Written by Liu Honglin, IRIS
In the world of Web3, the foundation is a concept that is often mentioned but not deeply understood. As the core pillar of the project, the foundation not only determines the technical direction, but also drives the development of the community and the ecosystem. However, for the majority of Web3 project founding teams, the question of ‘why establish a foundation?’ is always a key issue that cannot be avoided.
Previously, Lawyer Mankun explained in the “Web3 Lawyer: Understanding the ETH Foundation 2024 Report and Facing Compliance Challenges in the Trump Era” the important role of the encryption foundation in US legal compliance by combining US regulatory trends. As the industry gradually matures and the global regulatory environment continues to improve, the role of the encryption foundation in Web3 projects is extending from technical support and governance to compliance and ecological protection.
In this article, Lawyer Mankun will analyze how Web3 projects achieve Compliance operations and promote community development through the encryption foundation, and ensure the success of the project in the context of global regulation based on the essence of the foundation.
The governance limitations of the Web3 project
The uniqueness of Web3 lies in its Decentralization concept, which gives the project a broad space for imagination, but also brings governance complexity. Compared with traditional enterprises that rely on clear allocation of rights and responsibilities and stable management structure, the governance of Web3 projects needs to find a balance among technological research and development, community self-governance, and ecological construction, and also to face the game among longer stakeholders’ interests.
In many early Web3 projects, the independence of governance structure is often a challenging hurdle to overcome. The project relies on the management mode of the core team in the early stage, which can quickly promote the development progress, but it is also easy to fall into the dilemma of ‘centralized’ governance. For example, when there are changes in team members, the project’s legal responsibilities and operational directions may face significant risks due to the lack of an independent governance body. In addition, this model may also restrict community participation due to highly centralized decision-making authority, making the concept of decentralization unable to be truly realized.
Conflict of interest is also a common challenge in personal or team management modes. When team members are also the main holders of project tokens, their decisions may be more inclined to pursue short-term benefits and ignore the long-term development goals of the project. This behavior not only weakens the trust of the community, but may also cause irreversible damage to the project ecosystem.
The establishment of the encryption foundation is precisely to address these governance issues.
The core function of the encryption foundation
In the face of the challenges of the above Web3 projects, how can the encryption foundation solve them? This requires understanding what services the encryption foundation can provide for Web3 projects.
In the Web3 ecosystem, the foundation is not only the project’s governing body, but also a key pillar in ensuring its decentralization, sustainability, and compliance. From governance to fund management, and ecosystem development, every function of the foundation is closely aligned with driving the long-term development of the project and community interests. The following are the core functions of the foundation in Web3 projects:
- Governance of Decentralization
Decentralization is the soul of Web3, and the foundation is the center for realizing this concept. Through the governance framework of the foundation, projects can break free from the control of a single interest entity and give more decision-making power to the community. Typically, the foundation will establish multiple teams to address different issues. For example, the Events team is responsible for planning and organizing external activities, the Development team is responsible for technological innovation and product upgrades, and the Community team is responsible for operating the global community.
In addition, encryption foundations generally promote the formation of community Consensus through on-chain voting or proposal mechanisms. For example, the Ethereum Foundation has long adopted the EIP (Ethereum Improvement Proposal) process, allowing developers and the community to participate in the determination of technical direction. Such mechanisms not only enhance community participation, but also avoid the Crisis of Confidence caused by opaque governance.
At the same time, the foundation also assumes the responsibility of resource allocation. For example, it reasonably divides various resources such as development incentives, ecological expansion funds, community rewards, etc., to ensure the balance of interests of all parties. This open and transparent allocation mechanism not only improves the efficiency of resource utilization but also further consolidates the community’s trust in the project.
- Sound Fund Management
The Web3 project has diverse sources of funding, from token financing to ecosystem cooperation. Various funds need professional management to maximize their value. The encryption foundation plays the role of a “financial steward” in this process.
First, the encryption foundation will allocate resources to key areas such as research and development, marketing, and community building according to the overall plan of the project. For example, the Polkadot Foundation has established a special fund to support the development of Cross-Chain Interaction protocol; the ETH Foundation allocated 25.7% of the funding for L1 development in 2023, and 11% for ZK technology.
Secondly, to cope with the high volatility of the Web3 market, the encryption foundation typically reserves a portion of funds as reserves to cope with the risks brought about by market changes. This strategy not only enhances the project’s risk resistance, but also provides greater security for community members and investors.
More importantly, the encryption foundation usually discloses its financial status and fund spending on a semi-annual or annual basis, ensuring maximum transparency and increasing trust in the overall ecosystem.
- Promote ecological construction
The success of the Web3 project relies on a strong ecosystem, and the encryption foundation is the core promoter of ecosystem construction. The encryption foundation connects developers, users, and partners through financial support, technical guidance, and event organization, to jointly build a thriving project ecosystem.
Taking the Solana Foundation as an example, it helps developers within the ecosystem to build more secure and feature-rich projects by providing technical resources and funding. The Foundation’s support is not only reflected in fund allocation, but also includes providing developers with technical tools, multi-signature Wallet, and other infrastructure services. This precise support for developers enables rapid implementation of technological innovation within the ecosystem and enhances user experience within the ecosystem.
Another typical example is the NEAR Foundation. Through strategic fund allocation and community activity support, the foundation has not only attracted partners from around the world, but also provided open technical stack support for developers. For example, the NEAR Foundation has promoted the introduction of AI technology, expanding the ecosystem to a wider range of applications. These innovative promotion methods not only enhance the technical strength of the ecosystem, but also attract more developers and users to follow.
In addition, the foundation also injects new technological capabilities into the project and provides users with the opportunity to directly interact with the project, enhancing trust between the two parties by hosting events such as hackathons and developer conferences. For example, ETH Manor holds Devcon in different regions around the world every year, attracting technical talents and Web3 projects to join the ecosystem.
Compliance barrier for Web3 projects
In an increasingly complex global regulatory environment, Web3 projects are facing increasingly severe legal and Compliance issues. From intellectual property protection to the legitimacy of cross-border transactions, every link may become a potential risk point for project development. In this context, the encryption foundation, with its independent legal person status and systematic legal support, has provided an important Compliance barrier for the project.
The most prominent advantage of Compliance for the Foundation lies in its independent legal entity status. The existence of this status effectively isolates legal liabilities, ensuring that the interests of team members and community participants are not directly threatened by external litigation or regulatory risks. For example, when a project is sued by a third party for intellectual property issues, the Foundation can participate in the litigation as an independent entity, concentrating the risks at the organizational level rather than dispersing them to the core development team or community members. This mechanism of liability isolation not only reduces the legal burden on project operators but also allows participants to participate in project development with greater confidence.
The legal framework design of the foundation is another core advantage. Currently, Singapore, Switzerland, and Hong Kong have become popular registration locations for encryption foundations. The choice of these regions is not accidental, as they provide a friendly regulatory environment for encryption assets and tax optimization space. For example, Singapore, with its clear legal framework and trust structure, helps the foundation save about 30% of operating costs in tax optimization; Switzerland’s “encryption valley” enjoys globally renowned support policies for encryption assets, providing a broad stage for the foundation’s technological research and ecosystem expansion; and Hong Kong, through its latest virtual asset regulatory policies, facilitates Compliance for the foundation’s operations in Asia. The legal environment in these regions not only ensures the legality of the foundation, but also helps projects achieve more efficient resource management through optimized tax and fund flow costs.
Intellectual property protection is also one of the core tasks of the foundation. In Web3 projects, code, trademarks, and brands are key resources for building competitiveness. Through centralized management, the foundation can effectively protect the project’s technological achievements from being abused. For example, the ETH Foundation has registered its trademark ‘Ethereum’ globally, preventing malicious use by other institutions. This centralized management not only protects project assets but also lays a solid foundation for global brand promotion.
In addition, the foundation plays an important role in cross-border investment and trading. The global nature of Web3 projects makes cross-border capital flow and international cooperation the norm, but there are huge differences in regulatory policies for virtual assets among countries. The foundation, through collaboration with professional legal experts, ensures that every transaction and collaboration complies with local laws. For example, in the United States, the foundation team conducts due diligence to help projects ensure that token issuance complies with the Securities Act, while in the European Union, the foundation assists projects in complying with the General Data Protection Regulation (GDPR) to ensure that the processing of user data meets legal standards.
Finally, the foundation further dropped Compliance risks through a highly transparent operating model. The foundation usually implements strict Anti-Money Laundering (AML) and Know Your Customer (KYC) policies to ensure the legality of the source and use of funds, while enhancing community trust through regular financial audits and reports. Transparency not only helps the project drop legal risks, but also strengthens the project’s credibility in the market.
Summary by Lawyer Man Kun
The success of the Web3 project depends not only on technological innovation, but also on strong governance structure and compliance protection. As an independent legal entity, the encryption Foundation not only provides a framework for decentralized governance, but also resolves many complex operational challenges through its unique legal status. From resource allocation to ecological construction, from intellectual property protection to legal risk isolation, the Foundation plays an indispensable role in promoting the sustainable development of the project.
Singapore, Switzerland, and the Cayman Islands have long been popular locations for the establishment of encryption foundations due to their friendly legal environment and efficient policy implementation. With Hong Kong’s increasingly open policies towards virtual assets, its strong financial ecosystem and detailed regulatory guidance are becoming important choices for Asian Web3 projects to establish foundations.
Mancun Law Firm has been deeply involved in the Web3 industry for many years, with rich experience in foundation establishment and Compliance services. Whether your project aims to expand globally or focus on local development, the Mancun legal team can provide a comprehensive solution tailored to your needs, from architectural design and fund management to operational support. Choosing Mancun Law Firm means choosing professionalism and stability, and also opening up a broad avenue of Compliance and development for your project.
