Written by Tyler Whirty

Arbitrum is a leading Ethereum Layer 2 ecosystem that offers a handful of different scaling solutions for building decentralized applications. Originally developed by Offchain Labs, Arbitrum provides developers and end users access to cheaper and faster transactions via the protocols Arbitrum Rollup and Arbitrum AnyTrust, which are implemented respectively by the Arbitrum One and Arbitrum Nova blockchains.    

On March 23, 2023, Arbitrum’s highly anticipated airdrop took place, distributing $ARB tokens to users of Arbitrum’s Layer 2 solutions and over 100 DAOs in the Ethereum ecosystem, as well as Offchain Labs and other stakeholders. The $ARB airdrop formed the basis of ArbitrumDAO and the decentralized governance of the Arbitrum ecosystem. The total supply of $ARB tokens was set to 10 billion. 

On March 27, 2023, Lemma Ltd., a service provider hired by Offchain Labs to help with the roll out of ArbitrumDAO, posted an inaugural governance proposal - Arbitrum Improvement Proposal, or AIP, 1 - on Arbitrum’s forum and Snapshot page. This proposal asked the community to ratify the Arbitrum Constitution and form the Arbitrum Foundation, “a Cayman Islands foundation company, which will serve the ArbitrumDAO community and be governed by it” and “aims to foster the growth and development of the Arbitrum ecosystem.” Also outlined in the proposal were details about ArbitrumDAO’s treasury (containing roughly 3.5 billion $ARB tokens) and the Arbitrum Foundation’s “Administrative Budget Wallet,” which would receive 750 million $ARB tokens to fund its operations and activities; specifically, “making Special Grants, reimbursing applicable service providers for the Total Setup Costs and covering ongoing administrative and operational costs of The Arbitrum Foundation.” 

During the voting period on AIP-1, the proposal was subject to pushback from community members regarding the seemingly large budget allocated to the Arbitrum Foundation, with several tokenholders and delegates asking questions about oversight and security of the funds. These discussions came to a head when community members noticed that the $ARB tokens designated for the Arbitrum Foundation had already been transferred despite the proposal having not yet passed. 

As such, AIP-1 was better described as a “retroactive ratification” rather than an authorization from tokenholders. After a significant back-and-forth in the forum, AIP-1 failed to pass, with 100 million $ARB voting Against the proposal, 16 million $ARB voting For, and 14 million voting Abstain.

Arbitrum decided to follow community input and split AIP-1 into separate parts, acknowledging that more clarity was needed about the proposal.

Eventually, AIP-1 was reintroduced with revisions as two off-chain proposals: AIP 1.1, which proposes a lockup, budget and transparency reporting processes for the $ARB tokens distributed to the Arbitrum Foundation, and AIP 1.2, which amended the constitution and the Arbitrum Foundation’s Articles of Association and Bylaws to “(1) remove references to AIP-1, and (2) make other changes reflecting feedback from the community.”

Both off-chain proposals passed in mid-April 2023 and the proposals are now live on-chain. If passed, which is seemingly certain, these proposals would officially kick off ArbitrumDAO and the decentralized governance of the Arbitrum ecosystem. 

The Proposals

AIP 1.1

AIP-1.1 proposes a lockup, a budget, and transparency reporting for the 750 million $ARB tokens allocated to the Administrative Budget Wallet of the Arbitrum Foundation. 50 million of the tokens have already been transferred and a transparency report is available here.

The remaining 700 million tokens will not be used until the approval of a budget and will be placed in a smart contract-controlled lockup. The Administrative Budget Wallet will be used for funding ongoing administrative and operational costs of the Arbitrum Foundation, payment of service providers, and fostering the growth and development of the Arbitrum ecosystem, in line with the Foundation's mission statement as outlined in the bylaws. The proposal aims to ensure a smooth transition to the decentralized Arbitrum DAO, which now directly controls the upgradeability and technical future of the chains, the DAO treasury, the net fee revenue, and the responsibility to fund ongoing operations of the chains and critical chain infrastructure. See the forum post here. 

AIP 1.2

AIP-1.2 seeks to amend the Constitution, and The Arbitrum Foundation Amended & Restated Memorandum & Articles of Association (the “A&R M&A”) and Bylaws (the “Bylaws”) to (1) remove references to AIP-1, and (2) make other changes reflecting feedback from the community. These amendments are necessary, given that AIP-1 - which described and would have implemented critical aspects of governance - failed to pass.

The proposed changes include removing references to AIP-1, specifying the type of AIP required for proposals to amend the foundation's A&R M&A and Bylaws, lowering the threshold number of Votable Tokens required for an AIP to be posted on-chain, and clarifying the definition of the Administrative Budget Wallet. Additionally, a new section on the Data Availability Committee is proposed, along with changes to references to "Special Grants" and the ability of the ArbitrumDAO to replace The Arbitrum Foundation's directors. See the forum post here. 

Stakeholders

Proposer

AIP-1.1 and -1.2 were both submitted by L2BEAT, a research organization focused on Ethereum Layer 2 solutions that is also active in governance. However, the original source of the proposal is the Arbitrum team and group of service providers that were behind AIP-1, including the three proposed directors of the Arbitrum Foundation: Campbell Law, Edward Noyons, and Ani Banerjee. 

Supporters

The community is largely supportive of these proposals as evidenced by the associated Temperature Check votes passing with near unanimous support.

The off-chain Temperature Check versions of AIP 1.1 and AIP 1.2 passed with 98.13% and 99.15% support, respectively.    

Governance Process

Arbitrum follows a two-part governance process for passing AIP’s that varies slightly from similar versions used by other DAOs. In Arbitrum, there are “Constitutional” and “Non-Constitutional” proposals. Constitutional proposals are those that “modify the text or procedures of the Constitution or AIP-1, install or modify software on any chain, or take any action that requires ‘chain owner’ permission on any chain,” whereas Non-Constitutional proposals are those that do anything else.

Both types of proposals start off with a forum post and a Temperature Check proposal on Snapshot that runs for 1 week. A proposer is required to have voting power equal to at least 0.01% of votable tokens. In this phase, a proposal must simply win a majority of votes with no quorum or participation requirement.

If a Temperature Check vote passes, the AIP is able to move to an on-chain vote. Once AIP 1.2 passes, AIP proposers will be required to hold 1 million votable tokens to initiate an on-chain vote that will last 14-16 days. A simple majority is required for an on-chain AIP to pass, with a participation threshold of 5% and 3% of votable tokens for Constitutional and Non-Constitutional proposals, respectively.

For Constitutional proposals, additional steps are required after a successful on-chain vote and before implementation. For more detail see here. 

Big Picture

AIP 1.1 and 1.2 are certain to pass and commence the decentralized governance of Arbitrum. Though the drama surrounding the original AIP 1 was perhaps not an ideal start to ArbitrumDAO, the ordeal catalyzed an active community of tokenholders and delegates that are now presumably more bought-in to Arbitrum governance. As the leading Layer 2 for Ethereum, Arbitrum is now armed with a large treasury and an aligned community and is well-positioned to continue growing as an critical part of the Ethereum ecosystem.

For other DAOs and the crypto space as a whole, the AIP 1 episode serves as an important case study in DAO construction and implementation. Future DAO launches will certainly heed the lessons learned by Arbitrum; namely, the need to be deliberate around communication about decisions made during the “set up phase” in which core teams and service providers are laying the legal and technical foundations for turning governance over to the community.