Arbitrum Foundation Under Fire for Selling ARB Tokens Before Budget Ratification

The Arbitrum Foundation’s recent decision to sell ARB tokens for stablecoins before the ratification of its nearly $1 billion budget has sparked a governance crisis. The Foundation’s actions raise concerns about the efficacy of community governance models and the power dynamics between centralized organizations and decentralized ecosystems.

In a recent blog post, Arbitrum employee Patrick McCorry explained that the Foundation believed its omnibus governance package, Arbitrum Improvement Proposal (AIP-1), served as a “ratification” of decisions it had already made, including receiving 7.5% of all ARB tokens. As a result, the Foundation began using these tokens for the DAO’s operational purposes.

Arbitrum attempted to empower its community by airdropping over 1 billion ARB governance tokens to nearly 300,000 wallets as part of its community governance efforts. The first critical decision was AIP-1, covering governance, emergency powers, funding, and grants. However, McCorry pushed back against the perception that token holders had a say in the matter, stating that the point of AIP-1 was to inform the community of decisions that had already been made.

The controversy erupted after governance hawks pointed out the Foundation’s “special grants” program, which proposed that the Foundation would receive 750 million ARB tokens (around $1 billion) to spend without the approval of token holders. The tide of votes in favor of ratification shifted to rejection, creating uncertainty around what would happen if AIP-1 is defeated.

McCorry’s post adds to the governance crisis by introducing the “chicken and egg problem” of setting up decentralized governance structures. Certain parameters must be decided ahead of time, such as the structure of a “security council” that wields emergency powers, voting mechanics, and funding. According to McCorry, these blank check powers are fundamental to the ecosystem’s competitive edge and are necessary to attract partnerships with traditional companies.

In conclusion, the Arbitrum Foundation’s decision to sell ARB tokens before budget ratification highlights the power dynamics at play in decentralized ecosystems. The situation calls into question the efficacy of community governance models and raises important considerations for centralized organizations in the decentralized world.