Why is the Swiss Foundation often used in Token Generating Events? Our article provides some guidance and insights.
The Swiss Foundation, typically used for non-profit purposes, offers distinct advantages for token-generating projects that aim to develop or maintain open-source decentralized infrastructure protocols or applications and their native tokens.
1. The unique objective of a Swiss Foundations is to implement the purpose defined by its founders at inception. Blockchain-based entrepreneurs that wish to ensure the long-term development of their projects in line with core values such as decentralization, inclusiveness, and non-profit technology development can imbed such values into a foundation in order to supports this objective.
2. The Protocol Foundation is a type of Foundation that can be used to develop and propose the deployment of an open-source infrastructure or protocol, such as Ethereum. This Foundation structure consists of a neutral authority devoted to advancing the development of sustainable open source protocols, rather than running a for-profit commercial enterprise.
3. Accordingly, a Protocol Foundation does not manage a business. It directs the use of funds, not in the interest of generating a return, but rather to optimize software development by contributing, donating and sponsoring activities aimed at achieving innovation and education in relation to the technology. The Protocol Foundation is non-profit because its aim is to use its proceeds to advance the values of its founders, not to generate profit. However, this does not automatically result in a tax exempt status which needs a separate approval.
4. A Protocol Foundation can therefore not commit to running a business on behalf of donors. It can also not guarantee that the open-source version of a protocol that it proposes to the community will be adopted by users within the community (see 7. below). Following the successful launch of a protocol, the generated native token does not confer any rights to the token holders/recipients vis-à-vis the foundation. Depending on the nature of the token, holders can use the token to access and use the functionalities of the protocol or application, which by their decentralized nature do not belong to the foundation.
5. The Swiss Foundation shares similarities with smart contracts; once deployed, they are not easily changed and are self-executing, however certain flexibility can be coded or drafted into it. Similarly, establishing the Foundation's purpose and use of the funds at the onset provides greater certainty to donors and the wider community that a project evolution will remain true to its original intent. Hence, the legal structure provides an inherent assurance that contributions are used for the development, launch, maintenance and/or education of the protocol. This is the reason why the underlying relationship between the contributor and the Foundation is a donation.
6. The Swiss Foundation is a supervised entity and does not have individual owners. It is therefore suitable to support long-term developmental work for infrastructure projects, such as protocol development for decentralized ecosystems, without the risk of being side-tracked by the personal / political agendas of stakeholders. The community is therefore further assured that a Foundation's predefined purpose will remain the driving force behind the direction of its projects.
7. Foundations can onlypropose a final version of a protocol or application for deployment, which the community then choses to accept and/or use, much like in the case of Ethereum. The Foundation also does not issue or generate the final token. The Foundation registers donations in the first genesis block, which the community must then choose to accept. Since the protocol is open source, the community, in part or as a whole, can also decide to use another version. These are inherent elements of the nature of open-source decentralised protocols.
8. Funds are secured and can only be used according to the Foundation's established purpose. As the use of funds is audited, the community can therefore be assured that the funds are held in secure, transparent and supervised structure.
To summarize, the Protocol Foundation is an ideal legal structure for long-term infrastructure projects, such as the development of protocols. Notably, such projects are not labelled as “ICOs”. An ICO is an offering in which the issuer offers a coin with certain rights/functionalities. A Foundation cannot offer such coins – it can support software development and propose a version of an open-source decentralised protocol, including implemented token allocation and functionality.