The End of the Encryption Foundation: Towards a Sustainable Blockchain Governance Framework

The encryption foundation used to be an important tool for advancing the blockchain industry, but now it has become a stumbling block to progress. In the process of decentralization, the friction they cause far exceeds their contributions.

With the emergence of a new regulatory framework from the U.S. Congress, the encryption industry has welcomed a rare opportunity: to abandon the model of crypto foundations and its derivative issues, and to rebuild an ecosystem with clear responsibilities and the potential for scalability.

This article will analyze the origins and defects of the encryption foundation model, and argue how to replace the encryption foundation structure with conventional development companies to fully leverage the emerging regulatory framework. We will elaborate on the advantages of the corporate system in capital allocation, talent attraction, and market response - only this path can achieve structural synergy, scale growth, and substantial impact.

An industry that aims to challenge tech giants, financial giants, and government systems cannot rely on altruism, charitable funding, or vague missions. The scale effect comes from incentive mechanisms. If the encryption industry is to fulfill its promises, it must get rid of outdated structural crutches.

The Historical Mission and Temporal Limitations of the Encryption Foundation

The choice of the cryptocurrency industry to adopt the model of cryptocurrency foundations stems from the decentralized ideals of early founders: non-profit cryptocurrency foundations aim to serve as neutral managers of network resources, avoiding interference from commercial interests by holding tokens and supporting ecological development. Theoretically, this model can best achieve trustworthy neutrality and long-term public value. Objectively speaking, not all cryptocurrency foundations have failed; for example, the Ethereum Foundation has promoted network development with its support, and its members have completed highly valuable pioneering work under strict constraints.

But as time goes by, changes in the regulatory environment and intensified market competition have caused the encryption foundation model to deviate from its original intention:

1. SEC's dilemma in behavioral testing. "Decentralized testing based on development behavior" complicates the situation further - forcing founders to abandon, obscure, or evade their 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. Regulatory evasion channels. The cryptocurrency foundation has become an "independent entity" for the transfer of responsibilities, essentially turning into a circumvention strategy to evade securities regulation.

Although this arrangement is reasonable during legal confrontations, its structural defects can no longer be ignored:

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

As the congressional proposal advances a mature framework based on control, the illusion of separation for the encryption foundation is no longer necessary. This framework encourages founders to transfer control without having to relinquish their involvement in the construction, while providing clearer and less easily abused decentralized construction standards than the behavioral testing framework (.

After this pressure is relieved, the industry can finally abandon short-term measures and turn to a long-term sustainable framework. The encryption foundation once fulfilled its historical mission, but it is no longer the best tool for the next stage.

The Myth of the Encryption Foundation Incentive Collaboration

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

But this theory ignores the actual operational logic of organizations: eliminating equity incentives for enterprises does not solve the misalignment of interests, but rather institutionalizes it. The lack of profit motivation results in cryptocurrency foundations lacking clear feedback mechanisms, direct accountability, and market enforcement constraints. The funding of cryptocurrency foundations is essentially a sheltering model: once tokens are allocated and exchanged for fiat currency, there is no clear linkage mechanism between expenditure and effectiveness.

When other people's funds are managed in a low-accountability environment, it is difficult to achieve efficiency optimization.

In contrast, the endogenous accountability mechanism within the enterprise architecture: companies are constrained by market laws. Capital is allocated for profit, and financial indicators such as revenue, profit margin, and return on investment can objectively measure effectiveness. When management fails to meet targets, shareholders can assess and apply pressure.

In contrast, crypto foundations are often set up to operate at perpetual losses with no consequences. Due to the open and permissionless nature of blockchain networks and often lacking a clear economic model, it is nearly impossible to correlate the efforts and expenditures of crypto foundations with value capture. This detaches crypto foundations from the market realities that demand difficult decision-making.

It is more challenging to align the interests of employees at crypto funds with the long-term success of the network: their incentives are weaker than those of corporate employees, as their compensation is only a combination of tokens and cash ) from the foundation's token sale (, rather than the token + cash ) from equity financing ( + equity combination that corporate employees receive. This means that crypto fund employees are subject to extreme fluctuations in token prices, with only short-term incentives; while corporate employees enjoy stable long-term incentives. Compensating for this deficiency is quite difficult. Successful enterprises can continuously enhance employee welfare through growth, while successful crypto foundations cannot. This leads to difficulties in maintaining synergy, and crypto fund employees are prone 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 legal and economic capacity constraints.

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 instance, the vast majority of encryption foundations are prohibited from operating consumer-facing profit-making businesses, even though such businesses might generate substantial transaction flow for the network, thereby bringing value to token holders.

The economic reality faced by encryption foundations also distorts strategic decision-making: they bear all the costs of effort, while the benefits ), if any, are dispersed and socialized. This distortion, coupled with a lack of market feedback, leads to inefficient resource allocation, whether it be employee compensation, long-term high-risk projects, or short-term superficial benefit projects.

This is not the path to success. A thriving network relies on a diversified product service ecosystem, including middleware, compliance services, developer tools, etc., constrained by the market, and companies are better at providing these supplies. Despite the remarkable achievements of the Ethereum Foundation, how could the Ethereum ecosystem have today's prosperity without the profitable products and services built by ConsenSys?

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

Encryption Foundation Causes Operational Inefficiency

In addition to legal and economic constraints, the cryptocurrency foundation also causes significant operational efficiency losses. Any founder who has experienced the structure of a cryptocurrency foundation knows the cost: to meet the formalized ( often performative ) separation requirements, efficient collaborative teams must be dismantled. Engineers focused on protocol development need to collaborate daily with business development and marketing teams. However, under the structure of the cryptocurrency foundation, these functions are forced to be split.

When facing these architectural challenges, entrepreneurs often find themselves in an absurd dilemma:

• Can encryption fund employees and company employees coexist in the same room, for example, in the same 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, yet they bring real losses: the artificial barriers between functionally dependent parties delay development progress, hinder collaborative efficiency, and ultimately lead to all participants bearing the consequences of a decline in product quality.

The Encryption Foundation Becomes a Centralized Gatekeeper

The actual functions of the encryption foundation have seriously deviated from its initial positioning. Countless cases indicate that the encryption foundation is no longer focused on decentralized development, but instead has been granted an increasingly expanding power of control - evolving into a centralized entity that controls the treasury keys, key operational functions, and network upgrade permissions. In most cases, the encryption 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 bigger problem is that establishing most encryption foundations requires over $500,000 and takes months, accompanied by lengthy processes involving teams of lawyers and accountants. This not only hampers innovation but also sets cost barriers for startups. The situation has worsened to the point where it is now difficult to find experienced lawyers to establish foreign encryption foundation structures, as many lawyers have given up their practice – they now only serve as professional board members, charging fees in dozens of encryption foundations.

In summary, many projects have fallen into the "shadow governance" of interest groups: the tokens only symbolize the nominal ownership of the network, while the actual stewards are the encryption foundations and the directors they employ. This structure increasingly conflicts with emerging market structure legislation, which encourages on-chain accountability systems ( to eliminate control ), rather than merely dispersing control through off-chain opaque structures (. For consumers, eradicating trust dependency is far better than hiding dependency ). Mandatory disclosure obligations will also enhance the transparency of current governance, forcing project parties to eliminate control rather than delegate it to a few individuals with unclear responsibilities.

Better Solution: Corporate Structure

The necessity for the cryptographic foundation to exist will diminish as long as the founders do not have to give up or hide their ongoing contributions to the network, and as long as no one controls the network. 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.

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

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

The company's structure is inherently suited for growth and substantial impact, without relying on charitable funding or vague missions.

However, concerns about the synergy between the company and incentives are not entirely unreasonable: when the company continues to operate, the potential for network value appreciation to benefit both tokens and corporate equity does indeed raise real complexities. Token holders reasonably worry that specific companies might design network upgrade plans or retain certain privileges and permissions to prioritize their equity over token value benefits.

The proposed market structure bill addresses these concerns through its decentralized legal constructs and control mechanisms. However, ensuring incentive alignment will remain a continuous necessity—especially when the long-term operation of projects leads to the depletion 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 allows for a legal fiduciary duty to token holders, nor does it grant token holders enforceable rights regarding the ongoing efforts of the company.

However, these concerns can be alleviated, and do not constitute a legitimate reason to continue using the encryption foundation model. These concerns also do not require the injection of equity attributes into the tokens - that is, a legal claim to the developers' continued efforts - otherwise, it would undermine the regulatory basis that distinguishes it from ordinary securities. On the contrary, these worries highlight the need for tools: there is a need to continuously coordinate 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 are not widely adopted in the encryption industry is that using these tools will trigger stricter scrutiny under the SEC's action testing framework.

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

( Public Welfare Company ) PBC ( Architecture

Development companies can register or transform into nonprofit companies )P.