Why the Wells Process Fails to Understand Software Development

The Wells process is a compliance audit designed for static financial disclosures, not for evaluating live, evolving software systems. It treats a protocol's GitHub repository as a final prospectus, ignoring the continuous integration and deployment cycles that define projects like Uniswap or Optimism.

Software development is non-linear, while regulatory review is sequential. A protocol team can deploy hundreds of commits across multiple forks (e.g., Arbitrum Nitro, Base) during the months-long Wells review, rendering any initial snapshot of the codebase legally obsolete and practically meaningless.

Evidence: The Ethereum Merge was executed via a hard fork, a core software upgrade mechanism that has no analog in traditional finance. A Wells notice targeting pre-merge code would be investigating a system that no longer exists on the mainnet.

The Wells Process is deterministic. It demands a final, complete record of past actions to establish liability. This legalistic framework treats software as a finished product, not a living system. It cannot process the reality of continuous deployment.

Software development is probabilistic. Teams ship code, observe on-chain behavior via tools like Tenderly or OpenZeppelin Defender, and iterate. A protocol like Uniswap evolves through thousands of commits and mainnet forks, not a single audited release.

The mismatch creates false positives. A bug patched in hours on Avalanche becomes permanent evidence in a filing, ignoring the iterative security model that defines web3. The process penalizes the act of building in public.

Evidence: Major DeFi protocols like Aave and Compound execute hundreds of governance proposals and code updates annually. The SEC's static snapshot approach criminalizes this essential development lifecycle.

The Wells Process is a waterfall model applied to agile development. It demands a final, static product definition for legal scrutiny, which ignores the reality of continuous deployment. Protocols like Uniswap and Aave ship weekly upgrades, where features are tested live in a permissionless environment.

Legal liability requires perfect foresight, but software innovation requires experimentation. A developer cannot predict every edge case of a novel mechanism, like a ve-tokenomics model or an intent-based solver network, before users interact with it. The process punishes the discovery inherent to building.

This creates a perverse incentive for opacity. Facing regulatory ambiguity, teams like those behind dYdX or Osmosis are incentivized to develop in private, launch fully-formed, and limit protocol governance—stifling the open-source collaboration that drives the space forward. The process protects no one and innovates nothing.

The Wells process demands finality. It treats a software protocol like a static financial product, requiring a definitive, unchanging statement of facts for enforcement. This legal framework assumes a finished product, not a living system.

Software development is inherently iterative. Protocols like Uniswap V4 or Optimism's Bedrock upgrade launch with known, public roadmaps for continuous improvement. The code is a starting point, not an endpoint, with changes governed by decentralized DAOs.

This creates a definitional paradox. The SEC's case against Coinbase hinges on labeling an asset as a security at launch. However, a protocol's utility and governance—key to the Howey Test—evolve post-launch through community votes and forks, like those seen in Compound or Aave.

Evidence: The Ethereum Merge was a planned, multi-year software upgrade that fundamentally altered the network's consensus mechanism. A Wells notice based on pre-merge 'facts' would be obsolete, demonstrating the incompatibility of legal finality with protocol development.