Analyzing the Arbitrum Foundation Controversy: Selling Tokens Without Governance Process?

Written by: Odaily Planet Daily

Today, a piece of news regarding the star project Arbitrum has sparked controversy within the community and is still ongoing.

According to a blog post by an employee earlier on Sunday, the Arbitrum Foundation began selling ARB tokens in the form of stablecoins before its token holder governance community "approved" a budget of nearly $1 billion for the organization.

This action has triggered outrage within the community, and the price of ARB tokens has dropped to a low of around $1.15, with a daily decline exceeding 10% at one point, now rebounding to around $1.18.

What is the controversial proposal?

On April 1, the Arbitrum community initiated the Arbitrum Improvement Proposal 1 (AIP-1), which aims to introduce a decentralized autonomous organization structure called ArbitrumDAO, managed by ARB holders. The Arbitrum Foundation, located in the Cayman Islands, will serve and be governed by the ArbitrumDAO community, aiming to promote the growth and development of the Arbitrum ecosystem. The entity behind this proposal, Lemma, will also apply for a funding allocation of 750 million ARB tokens (worth over $1 billion).

Although the proposal has not yet been approved, a multi-signature wallet named "Arbitrum DAO Treasury 2" has already been created and has received nearly 700 million ARB tokens. A representative from the Arbitrum Foundation stated that this address is the Administrative Budget Wallet.

However, Arbitrum DAO's debut has been rocky, with the first proposal causing significant controversy.

According to the token economic model announced during the airdrop, 42.78% (4.278 billion tokens) of the total supply should be allocated to the Arbitrum DAO community treasury. However, under AIP-1, the 750 million ARB tokens that originally belonged to the community may be diverted to the foundation to establish an ecological fund. According to official statements, the purpose of this action is "to support a special donation program for the growth of the Arbitrum ecosystem."

Voting indicated that the progress of AIP-1 was initially smooth. However, with increasing criticism and active participation from community members, more and more people have cast votes against this proposal. As of the publication of this article, the number of opposing votes has reached 75%.

（AIP-1 voting page）

In the governance forum, there were multiple points of dissatisfaction among community members regarding this proposal. Some investors reported that they held ARB from the airdrop but could not participate in the voting; on-chain data showed that the 750 million ARB tokens allocated in the proposal had already been transferred before the proposal was approved; and there were security risks associated with the 750 million ARB tokens, among other issues.

What was even more criticized was that on-chain data showed the Arbitrum Foundation transferred 50 million ARB tokens, leading many to suspect that the foundation was cashing out in large amounts too early.

This evening, the Arbitrum Foundation clarified on its official Twitter that the foundation did not sell 50 million ARB tokens. Of these, 40 million were allocated as a loan to a savvy participant in the financial market, while the remaining 10 million were exchanged for fiat currency and used for operational costs.

"Request" or "Approval"? "Chicken" and "Egg"?

Regarding the highly discussed AIP-1, the foundation used an interesting analogy, "Which came first, the chicken or the egg?"

Although the community has raised questions about many details in AIP-1, the foundation believes that these proposal contents (at least in their view) are essential. The Arbitrum Foundation argues that, considering the core technology handover and upgradability of the Arbitrum chain, many parameters need to be determined before establishing the DAO. Specifically, this includes handing over the code to the DAO, creating a security committee, setting a time delay for code upgrades, establishing initial rules, creating an AIP proposal mechanism, initial validators on Nova, DAC, and so on.

Therefore, what community members believe should be "determined by the DAO" is technically impossible. Without a series of initial settings, the Arbitrum chain cannot be handed over to the Arbitrum DAO. Thus, this is a "chicken or egg" problem—without the foundation conducting initial operations, the DAO cannot be created.

Regarding the already occurred token transfers, Arbitrum provided an official response. The foundation believes that AIP-1 is not a funding "request," but rather a demand for the community's "approval."

The foundation believes that the community has confused the concepts of request and approval. They argue that what is happening now is a decision already made by the foundation, and the proposal is not requesting an action from the community; "The purpose of AIP-1 is to inform the community of all decisions that have already been made in advance."

As for the reason behind this "misunderstanding," the foundation attributes it to "unclear categorization." They believe that the unclear categorization of the token allocation pie chart in the governance documents may have led to the community's misunderstanding. In the original pie chart, the DAO Treasury address and the foundation's allocation were placed in the same section and described as "DAO Treasury." If this part were divided into two sections, it would present a more "clear" picture.

（Originally published ARB token allocation pie chart）

Community Doubts Raised, Token Price Drops

After experiencing various disappointing actions from the community, the behavior of the Arbitrum Foundation has led to continuous criticism, and the price of ARB tokens has also dropped in response.

According to OKX, the current price of ARB tokens is $1.18, down 9% within 24 hours.

Some community members believe that AIP-1 is not a genuine vote. Since the proposal content has already been executed without community consent, what is the meaning of such a vote?

Currently, the doubts regarding this event have extended horizontally across the industry, with Blockworks Research casting a vote against this proposal. Blockworks stated that it is committed to improving DAO governance and transparency and criticized AIP-1 as a regression of the current community governance status. Blockworks believes that up to 750 million ARB tokens may be controlled by the Arbitrum Foundation, operated by the three initial directors Campbell Law, Edward Noyons, and Ani Banerjee. They argue that the foundation's actions exacerbate centralization and strip some power from the upcoming Arbitrum DAO.

It is worth mentioning that during the ARB airdrop, a total of 137 DAOs received ARB tokens. This was also the first large-scale airdrop targeting DAOs. It is not hard to imagine that in the coming days, as this event continues to unfold, many DAOs holding large amounts of ARB will be forced to express their stance, either in support or opposition. Their stance will either gain or lose the trust of community members.

As the deadline for the AIP-1 vote approaches, how will the Arbitrum Foundation respond if this proposal is ultimately not approved?