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Arbitrum sells tokens amid 77% disapproval, claims DAO governance ‘working as intended’

Governance • April 2, 2023, 3:32PM EDT

Quick Take

  • The Arbitrum Foundation has clarified that Arbitrum Improvement Proposal (AIP-1) is merely a “ratification,” and that it has already sold governance tokens for fiat — causing many to question the Ethereum Layer 2’s supposedly decentralized governance structure.
  • The price of ARB has declined by 8% over the past 24 hours as debate and criticism rage on social media.

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Questions are being asked on a Sunday regarding Arbitrum’s governance after its centralized, self-titled foundation sold ARB tokens before the conclusion of a key governance vote, rendering the democratic process essentially moot.

The “special grants” program sees the Arbitrum Foundation receiving 750 million ARB governance tokens — worth nearly $1 billion — to spend without the expressed approval of token holders.

Rebranding the keystone Arbitrum Improvement Proposal’s vote as a “ratification,” the Arbitrum Foundation nonetheless claims “decentralized governance is working as intended” via both the official Arbitrum Twitter account and a lengthy governance forum post.

It also claimed it did not sell 50 million governance tokens but rather allocated 40 million “as a loan to a sophisticated actor in the financial markets space” and converted 10 million to fiat for “operational costs.” Prominent market maker Wintermute confirmed it is the former via retweet.

Free governance responsibilities (kind of)

The debacle follows the high-profile airdrop of Arbitrum governance tokens to users of the Ethereum Layer 2 scaling solution last week, which saw more than one billion ARB tokens allocated to nearly 300,000 wallets — creating a so-called decentralized autonomous organization, ArbitrumDAO.

Token holders and the wider crypto community have taken to Twitter to voice concerns (and jokes) over the apparent lack of decentralized autonomy. A wider theme is that some aren’t buying the Arbitrum Foundation’s lengthy argument, claiming it’s merely a lot of words to say, “we sold.”

The Arbitrum Foundation, however, claims this is merely a “chicken and egg problem,” as “certain parameters need to be decided” before truly decentralized governance may be reached. It also claims the massive “special grants” combats “voter fatigue” and are crucial to the project’s viability against the competition.

AIP-1 is currently slated to fail, with more than 77% of the total vote against its passing, as of 3:00 p.m. EDT.

The price of Arbitrum’s governance token declined by 8% over the past 24 hours.

Disclaimer: Evgeny Gaevoy, the founder and CEO of Wintermute, sits on The Block’s board of directors and holds an equity stake in the company.