Arbitrum DAO drama put on hold after AIP-1 backtracked, set to be split into parts

A governance crisis stemming from Arbitrum DAO’s failed keystone vote seems to be averted for now, but the damage to its reputation as a “chain of the people” may take longer to recover.

Arbitrum Foundation logo
Image: Arbitrum

On late Sunday, Arbitrum backtracked its first DAO proposal to send 750 million ARB tokens, worth nearly $1 billion, to the Arbitrum Foundation that would allocate funds to the special grants program meant to support projects built on the Arbitrum blockchain.

As the proposal has drawn 83% opposition, Arbitrum initially attempted to sidestep the community governance, explaining that AIP-1 was meant as a ratification and not a request. Apparently, Arbitrum has already spent 50 million ARB tokens without DAO approval, effectively rendering the votes cast against the proposal moot.

“One of the mistakes in the drafting of AIP-1 was a failure to note at the outset that this proposal was intended to act as a ratification of the initial setup of both the Arbitrum DAO and the Foundation that has been created to serve the DAO,” Arbitrum Foundation employee Patrick McCorry wrote in a lengthy governance forum post. “As discussed above, there is a chicken and the egg that needs to be solved when decentralizing a network, and the point of AIP-1 was to inform the community of all of the decisions that were made in advance.”

The proposal was submitted by Lemma LTD, which McCorry revealed to be a service provider for the Foundation tasked with monitoring and participating in governance forums.

As expected, McCorry’s post wasn’t received well by DAO members, as many accused the Arbitrum Foundation of not operating in full disclosure and lamented the loss of trust in the project’s team.

“All tokenomics page shows only User airdrop + DAO airdrop tokens as unlocked, and the rest of the tokens to unlock in March 2024. Now suddenly it seems 750,000,000 more ARB tokens are not only unlocked, but also some of these tokens have been dumped. How is this acceptable?” one DAO member wondered in disbelief.

“You guys squarely kneecapped all the trust the community put in you, and it’s gonna be a long road back to equilibrium,” another ARB holder opined.

There’s also a legal caveat: according to crypto researcher and venture capitalist Adam Cochran, non-binding governance votes coupled with a centralized sequencer constitute a money transmitter under US regulations.

As analyst explained, since L2 chains, unlike L1s, are a deposit into an offchain system, they rely on the three key attributes to argue that they are not a centralized provider: key signing as custody, decentralized tech, and decentralized governance. As Arbitrum is currently a centralized sequence and prover, it needs to rely on the other two pillars, so its non-binding vote is a big shot in the foot for the protocol.

“That not only makes the current action centralized, but it sets a precedent base case for all future actions, in that they are only really binding *if* the centralized entity, who develops the software, declares them to be,” Cochran wrote.

Following the backlash, Arbitrum announced that it would break the controversial AIP down into separate proposals that would be voted on individually. It also proposed that funds sent to the Arbitrum Foundation would be subject to a four-year vesting period and exempt from voting.

“The Foundation does not exist to sell tokens, only sold enough to fund its current operating expenses and has no near-term plans to sell more tokens,” Arbitrum added.