Crypto foundations are non-profit organizations created to support specific blockchains and related projects. They can foster community building and support decentralized control over a project. Though it may seem odd that an entity is responsible for a community-led project, foundations are a common practice in the industry.

Operating alongside the community and for-profit developers, crypto foundations have offered some significant benefits to blockchain projects, including assistance and assurance that a blockchain remains decentralized in its development. They also can provide marketing and education about the project to boost recognition and adoption.

While there are benefits to crypto foundations, some have recently looked more skeptically at the crypto foundation model and are questioning who the structure benefits. To provide context to crypto foundations, we’ll cover what crypto foundations do and why they exist.

What do crypto foundations do?

Despite the close relationship between foundations and blockchain ecosystems, foundations do not take an active role in developing or controlling the blockchain. Instead, foundations are primarily responsible for the continued growth and support of a blockchain, its related technology and support for the community.

The support offered by crypto foundations can come in the form of non-financial and financial support.

Non-financial support can include engaging with the community, creating connections for projects and hosting events. The Ethereum Foundation, for example, hosts the Devcon Conference and other Ethereum events for developers and researchers to learn more about Ethereum while connecting with other builders in the community.

While these foundations tend to invest and support ecosystem projects, this is not to be confused with the charity work done by traditional non-profits.

Instead, foundations are funding projects in a way more similar to the work of a traditional venture capital firm, granting funding to projects that will help the overall ecosystem around that blockchain. The Solana Foundation, for instance, offers investments through the Solana Foundation Grants program to “ initiatives aimed at decentralizing, growing, and securing the Solana network.” Crypto foundations can also be involved with non-grant funding or investments alongside traditional venture capital firms like a16z or Pantera Capital.

Why do crypto foundations exist?

Crypto foundations are designed to further the decentralization and evolution of a project. By providing support without direct involvement, crypto foundations ensure that the development of a blockchain is distributed across the community and not centralized by one single entity. Despite this ambitious goal, it’s unclear if foundations actually achieve decentralization.

Blockchains are not created in a void and some degree of centralization needs to occur for a project to launch. At launch, a for-profit entity is almost always the catalyst for the project’s creation. The foundation typically comes sometime after.

To illustrate, let’s take a look at Filecoin (FIL) and the Filecoin community. Protocol Labs is a for-profit, research and development lab specifically focused on developing decentralized storage solutions for Filecoin. Filecoin Foundation for the Decentralized Web is a non-profit entity that provides guidance and support to projects looking to build within the Filecoin ecosystem. The same relationship exists among almost every other blockchain, like the Algorand Foundation (non-profit) and Algorand Inc (for-profit).

Debates around decentralization and crypto foundations arise when discussing the relationship between for-profit entities and non-profit foundations. Foundations are typically kicked off by for-profit entities and receive an allocation of tokens at the launch.

In the case of Polkadot (DOT), the Web3 Foundation received around 12% of the initial token supply, or 1.2M DOT. The amount of DOT was worth around $348K at the launch but has since exploded to over $7.5M today. This method of funding through token launches is not unique to Polkadot and happens with many other crypto foundations today.

The close relationship between foundations and for-profit entities has drawn skepticism beyond just crypto critics, but also the United States Securities and Exchange Commission (SEC) and class action attorneys. In July 2022, a class action lawsuit was filed against both the Solana Foundation and Solana Labs alleging that the two entities violated the Securities Act by selling SOL tokens.

The lawsuit, and other similar actions taken against foundations, highlight another added benefit of having a crypto foundation: dodging securities liability.

For the purposes of evaluating whether or not a cryptocurrency is a security under US law, courts typically turn to the Howie Test. Under this test, the court will determine that a cryptocurrency is a security when it is:

• An investment of money
• In a common enterprise
• With a reasonable expectation of profits
• Derived from the entrepreneurial or managerial efforts of others.

If a cryptocurrency satisfies each of these four prongs in the Howey Test, then it may be considered to be a security under U.S. law. While the first three prongs may be true for nearly every cryptocurrency, the final prong of the test is what crypto foundations help to circumvent, though other ways such as DAOs (which may or may not be part of a foundation) or engaging proof-of-stake as the consensus mechanism are also used as proof of decentralization.

Foundations are responsible for the development and support of a blockchain but do so in passive or parallel ways. This decentralized approach to blockchain development has provided a pseudo-safe haven for developers to continue building without a token becoming a security. As long as there isn’t a centralized nature to the development, many believe that the blockchain’s underlying cryptocurrency cannot be considered a security.

Foundations serve as one key point in the argument that cryptocurrencies are exempt from securities law. To add an additional layer of protection from U.S.-based enforcement, these foundations are additionally created in Switzerland or other crypto-friendly countries.

Nonetheless, the only asset that the SEC has officially deemed to not be a security is Bitcoin, and ongoing debates in the U.S. over whether cryptocurrencies are securities or commodities are complex and time will tell if a blockchain having an associated foundation will factor in future decisions and regulations.