For much of the last decade, the blueprint for launching a decentralized project was simple: set up an offshore foundation, assign it ownership of the protocol, and call it “decentralized.” The foundation served as a regulatory fig leaf, projecting legitimacy while keeping developers at arm’s length.
That model worked until it didn’t. As the Web3 ecosystem matures, regulators, investors, and communities alike have begun to question whether these foundations truly serve their intended purpose. In many cases, they’ve become empty vessels: passive holding entities disconnected from the communities they’re meant to represent. The result is a widening gap between legal structure and on-chain governance.
The Foundation as Myth
The foundation model was born out of necessity. Early token projects needed a non-profit entity to issue grants, hold treasury funds, and develop open-source software without trampling over securities laws or corporate governance rules. Offshore jurisdictions such as Switzerland, Panama, or the Cayman Islands offered ready-made legal frameworks that could accommodate these goals with minimal friction.
Many projects still default to a foundation even when its functions could easily be managed through transparent governance or multi-entity structures. The assumption is that if you have a foundation, then you’re compliant.
In reality, regulators are now looking past the paperwork. What matters is functional decentralization; not whether a foundation exists, but whether decision-making is truly distributed. This approach is echoed in Section 205 of the proposed Clarity for Payment Stablecoins Act of 2023, which adds Section 42 to the Securities Exchange Act to define “mature blockchain systems.” Under this framework, a blockchain may be certified as mature only if it is “not controlled by any person or group of persons under common control” and meets objective criteria such as distributed governance, open-source code, and dispersed ownership. In particular, the statute prohibits any person or related group from unilaterally altering protocol rules or controlling 20% or more of voting power or token supply. In practice, the Act’s maturity test embeds a decentralization test, linking commodity treatment to genuine, verifiable dispersion of control, not just formal structure.
Functional vs. Formal Decentralization
The law is catching up to technology. Jurisdictions such as Wyoming and the Marshall Islands have begun recognizing DAOs as legal entities in their own right, embedding on-chain governance into statutory form. The trend reflects a broader shift: the acknowledgement that how an organization operates may be more relevant than where it is incorporated.
Formal decentralization via offshore foundations provides optics, while functional decentralization relying on the presence of verifiable, autonomous governance provides substance. Projects that can demonstrate transparent treasury management, verifiable voting, and autonomous decision-making processes are much better positioned to withstand legal scrutiny than those hiding behind opaque foundations. In this sense, compliance is evolving from a simple checklist to a trackable continuum.
Bridging Accountability and Autonomy
One of the foundation’s original purposes was to create accountability. AKA, a legal entity that could sign contracts, hire auditors, and interface with service providers. Many foundations have become bottlenecks, slowing decision-making and creating uncertainty about who is ultimately responsible for actions taken in the name of “the community.”
The next generation of legal design may likely favor modular hybrids: minimal legal wrappers that operate to interface with the traditional world (i.e., banks, regulators, vendors), while the core governance functions remain fully decentralized. In these structures, fiduciary duties can be clearly defined—allowing foundation directors to act as administrators, not governors—while the DAO retains the real operational control through code and governance votes.
This hybrid format reconciles the two truths that decentralization thrives in transparency, but the real world still requires signatures.
The Future of DAO Legal Design
We are witnessing the slow decline, or even the death, of the foundation myth. The idea that decentralization can be achieved via offshore paperwork alone is fading, and in its place, a more honest and sophisticated understanding of legal architecture is emerging. It is one that treats DAOs as living governance systems rather than corporate disguises.
The question any forward-looking team should ask is not, “What jurisdiction should we pick?” but rather, “What governance model best demonstrates our decentralization?”
If the structure mirrors how control actually flows (i.e., if the on-chain governance matches the off-chain documentation), then the legal wrapper will hold up. If it doesn’t, no foundation will save it.
In Web3, decentralization is not a legal form. It’s a function. The future belongs to projects that can prove it, not just register it.
