Trouble in Arbidise: how deceit leads to further decentralization

A misunderstanding or a governance token with no governance?

I believe Arbitrum has messed up big time, but ironically the team dumping may actually create the bottom for the $ARB token and mark an excellent entry point.

The Story

The proposal in question, the now infamous AIP-1, failed to pass after an outburst on CT (Crypto Twitter). The proposal outlined the structure for the Arbitrum DAO and funding costs. The proposal suggested 3.5 billion $ARB tokens be sent to the ArbitrumDAO Treasury and the contested point, 750 million $ARB tokens, to the ‘Administrative Budget Wallet.’

This wallet, controlled by the Foundation, intends to make ‘special grants, reimbursing applicable service providers for the total setup costs and covering ongoing administrative and operational costs of the Arbitrum Foundation.’ A cynic may read this as dumping on retail.

Blockworks Research fired the starting pistol with their Twitter thread. Their core concern was that 750 million $ARB tokens, at that time valued at over $1 billion, now less, would be controlled by the Arbitrum Foundation run by three people: Campbell Law, Edward Noyons, and Ani Banerjee.

The real issue is that a multi-sig wallet had already been created and received funds before the proposal had passed. Blockworks Research made a comparison with the Uniswap Foundation, which received $74 million. Lookonchain added fuel to the fire, tracking transactions showing supposedly locked tocks from the team and advisors already being moved- a total of 2.694 billion $ARB tokens.

Arbitrum responded broadly, stating that the proposal was a ratification, not a proposal, cited other Foundations with similar allocations, and acknowledged miss communications.

Arbitrum made a second response citing that reason 10 million $ARB tokens had been sold was to cover operational costs. The thread amounts to four key points:
1. AIP-1 is too broad and will be segmented
2. 750 million $ARB tokens allocation to the Arbitrum Foundation will be voted on in a separate proposal, and these tokens cannot be used to vote
3. Greater transparency into the use of funds
4. Reducing the vagueness of the special grants program

A current popular trend swirling on CT is for the Arbitrum Foundation to engage in a buyback, but this seems highly unlikely.  

Who Got Burnt?

As always, it was retail. The only winners currently are the airdrop receivers who sold, airdrop farmers, Arbitrum insiders, and market makers. Retail got dumped on yet again.

The problem with crypto is the best thing about crypto: the volatility in the space. Everything happens at lightspeed compared to traditional markets. This extends from price action to the time advisors, and venture capital firms are willing to wait until they can see a return.

The Ugly

The facts are simple, individuals involved with Arbitrum wanted liquidity, allocated a huge chunk to founders without the DAO’s permission, and some would accuse Arbitrum of masquerading as fully decentralized whilst it remains so in name only.

Quick math of the distribution of $ARB tokens reveals that airdrop recipients (DAOs and users) received 1.13% and 11.62% of the total supply. The DAO treasury received 42.78%, which can only be used for voting once transferred out of the treasury. Therefore, DAOs and airdrop recipients held 23.3% of the initial voting power.

The Good

The community response has caused reflection and a change of direction from Arbitrum. The elite democracy, which reigns supreme in DAOs due to voting rights associated with token ownership, has, in this case, via pressure groups and community participation- direct democracy- been upturned, and the community has been heard.

What Will Happen To $ARB?

$ARB is a governance token. If the token does not allow direct governance of Arbitrum, it is worthless outside of speculative value.

The Arbitrum team selling supposedly locked $ARB and all the negative press surrounding this fallout has caused the value and general faith in the Arbitrum project to plummet. I believe this is a great narrative to bid and could mark a local bottom for $ARB.

Understanding crypto's pseudo-equity nature and the tokens' valuations attached to successful projects. There is no debate that Arbitrum will be a contender in the upper rankings.

Overall, this event was a brilliant test of on-chain democracy and decentralization. Nothing can be concealed on-chain, news spreads rapidly in the crypto space, and the community makes themselves heard. All of the distinct groups who made their decision and voted is exactly what decentralization is about.

The affair was ugly, and communication was dreadful. However, people voiced their opinions, and change was made. Nobody said it would be easy or attractive, but the will of the people triumphed, and Arbitrum, through this hurdle, will only become more decentralized.

Full disclosure, I personally hold $ARB, and all the views expressed in this article belong solely to me.