Despite having the same non-profit status, these cryptocurrency groups may support blockchain projects in different ways and with different objectives.
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Non-profit organizations called crypto foundations were established to aid particular blockchains and associated initiatives. They can encourage the development of a sense of community and assist decentralized project management. Although it might seem strange that a foundation is in charge of a project led by the community, this is standard procedure in the sector.
Crypto foundations, which work with the community and for-profit developers, have provided blockchain projects with a number of important advantages, such as support and guarantee that a blockchain will continue to grow decentralized. In order to increase awareness and uptake of the project, they can also offer marketing and education.
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Crypto foundations are nonprofit establishments dedicated to supporting particular blockchains and associated initiatives. They can help to promote decentralized project control and community building. Although it might seem strange for an organization to be in charge of a project led by the community, industry standards call for foundations.
Crypto foundations have provided some noteworthy advantages to blockchain projects by working with the community and for-profit developers. These benefits include support and guarantee that a blockchain will continue to grow decentralized. To increase awareness and uptake, they can also offer marketing and information about the project.
Although there are advantages to crypto foundations, some people have recently taken a more critical look at the concept and are wondering who the structure serves. We will discuss the purpose and background of crypto foundations in order to put them in context.
What are the functions of crypto foundations?
Although foundations and blockchain ecosystems are closely related, foundations are not directly involved in creating or managing the blockchain. Rather, the primary responsibility for the ongoing development and upkeep of a blockchain, its associated technology, and community support lies with foundations.
Crypto foundation support can take two forms: non-financial support and financial support.
Non-financial support can take the form of organizing events, interacting with the community, and making contacts for projects. For instance, the Ethereum Foundation organizes events like the Devcon Conference to help researchers and developers learn more about Ethereum while interacting with other community builders.
This should not be confused with the charitable work carried out by conventional non-profits, even though these foundations frequently invest in and support ecosystem projects.
Rather than this, foundations are providing funding to projects that will benefit the blockchain’s entire ecosystem, much like a traditional venture capital firm would. For example, the Solana Foundation provides funding to “initiatives aimed at decentralizing, growing, and securing the Solana network” through the Solana Foundation Grants program. Crypto foundations can work with conventional venture capital firms like a16z or Pantera Capital on non-grant funding or investment projects.
The purpose of crypto foundations
The purpose of crypto foundations is to advance a project’s evolution and decentralization. Crypto foundations guarantee that the creation of a blockchain is dispersed throughout the community rather than being centralized by a single organization by offering support without getting directly involved. It’s unclear if foundations actually accomplish decentralization in spite of this lofty objective.
Blockchain projects require a certain level of centralization in order to get off the ground. Almost invariably, a for-profit organization is the driving force behind the project’s inception. Usually, the foundation is built later.
Let’s examine Filecoin (FIL) and the Filecoin community as examples. Protocol Labs is a for-profit research and development organization whose primary goal is to create decentralized Filecoin storage systems. A non-profit organization called the Filecoin Foundation for the Decentralized Web offers direction and assistance to initiatives aiming to expand within the Filecoin ecosystem. Nearly every other blockchain has a similar relationship, such as that between Algorand Inc., a for-profit company, and the Algorand Foundation, a non-profit organization.
When talking about the relationship between for-profit companies and non-profit foundations, debates about decentralization and crypto foundations come up. Usually, for-profit organizations launch foundations, which are then given token allocations at the launch.
With Polkadot (DOT), the Web3 Foundation was given 1.2 million DOT, or about 12% of the original token supply. At launch, the value of DOT was estimated to be $348K, but it has since skyrocketed to over $7.5M. Polkadot is not alone in using token launches as a fundraising strategy; many other crypto foundations do the same thing as well.
Not only are crypto critics skeptical, but the US Securities and Exchange Commission (SEC) and class action lawyers are also dubious due to the close ties between foundations and for-profit businesses. A class action lawsuit was filed in July 2022, accusing Solana Foundation and Solana Labs of breaking the Securities Act through their sales of SOL tokens.
Dodging securities liability is an additional advantage of having a crypto foundation, which is highlighted by this lawsuit and other actions taken against foundations that are similar.
Courts usually use the Howie Test to determine whether or not a cryptocurrency is a security under US law. A cryptocurrency will pass this test and be deemed a security by the court if it is:
- A financial commitment
- In a joint venture
- With a realistic expectation of financial gain
- Derived from other people’s managerial or entrepreneurial endeavors.
A cryptocurrency might be regarded as a security under US law if it passes all four of these Howey Test prongs. The final prong of the test is what crypto foundations help to get around, even though the first three prongs may apply to almost all cryptocurrencies. Other methods of demonstrating decentralization include using proof-of-stake as the consensus mechanism or deploying DAOs, which may or may not be a part of a foundation.
A blockchain’s development and maintenance are the responsibility of foundations, though they are carried out in a parallel or passive manner. Because of this decentralized method of blockchain development, developers can now continue to build without worrying about a token turning into a security. For many, the cryptocurrency at the core of the blockchain cannot be regarded as a security as long as it is not developed in a centralized manner.
According the latest information available in April 2023, Switzerland is widely recognized for having a significant number of cryptocurrency foundations, largely due to its favorable regulatory environment, particularly in the “Crypto Valley” region in and around Zug. This area has become a hub for blockchain and cryptocurrency projects, attracting many international companies to establish their foundations there. Switzerland’s supportive legal framework, political stability, and openness to innovation have made it a leading destination for cryptocurrency foundations.
One important component of the case for cryptocurrencies’ exemption from securities law is their foundation. These foundations are additionally established in Switzerland or other crypto-friendly nations to provide an extra degree of protection against enforcement actions based in the United States.
However, Bitcoin is the only asset that the SEC has formally declared to be non-security. There are complicated ongoing discussions in the U.S. regarding the classification of cryptocurrencies as securities or commodities, and only time will tell if a blockchain with a corresponding foundation will be taken into account in future rulings and laws.
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