A Detailed Guide to Understand Crypto Foundations and Why They Exist

Crypto foundations are not-for-profit organizations established to back specific blockchains and associated projects to further decentralization.

Despite the organizations sharing a non-profit status, crypto foundations can have different strategies and goals for backing blockchain projects. They can support community building and back decentralized control over a project. 

Crypto foundations have operated alongside for-profit developers and the community to benefit blockchain projects considerably. This includes assistance and guarantee that a blockchain maintains decentralization in its development. 

Crypto foundations also offer marketing as well as education concerning the project to enhance adoption and recognition. 

Understanding Crypto Foundations Function

There is a close link between blockchain systems and foundations. However, foundations have no active role in creating or managing the blockchain.

Rather, foundations are mainly behind a blockchain’s consistent growth and support, associated technology, and support for the community. Crypto foundations provide both financial and non-financial support. 

Nonfinancial support can entail engaging with the community, hosting events, and developing connections for projects. For instance, the Ethereum project hosts the Devcon Conference as well as other Ethereum events for researchers and developers to gain more knowledge concerning Ethereum while linking with other developers in the community.

Despite the foundations tending to back and invest in ecosystem projects, it should not be confused with the charity work executed by conventional not-for-profits. Rather, foundations finance projects in a manner that is more similar to the work of a conventional venture capital company, assuring funding for projects that will aid the overall ecosystem around the blockchain. 

The Solana Foundation uses the Solana Foundation Grants Program to ‘programs meant to decentralize, expand, and safeguard the Solana network.’ Besides, crypto foundations and conventional venture capital companies can be involved with non-grant investments or funding.

Understanding Why Crypto Foundations Exist

Crypto foundations are developed to further a project’s evolution and decentralization. By offering backing without direct involvement, crypto foundations ensure blockchain development is distributed across the community and not centralized by a single entity. 

Blockchains are not made in a void, and some decentralization level must be met for a project to launch. At the unveiling, a for-profit entity nearly always catalyzes the project’s development. 

A perfect illustration is Filecoin (FIL) and the Filecoin community. Protocol Labs, a for-profit and R&D lab, exclusively focused on making decentralized storage solutions for Filecoin.

Filecoin Foundation for the Decentralized Web is a not-for-profit entity that offers support and guidance to projects seeing to develop within the Filecoin ecosystem. A similar relationship exists among nearly all other blockchains.

Talks concerning crypto foundations and decentralization come up when deliberating about the link between non-profit foundations and for-profit entities. Basically, for-profit entities start foundations, and tokens are allocated at the unveiling. 

Crypto Foundations Purpose in Legal Compliances

Concerning Polkatod, the Web3 Foundation got an estimated 12% of the initial supply token (1.2M DOT). The DOT amount was worth an estimated $348K at the unveiling but is currently more than $7.5M. 

The close link between for-profit entities and foundations has been criticized. For instance, in July 2022, the Solana Foundation and Solana Labs were accused of selling SOL tokens, contravening the  Securities Act. 

The lawsuit underscores another benefit of having a crypto foundation: evading securities liability. To address whether or not a cryptocurrency is a security, courts utilize the Howie Test.

The court uses the Howie Test to establish that a cryptocurrency is a security when it is in a common enterprise, a money investment derived from others’ managerial or entrepreneurial efforts and has a reasonable profit expectation. 

In case a cryptocurrency satisfies all four prongs, it can be considered a security under the United States law. Derivation from others’ managerial or entrepreneurial efforts is what crypto foundations aid to evade.

Final Thoughts

Foundations aid in the support and development of a blockchain. However, they do this in parallel or passive means. 

Foundations are critical in the argument that cryptocurrencies are excluded from securities law. The foundations are also developed in Switzerland or other crypto-friendly nations to include an extra protection layer from the United States-based enforcement.