities laws and market structure legislation do not allow tokens to represent the rights of a centralized organization (including the economic rights of off-chain operations run by the foundation). Network tokens represent ownership of the network, not ownership of the company or foundation.

In short, network led by the foundation has its significance, but timing is crucial. If deployed too early, they may hinder rather than promote decentralization.

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

No. DUNA is a "non-profit association," but you should not confuse them with a foundation. By definition, DUNA is a purpose-driven organization with a narrower scope—it is merely a wrapper for token governance. They are not hierarchical organizations, do not have product teams, and do not operate any business.

Just as a foundation focused on funding can avoid the incentive misalignment that occurs when non-profit organizations attempt to create products, DUNA also avoids this situation through design. Their existence is to reflect governance outcomes, rather than the actions of managers.

In addition, "non-profit" does not mean "tax-exempt." DUNA can engage in profit-making activities, including generating revenue from protocol operations (such as decentralized exchange fees, decentralized social media fees, etc.). Wyoming's DUNA regulations explicitly allow for reasonable compensation for any services provided by the DUNA ecosystem (including token holders). DUNA can even be used for token-based governance for protocols that adopt programmatic buy-back and burn economic models. (For more information on DUNA, please read this article.)

Therefore, DUNA will not inherit the structural drawbacks of large non-profit foundations - they provide a clear and targeted legal interface for networks that wish to remain domestic without compromising decentralization.

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

• If your network requires a funding plan, please use the foundation.
• If your network requires development and products, please use a company.
• If your network requires governance, please use DUNA for token governance and use the BORG tool to transfer permissions on-chain.

If you have not established a network, then the above content does not apply.