Who Owns the Upside?

Circle, the creators of USDC, recently acquired the team and intellectual property of Interop Labs, the core contributors to the Axelar Network.

Circle intentionally left out the AXL token from the deal.

This acquisition is a clear reminder that crypto still has not figured out who actually owns the value of a blockchain protocol: token holders or equity owners?

AXL holders are discovering how fragile their position can be when the protocol’s core contributors decide to exit through an equity cap table instead of an onchain governance vote.

That tension sits at the heart of the broader, long-running battle between tokens vs equity, and foundations vs labs entities.

Let’s dig in.

Tokens as the new capital stack

What tokens can and can’t be

In their ideal form, crypto tokens are a native internet primitive with many uses - capital formation, user ownership, network governance, and more.

When a protocol launches a token, it can simultaneously bootstrap liquidity, incentivize early usage, and distribute upside to a global base of participants in a way that is impossible with traditional equity.

Tokens can also confer governance rights - such as protocol parameter changes, upgrade approvals, and treasury allocations - and plug directly into DeFi markets as collateral. This provided token holders with influence over the future of the protocol and allowed the network’s “equity” to be continuously priced and leveraged onchain, all in a permissionless manner.

In practice, the Biden administration’s regulatory posture made token launches a legal minefield.

The prior administration’s aggressive enforcement and broad, outdated interpretations of securities law pushed founders to avoid any explicit “value accrual” to tokens, not allowing token holders to claim rights to protocol revenue without inviting SEC scrutiny.

That regime also pushed founding teams toward structures that separated the operational company (labs entities) from the token‑issuing or grant‑administering foundation, with carefully drafted language about “sufficient decentralization” and limited promises to token holders.

The current administration is making much-needed regulatory changes, but the debate about what tokens can and can’t be still remains.

The case against launching tokens too early

Because tokens are not just a fundraising instrument but also the product’s core economic primitive, launching them early can create hard‑to‑reverse repercussions.

A token with poorly designed emissions, utility, or governance can lock a protocol into an incentive structure that is expensive or politically impossible to change once thousands of users hold it.

From an operational standpoint, tokens need to be managed just like products - they require continuous design, marketing, financial management, and everything else a typical product requires.

For small teams to develop multiple products in their earliest days is just too cumbersome. And when one of those products has thousands of users who are constantly asking the team “Wen moon?” and “Wen Binance?”, that product becomes more of a distraction than an asset.

The dual asset fundraising structure

From an investor perspective, I’ve always thought that a cleaner approach has been to raise with traditional instruments like SAFEs (Simple Agreement for Future Equity) plus a token warrant, instead of a SAFT (Simple Agreement for Future Tokens).

The SAFE allows the founding team to patiently work toward organic product‑market fit and gives them the flexibility to pivot without being bound to a prematurely-deployed tokenomics design. And the warrant preserves the option to introduce a token later if and when it is truly needed for the network’s function and distribution.

This structure keeps the cap table clean, avoids the regulatory spotlight of an immediate public token, and gives founders operational flexibility.

Little did we know the tension that this dual asset model would cause.

Labs, protocols, and foundations

The Uniswap fee switch debate

Uniswap is a canonical example of this split between a for‑profit development company and an decentralized protocol governed by token holders.

Uniswap Labs is a venture‑backed company that builds interfaces and products around the Uniswap Protocol, which is governed by UNI token holders via onchain voting. The underlying smart contracts of the Uniswap Automated Market Maker (AMM) are open source, while Labs commercializes the front ends to the protocol.

Token holders control protocol parameters and treasury, but Labs controls hiring, BD, brand positioning, and much of the product roadmap via its ownership of the swap user interface.

Uniswap’s fee switch debate illustrates the tension of what rights the token should confer to holders.

The protocol includes a dormant parameter that could redirect up to 1/6 of trading fees from liquidity providers to the UNI-governed treasury. But this parameter has stayed off for years (discussions began in July 2022) due to fears that activating it would make UNI look too much like a security, which would invite SEC scrutiny under the Howey test.

UNI holders argue they deserve a cut of the protocol’s massive volume, yet governance has deadlocked over competitive LP yields, regulatory blowback, and how to route fees.

This hesitation keeps UNI as solely a governance token rather than a revenue-sharing asset, and highlights the labs-protocol split where equity captures value while tokens fight for scraps.

The Aave controversy

Aave takes a similar approach and it has its own flavor of the labs vs. token holder tug of war.

Aave Labs currently controls core brand assets (domains, social handles, IP), while the Aave DAO and AAVE token holders control the protocol smart contracts and treasury. A live governance proposal seeks to move those brand assets into a DAO‑controlled legal wrapper because community members argue that token holders should own the brand.

The dispute escalated when Aave Labs integrated a new swap feature whose revenue goes to the labs entity instead of the DAO, triggering accusations that private shareholders were “privatizing” income the community had come to expect as protocol revenue.

What role do the foundations play?

Foundations sit awkwardly between the labs entities and token holders.

In theory, a foundation is a non‑profit or non‑equity vehicle that stewards the protocol, administers the token treasury, and funds public goods, while labs focus on execution and commercialization.

In practice, foundations often operate like grant‑making arms with limited strategic leverage.

They can fund core development and ecosystem projects, but if the main team and IP live in a lab that can be acquired, the foundation may have little recourse when equity holders choose an exit that sidelines token holders, as the Circle–Interop Labs–Axelar episode illustrates.

Circle, Interop Labs, and AXL

Circle’s recent agreement to buy Interop Labs’ team and IP, explicitly excluding the AXL token and Axelar Network from the transaction, is a sobering test of what token holders actually own.

AXL’s price tanked on the news, as investors realized the value from a Circle acquisition would accrue entirely to Circle’s shareholders, while AXL holders are left with a network minus its flagship contributor and key IP.

Circle intends to integrate Interop Labs’ tech into its cross‑chain stack, including its Arc L1 and Cross‑Chain Transfer Protocol, which may indirectly benefit Axelar’s original interoperability thesis by increasing cross‑chain usage overall.

But for AXL holders, the core question is whether the remaining set of contributors and whatever governance structure the network retained can credibly maintain the protocol now that the best‑resourced team has moved under a corporate roof whose fiduciary duty is to their public stock, not the token.

How labs exits hit token holders

When a lab entity is acquired, multiple things usually happen simultaneously:

• Equity holders realize liquidity, while token holders see price volatility with no guaranteed claim on deal proceeds.

• The acquiring company may re‑prioritize the roadmap or redirect talent, shifting focus toward enterprise products or private integrations that do not obviously flow value back to the token.

• The psychological “soft promise” that token holders are aligned with the core team breaks, and governance suddenly has to function without the same central steward.

From the user and product perspective, the UX may remain stable in the short term - smart contracts will still settle, bridges will still route messages - but uncertainty rises about long‑term support, security, and product development.

Competing teams can fork the code and launch successor protocols, but that introduces fragmentation risk and does not automatically restore lost value to the legacy token.

In theory, foundations could mitigate some of this.

In reality, many foundations were set up with narrow mandates, such as token distribution and grants, leaving them with little leverage when the lab entity moves on to greener pastures.

Potential solutions

Can tokenized equity fix this?

One proposed solution is to stop treating tokens and equity as separate universes and instead tokenize the equity itself.

Under this model, the instrument that represents ownership in the operating company becomes an onchain asset - fractionalized, globally tradable, composable with DeFi, and governed by traditional shareholder rights.

If the Interop Labs equity that Circle acquired had been fully tokenized and broadly held, the economic alignment between the community and company would have been much tighter, and the tokenized equity holder would be participating in the acquisition proceeds directly.

The challenge is that tokenized equity does not allow for the regulatory separation between a non‑security utility token and a clearly security‑like ownership claim.

Tokenized shares are almost certainly regulated as securities in major jurisdictions. Robinhood’s tokenized stocks on Arbitrum show how this looks in practice; they are effectively wrappers around brokerage‑held shares, with all the KYC, offering restrictions, and disclosure obligations that implies. That’s why Robinhood initially launched their tokenized stock offerings in the EU only.

For protocol teams, that means accepting earlier “IPOs” in a legal sense - public company compliance and oversight much sooner than a typical startup would face. This could be even more burdensome than managing a normal token.

Furthermore, tokenized equity does not solve the “who owns the protocol?” question when the protocol is supposed to be credibly neutral infrastructure.

If the same security that entitles you to offchain cash flows also governs core onchain parameters, the protocol begins to resemble a traditional corporate platform more than a decentralized network, which may undermine composability and neutrality that is so unique to crypto.

What about tokens that look like equity?

Another direction is to push tokens themselves closer to equity. This would entail explicitly conferring rights to protocol cash flows, residual assets, or even indirect claims on labs or foundation revenues.

Some DeFi tokens already implement fee sharing, buybacks, or other mechanisms that make them economically similar to stocks. In principle, this aligns token price more tightly with real value creation and avoids “governance only” tokens.

However, this approach again runs directly into the core of securities regulation.

Tokens designed and marketed as claims on a common enterprise’s profits, with an identifiable management team and revenue‑sharing expectations, clearly pass the Howey test and fit into traditional securities definitions in many jurisdictions.

This forces the tokens to be offered, traded, and custodied inside regulated perimeters, which throws away a lot of the open, permissionless distribution benefits that made tokens attractive in the first place.

How the structures might shake out

Equity and tokens may move toward specialization, each representing specific rights:

• Equity will own offchain value - brands, trademarks, enterprise contracts, custodial products, and any revenue that depends on legal enforceability and KYC’d customers.

• Tokens will own onchain value - parameters that govern where protocol revenue flows, rights over treasuries and fee switches, and direct control over digital assets like smart contract upgrades and reserves.

For that to work, founders need to design transparent, enforceable relationships between labs, foundations, and DAOs.

That likely means clearly identifying upfront what happens if labs get acquired, including how IP is licensed, how brand assets are controlled, what minimum commitments exist to the protocol and token holders, and when foundations can intervene.

It also means being honest with investors (both equity and token) about which piece of the stack is meant to capture which type of value, so that the next Interop Labs‑style exit does not come as a shock to the supposed “owners” of the network.

Still, I’m not sure how much difference these efforts would make.

The Circle–Interop Labs drama is a just a preview. Until crypto resolves the entity ambiguity between labs, foundations, and DAOs, and the economic ambiguity between tokens and equity, every successful protocol will face the same question at exit time:

Who actually owns the upside?