Why the 'Common Enterprise' Factor Dooms Most Layer 1 Tokens

Most L1s are run by a centralized core team and foundation controlling >20% of tokens and dictating protocol upgrades. This creates a clear 'common enterprise' where token value is tied to managerial efforts, not user utility.

• Legal Precedent: SEC vs. LBRY, Telegram GRAM.
• Reality: Ethereum escaped only after The Merge's proof-of-work sunset; newer chains lack this historical ambiguity.

Shift token value accrual from speculative team promises to automated, on-chain treasury mechanics. See Frax Finance (frax.finance) and its sfrxETH yield or Olympus DAO (olympusdao.finance) with protocol-owned liquidity.

• Mechanism: Revenue is programmatically used for buybacks, staking yield, or burning.
• Legal Shield: Value derives from code, not a promoter's roadmap, attacking the 'expectation of profit' prong.

Native staking rewards are a prima facie security under Howey. They represent an 'investment contract' where profit comes from the work of validators (a common enterprise). Solana (sol), Cardano (ada), and Avalanche (avax) are directly in the crosshairs.

• SEC Position: Explicitly stated in multiple enforcement actions.
• Metric: ~5-10% APY is a red flag, not a feature, for regulators.

Tokens must be consumptive assets, not investment vehicles. Ethereum's ETH post-Merge is the archetype: a gas token and staking deposit with yield from user-paid fees, not issuer promises. Arbitrum's ARB for governance or Filecoin's FIL for storage are stronger models.

• Key: No native, protocol-issued inflation reward.
• Defense: Value is a function of network usage, not promotion.

If a token's future utility (e.g., scaling, new VMs) depends on a core team's execution, it's a security. This dooms most VC-backed L1s like Sui (sui) and Aptos (apt) whose ~3-5 year unlock schedules align investor profits with development milestones.

• Evidence: Foundation-controlled grant programs and ecosystem funds.
• Result: Token = a share in the foundation's business success.

The only durable path is Bitcoin and Ethereum's model: a finished core protocol governed by rough consensus. Layer 2s like Starknet (starkware.io) or zkSync (zksync.io), where the token is purely for staking/proving on a live network, present a narrower target.

• Blueprint: Launch feature-complete. Governance becomes a coordination tool, not a development vehicle.
• Outcome: The 'enterprise' is the open-source software, not an organization.

The SEC's case hinges on the Foundation's active, ongoing role in directing the network's development and marketing. The token's value is explicitly tied to this managerial effort, not just network usage.

• Key Control: Foundation controls ~$1.2B+ treasury, funds core devs, and runs validator incentive programs.
• Key Effort: Centralized roadmap execution (Firedancer, token extensions) drives speculative value.
• Key Risk: Token is an investment contract in a common enterprise managed by the Foundation.

Ava Labs' contractual obligations and dominant development role create a clear common enterprise. The SEC alleges AVAX value is premised on Ava Labs' technical and promotional work.

• Key Control: Ava Labs holds the core IP, employs the primary dev team, and orchestrates subnet deployments.
• Key Effort: Enterprise subnet strategy and partnerships (JPMorgan, Citi) are centrally brokered efforts.
• Key Risk: Network growth is not organic; it's a product of a specific company's business development.

Explicit promises of future performance and ecosystem funding directly link ALGO's value to the Foundation's managerial success. This is a textbook common enterprise.

• Key Control: Foundation controls governance, doles out ~$300M+ in development grants, and manages staking rewards.
• Key Effort: Active "accelerator" programs and partnership announcements are central drivers of adoption narratives.
• Key Risk: Tokenomics are centrally adjusted (e.g., staking changes) to influence price, confirming investment contract nature.

ETH survives scrutiny because the Ethereum Foundation's role has diminished post-Merge. Client diversity, consensus, and execution are now managed by disparate, independent teams.

• Key Decentralization: No single entity controls protocol development; multiple client teams (Prysm, Lighthouse, Geth, Nethermind) are independent.
• Key Effort: Value derives from global, permissionless use as gas and collateral, not a promoter's efforts.
• Key Precedent: The SEC's tacit acceptance sets a benchmark: true decentralization negates the "common enterprise" factor.

Newer L1s like Aptos and Sui are launched by for-profit entities (ex-Meta/Diem teams) that sell enterprise blockchain solutions. The token is the funding vehicle for this service business.

• Key Control: Founding entities own core technology, run initial validators, and sign enterprise deals.
• Key Effort: Token value is explicitly marketed alongside the parent company's technical services and partnership announcements.
• Key Risk: This is a quintessential common enterprise; investors profit from the company's business success, not a decentralized network effect.

The only viable path is a token with immediate, non-speculative utility at launch, divorced from a promoter's efforts. Think Filecoin for storage or Helium for connectivity.

• Key Design: Token is a required work credential or unit of resource, not a passive investment. Value accrual is from utility consumption, not ecosystem fund performance.
• Key Effort: Network growth must be permissionless and organic; core devs can fade into the background.
• Key Example: A token that is purely gas for a VM, with no foundation treasury or promised roadmap, mirrors a commodity, not a security.