Crypto VC a16z’s GC Says Blockchain Foundations Have Outlived Their Usefulness

Venture capital giant a16z crypto’s head of policy and general counsel says protocol foundations do more harm than good and should be scrapped.

In a June 2 blog post, Miles Jennings argued that “it’s time for the crypto industry to move on from its foundation model.”

In “The End of the Foundation Era in Crypto,” Jennings said the nonprofit organizations that support and guide most major blockchain projects’ development — such as the Ethereum, Solana, and Sui foundations — “were once a clever legal pathway to progress.” Today, Jennings argues, they’ve become obsolete:

Instead, “ordinary developer companies” are a better way to build and maintain networks, he wrote, adding that they are aligned with growth and real impact rather than charitable funding or vague mandates.

“In theory, foundations can be a good tool for helping coordination among many independent actors,” Jennings added in comments to The Defiant, continuing:

“However, in practice, many foundations have struggled in this area. Effective coordination requires a build out of many different areas of expertise, from marketing to business development to engineering. That is very rarely done, so reliance on the original development company remains.”

Kyle Tut, co-founder and CEO of web3 data storage and retrieval firm Pinata, agreed, telling The Defiant via email that “foundations have always been a part of the broader decentralization theatre issue.”

The best path forward is to “eliminate the use of foundations and get back to focusing on building open and transparent tokens to power decentralized technology,” Tut added.

Foundations had a place when crypto needed a buffer from the Securities and Exchange Commission (SEC) scrutiny, said Martin de Rijke, head of growth at on-chain asset manager Maple Finance told The Defiant.

“But today, they often slow things down and create confusion around accountability,” de Rijke said. “At Maple, we’ve found that operating as a company gives us the clarity and flexibility to actually build, scale, and serve users, especially institutions, in a fast-moving market.”

While there are good foundations, he said, the old model simply doesn’t meet the needs of real businesses.

“If crypto wants to compete with traditional finance and onboard serious capital, it needs serious structures,” de Rijke said. “A company can make decisions, allocate resources, and take responsibility in a way that just works better in most cases.”

Decentralization Theater

With a new administration having deposed the leadership of regulatory agencies that had crypto fighting for its life, “the crypto industry has a rare moment to leave the foundation, and this friction, behind,” Jennings wrote in the a16z crypto blog post.

The SEC’s focus on whether or not crypto assets are securities encouraged founders to abandon or obscure their ongoing involvement in the projects they created, Jenning argued.

“[F]oundations are now often just convoluted workarounds: a way to shift authority and ongoing development efforts to an ‘independent’ entity in hopes of avoiding securities regulation,” he wrote, adding that foundations have their own issues, like centralization and lack of alignment:

There are exceptions to the rule, Jennings told The Defiant, pointing to the Uniswap Foundation as a “rare exception.”

Four flaws

There are four basic problems with foundations that render company control a better option, Jennings wrote in the blog post on Monday.

The first is a lack of accountability. Companies have market discipline enforced upon them, with shareholders to evaluate performance and if necessary apply pressure when goals are missed or unclear.

Foundations, on the other hand, are designed to run indefinitely and at a loss. And because blockchain networks generally lack clear economic models, “crypto foundations are shielded from the realities of market forces that demand hard decisions,” Jennings wrote.

Second is the legal and economic constraints that foundations labor under, as they are mostly unable to engage in commercial activity.

“Successful networks depend upon the development of a wide array of products and services — middleware, compliance services, developer tooling, and so on — that market-disciplined companies are better able to provide,” Jennings wrote.

Third are the operational inefficiencies foundations introduce, creating artificial legal barriers to good management.

“Engineers focused on protocol development often collaborate daily with business development, go-to-market, and marketing teams — yet under foundation structures, these functions are siloed,” Jennings wrote.

Fourth is that foundations have morphed into centralized gatekeepers.

“Many projects have ended up with a kind of ‘shadow governance’ of entrenched interests,” Jennings wrote. “Tokens may represent nominal ‘ownership’ of the network, but it is the foundation and its hired directors that steer the ship.”

Before Ethereum’s recent rebound — on the heels of its major upgrade, Pectra, and a reshuffling of its foundation’s leadership — a primary reason for record low sentiment around the ecosystem was dissatisfaction with how the Ethereum Foundation was being run.

What’s Next?

Jennings argues in his post that ordinary developer companies that build networks from conception to reality are a better solution as they “can deploy capital efficiently, attract top talent through offering more than just tokens, and respond to market forces through feedback loops on their work.”

Still, concerns that companies’ incentives are not necessarily aligned with the best interests of a network or its users are valid, Jennings admitted.

“The good news is tools to align incentives already exist,” he wrote. “The only reason they haven’t yet proliferated in the crypto industry is because, under the SEC’s efforts-based framework, using these tools would have brought increased scrutiny.”

These range from the public benefit corporation structure to revenue sharing agreements with networks and DAOs, and vesting plans that shift token lock-ups from a timed schedule to one based on reaching milestones. Then there are simple contractual protections.

In terms of implementation, two emerging approaches exist, Jennings wrote. One is a decentralized unincorporated nonprofit association (DUNA) status, which gives DAOs legal status to enter into contracts and enforce legal rights, among other things.

Then there’s what Jennings calls cybernetic organizations, or BORG, tooling. These tools allow DAOs to move many of the governance issues handled by foundations, like grant programs and upgrade committees, on-chain.

While blockchain foundations had a time and place, and many did a good job, “the evolving regulatory environment in the U.S. should promote transparency and decentralization, shifting the industry away from foundations, which generally have opaque structures that mask control,” Jennings told The Defiant via email, concluding:

“There’s a role for foundations in that future, but they’ll look very different from today’s offshore workarounds.”