Why 'Vertical Commonality' Could Ensnare Entire Blockchain Ecosystems

Centralized staking providers like Lido, Coinbase, and Kraken create a single point of regulatory failure. Their services are a textbook 'common enterprise' where user rewards depend on the managerial efforts of a third party.\n- $40B+ in staked ETH is exposed via liquid staking tokens (LSTs).\n- A ruling against one major provider could trigger a cascade of de-risking across Ethereum, Solana, and Cosmos.

The Maximal Extractable Value (MEV) supply chain—from searchers and builders to relays—creates a profit-sharing ecosystem that regulators can frame as an investment contract.\n- Flashbots' SUAVE and Jito Labs exemplify coordinated, profit-driven networks.\n- Proposer-Builder Separation (PBS) centralizes block production, making the 'common enterprise' argument easier to prove.

The only durable defense is to bake critical functions into the protocol layer, removing intermediary dependencies. This aligns with the Howey Test's fourth prong by eliminating reliance on a third party's efforts.\n- Ethereum's PBS enshrinement and Solana's localized fee markets are critical R&D paths.\n- Cosmos' interchain security and EigenLayer's cryptoeconomic slashing shift trust to code, not corporations.

The SEC's core argument: Uniswap Labs' continued development of the protocol and front-end constitutes the essential managerial effort. UNI token value is directly tied to these efforts, not just fee-switch votes.\n- Key Risk: $6B+ UNI market cap and $4B+ protocol TVL deemed a single enterprise.\n- Precedent: Labs' control over the dominant interface creates de facto dependency for all liquidity providers and traders.

The SEC's 2023 complaint explicitly cited Solana Labs' central role in bootstrapping the network and driving adoption as creating vertical commonality. SOL's success is painted as a direct function of the company's efforts.\n- Key Risk: $70B+ peak ecosystem TVL and ~3000 TPS performance metrics used as evidence of a managed enterprise.\n- Expansive View: All dApps and validators on Solana could be seen as participants in the same common enterprise orchestrated by the core team.

The OFT (Omnichain Fungible Token) standard creates a dangerous legal template. LayerZero Labs provides the essential cross-chain messaging infrastructure that makes the token functional. If the infrastructure fails, the token fails.\n- Key Risk: $10B+ in value bridged via LayerZero could be implicated.\n- Novel Attack Vector: Any token using the standard inherits the 'managerial effort' of the LayerZero team, potentially ensnaring thousands of token projects in a single enforcement action.

The SEC's argument: Lido's node operator selection, oracle network, and protocol upgrades are centralized managerial efforts critical to stETH's price and utility. Holders' profits are derived from Lido's work, not their own.\n- Key Risk: $30B+ in stETH and ~32% of all staked ETH represents a massive, concentrated target.\n- DAO Facade: The legal distinction between the Lido DAO and the initial founding entities (Lido OG) is likely irrelevant to regulators applying vertical commonality.

When a single sequencer (e.g., Espresso, Astria) is adopted by dozens of L2s, it creates a single point of failure and censorship. The economic security of a $10B+ TVL ecosystem becomes dependent on the liveness of one actor.

• Censorship Risk: A single entity can censor transactions across all dependent chains.
• Liveness Risk: A sequencer outage halts the entire vertical stack, not just one chain.
• Centralization Vector: Replaces decentralized validator sets with a centralized service.

Relying solely on a single data availability layer (e.g., Ethereum blobs, Celestia) for all L2s creates a capacity bottleneck and a universal choke point. A successful attack or a sustained surge in demand can brick every chain in the stack.

• Throughput Ceiling: Total ecosystem TPS is capped by the DA layer's blob space.
• Universal Downtime: A DA layer failure halts settlement and state updates for all dependent L2s.
• Cost Spikes: Congestion on the DA layer raises fees for the entire ecosystem simultaneously.

Vertical stacks often standardize on canonical bridges (e.g., native L1<>L2 bridges) and oracle feeds. A compromise here doesn't just drain one app—it enables theft or manipulation across the entire ecosystem.

• Bridge Hack Magnitude: A single exploit can target all assets locked across the vertical.
• Oracle Manipulation: A corrupted price feed can trigger cascading, faulty liquidations on every DeFi protocol in the stack.
• Vendor Lock-In: Creates ecosystem-wide dependence on a single provider's security model.

Ecosystems must architect for failure by introducing redundancy at every critical layer. This means multiple sequencer options, fallback DA layers, and competing bridge/oracle networks that can failover without halting the chain.

• Multi-Prover Systems: Use diverse proof systems (e.g., zk and fraud proofs) to avoid a single bug class.
• Escape Hatches: Force-enforced withdrawal periods to L1 if the L2 stack fails.
• Economic Decoupling: Ensure the failure of one component doesn't propagate its cost/risk to others.

Vertical commonality hinges on investors' profits being derived from the managerial or entrepreneurial efforts of a promoter. In crypto, a core dev team's ongoing work on protocol upgrades, governance, and ecosystem growth can be framed as this 'essential effort', turning a decentralized token into a security.

• Key Risk: Post-launch development and marketing are scrutinized.
• Precedent: The SEC's case against LBRY centered on the team's continuous development efforts.
• Mitigation: True on-chain governance and credible decentralization roadmaps are non-negotiable.

An integrated tech stack (e.g., a monolithic L1 with its own VM, bridge, and DEX) creates a single point of legal failure. If the foundation's efforts are deemed essential to the entire stack's value, every asset within that ecosystem could be deemed a security.

• Example: A token on an L1's native DEX is more entangled than a multi-chain asset on UniswapX.
• Strategy: Promote modularity and sovereignty. Use Celestia for DA, EigenLayer for shared security, and Across for intent-based bridging to disperse 'essential efforts'.

Venture capital funding a core development entity creates a textbook 'promoter.' Their equity stake's value is directly tied to the token's success, creating a clear profit motive from the team's efforts. This directly satisfies the 'efforts of others' prong for all token holders.

• Reality: >90% of top 100 L1/L2s are VC-backed.
• Dilemma: Bootstrapping is nearly impossible at scale, but taking VC money paints a target.
• Solution: Transparent, time-locked vesting schedules and rapid, verifiable dev team decentralization post-launch.

To defeat vertical commonality, you must architect genuine on-chain irrelevance. The core dev team must become one of many possible contractors, not the essential manager.

• Mandate 1: Code upgrade authority must reside in a decentralized, on-chain governance system (e.g., Compound Governor).
• Mandate 2: Foundation treasury must be governed by the DAO, not a board.
• Mandate 3: Ecosystem growth (grants, marketing) must be managed by community-led subDAOs. The goal is to point to the chain and say, 'The protocol runs itself.'