The Rise and Fall of Encryption Foundations: Exploring Better Industry Structures

The encryption foundation was once an important force driving the development of blockchain networks. However, today they have instead become a major resistance to industry development. In the process of decentralization, the friction caused by the encryption foundation far exceeds its contributions.

With the emergence of a new regulatory framework in the US Congress, the encryption industry has welcomed a rare opportunity: to abandon the cryptocurrency foundation model and the various issues it brings, and to reconstruct the ecosystem with a clear responsibility and authority, and a scalable mechanism.

This article will first analyze the origins and defects of the encryption foundation model, and then argue how to replace the encryption foundation structure with traditional development companies to adapt to the emerging regulatory framework. The article 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.

In an industry dedicated to challenging tech giants, financial oligarchs, and government systems, how can it 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 If the encryption industry is to fulfill its promises, it must break free from outdated structural constraints.

The Historical Mission and Limitations of the Encryption Foundation

The encryption industry initially chose the encryption foundation model, stemming from the early founders' idealism of decentralization: the non-profit encryption foundation aims to act as a neutral manager of network resources, avoiding interference from commercial interests by holding tokens and supporting ecosystem development. Theoretically, this model can best achieve trusted neutrality and long-term public value. Objectively speaking, not all encryption foundations have failed; for example, the Ethereum encryption foundation has promoted network development under its support, and its members have completed highly valuable pioneering work under strict constraints.

However, as time goes by, the intensification of regulatory dynamics and market competition has 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 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 encryption foundation has become an "independent entity" that shifts responsibilities, effectively becoming a circumvention strategy to evade securities regulation.

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

1. Lack of incentive coordination: there is no coherent interest coordination mechanism.
2. Unable to achieve growth optimization: structurally unable to achieve scale expansion and 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 relinquish control without having to give up participation in the construction, while providing clearer and less easily abused decentralized building standards than behavioral testing frameworks (.

After this pressure is relieved, the industry can finally abandon expediency 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 focuses on maximizing network value.

However, this theory ignores the actual operational logic of organizations: eliminating equity incentives for enterprises does not solve the problem of misaligned interests, but rather institutionalizes it. The lack of profit motivation results in the encryption foundation lacking a clear feedback mechanism, direct accountability, and market-driven constraints. The funds of the encryption foundation are essentially a form of sheltering model: after tokens are allocated and exchanged for fiat currency, there is no clear linkage mechanism between expenditures and outcomes.

When other people's funds are managed in a low accountability environment, it is almost 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 management fails to meet targets, shareholders can evaluate and exert pressure.

In contrast, 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 unclear economic models, mapping the efforts and expenditures of encryption foundations to value capture is nearly impossible. Consequently, encryption foundations are disconnected from the market realities that require making tough decisions.

Aligning the long-term success of cryptocurrency fund employees with the network is more challenging: their incentives are weaker than those of corporate employees, as compensation is only a combination of tokens and cash ) from cryptocurrency foundation token sales (, rather than the token + cash ) from equity financing ( + equity packages enjoyed by corporate employees. This means cryptocurrency fund employees are subject to extreme fluctuations in token prices, with only short-term incentives; whereas corporate employees enjoy stable long-term incentives. Compensating for this deficiency is fraught with difficulties. Successful companies can continuously enhance employee benefits through growth, whereas successful cryptocurrency foundations cannot. This leads to difficulties in maintaining synergy, as cryptocurrency fund employees are prone to seek external opportunities, creating potential conflicts of interest.

Legal and Economic Constraints of the Encryption Foundation

The encryption foundation not only faces incentive distortions but also legal and economic constraints.

Most encryption foundations are legally prohibited from developing peripheral products or engaging in commercial activities, even if these initiatives could significantly benefit the network. For example, the vast majority of encryption foundations are banned from operating consumer-facing profit-making businesses, even if such businesses could generate substantial transaction volume for the network, thereby providing value to token holders.

The economic realities faced by encryption foundations similarly distort strategic decision-making: they bear all the costs of efforts, while the returns ), if any, ( are widely dispersed. This distortion, combined 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 beneficial projects.

This is not a path to success. A thriving network relies on a diversified product service ecosystem, such as middleware, compliance services, developer tools, etc., constrained by the market, where companies are better at providing these supplies. Despite the remarkable achievements of the Ethereum encryption foundation, how could the Ethereum ecosystem be as prosperous as it is today without the profit-oriented 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 tokens relative to centralized organizations, requiring that value must stem from the programmatic functions of the network ), such as how ETH captures value through the EIP-1559 mechanism (. This means that both enterprises and encryption foundations cannot support token value through off-chain profitable businesses, such as how FTX previously used exchange profits to buy back and destroy FTT to inflate its price. Such centralized value anchoring mechanisms lead to trust dependency ), which is a hallmark of securities: the collapse of FTX led to the crash of FTT's price (, hence the ban is reasonable; however, it also cuts off potential pathways based on market accountability ), namely achieving value constraints through revenue-generating off-chain businesses (.

Encryption foundation leads to low operational efficiency

In addition to legal and economic constraints, the encryption foundation has also caused significant operational efficiency losses. Any founder who has experienced the structure of the encryption foundation knows its costs: in order to meet the formal separation requirements that often have a performative nature ), efficient collaborative teams have to be dismantled. Engineers focused on protocol development need to collaborate with business development and marketing teams every day. However, under the structure of the encryption foundation, these functions are forced to be separated.

In dealing with this architectural challenge, entrepreneurs often find themselves in an absurd predicament:

• Can encryption fund employees and company employees be 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 not related to the essence of decentralization, yet they bring about real losses: the artificial barriers between functional dependencies delay development progress, hinder collaborative efficiency, and ultimately lead all participants to bear the consequences of declining product quality.

Encryption Foundation Becomes a Centralized Gatekeeper

The actual functions of the encryption foundation have severely deviated from its initial positioning. Countless cases indicate that the encryption foundation is no longer focused on promoting decentralized development, but instead has been endowed with an increasingly expanding 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 board of directors of the encryption foundation, it merely replicates the agency problems of corporate boards, and the recourse tools are even more scarce.

The problem lies in the fact that establishing most encryption foundations requires an investment of over $500,000 and takes months, accompanied by lengthy processes involving teams of lawyers and accountants. This not only delays innovation but also sets up cost barriers for startups. The situation has worsened to the point where it is becoming increasingly difficult to find lawyers experienced in setting up 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 cryptocurrency encryption foundations.

In summary, many projects have fallen into the "shadow governance" of interest groups: tokens only symbolize the nominal ownership of the network, while the actual helm is held by encryption foundations and their hired directors. This structure increasingly conflicts with the emerging legislative framework for market structures, which encourages on-chain accountability systems to eliminate control (, rather than merely decentralizing control in opaque off-chain structures ). For consumers, eradicating trust dependency is far preferable to hiding dependencies (. Mandatory disclosure obligations will also enhance the transparency of current governance, compelling project parties to eliminate control rather than entrusting it to a small number of individuals whose responsibilities are unclear.

Better Solution: Corporate Structure

If the founders do not need to give up or hide their ongoing contributions to the network, and only need to ensure that no one controls the network, the encryption foundation will lose its necessity to exist. 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 ) build networks from concept to reality, providing a better platform 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
• Responding 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 synergy between the company and incentives are not unfounded: when a company operates continuously, the possibility that the network's value increase benefits both the tokens and the company's equity does indeed raise real complexities. Token holders reasonably worry that a specific company may design network upgrade schemes or retain certain privileges and permissions to ensure that its equity takes precedence over the value benefits of the tokens.

The proposed market structure bill addresses these concerns through its decentralized legal construction and control mechanisms. However, ensuring incentive alignment remains a continuous necessity—especially when the long-term operation of a project 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 company's ongoing efforts.

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

New Applications of Existing Tools in the Encryption Field

It is reassuring that collaborative incentive tools already exist. The only reason they have not become popular in the encryption industry is that using these tools under the SEC's action testing framework would trigger stricter scrutiny.

However, based on the control framework proposed by the Market Structure Act, the effectiveness of the following mature tools will be fully unleashed:

( Public Welfare Company ) PBC ( Architecture

Development companies can register or transform into public welfare companies.