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Arbitrum’s first governance proposal sparks controversy with $1B at stake

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A proposal to fund the Arbitrum Foundation with 750 million ARB tokens — nearly $1 billion — raised controversy in the ARB community over the weekend, as the Foundation announced that it was only ratifying a decision that had already been made. 

The conflict comes after a few days the layer-2 protocol airdropped its governance token.

According to the AIP-1 proposal on Arbitrum’s DAO, the 750 million tokens would be used to cover “Special Grants, reimbursing applicable service providers […] and covering ongoing administrative and operational costs of The Arbitrum Foundation.”

Among tokens holders, over 70% are against the move at the time of writing.

Screenshot: AIP-1: Arbitrum Improvement Proposal Framework. Source: Arbitrum DAO. 

After facing backlash from community members, the Foundation said in a forum post on April 2 that AIP-1 was a ratification, not a proposal. It also noted that part of the tokens were already sold for stablecoins. In other words, its billionaire budget and allocations would not be subject to an on-chain governance process.

The Arbitrum Foundation claims the symbolic first governance attempt failed due to communication problems and decisions that were “clearly not articulated correctly”:

“One of the mistakes in the drafting of AIP-1 was a failure to note at the outset that this proposal was intended to act as a ratification of the initial setup of both the Arbitrum DAO and the Foundation that has been created to serve the DAO. […] the point of AIP-1 was to inform the community of all of the decisions that were made in advance.”

Commenting on the governance forum, members of the community pointed out that Arbitrum’s team “has been dumping tokens that were initially informed to the community as locked tokens,” claiming that “all tokenomics page shows only User airdrop + DAO airdrop tokens as unlocked” with remaining “tokens to unlock in March 2024.”

Others highlighted that under the United States securities laws, the anticipated sale would be considered fraud, and that U.S. citizens who have bought ARB tokens or claimed the airdrop “are eligible for legal remedies.”

“I will be pursuing this with my lawyers and expect to file a securities fraud lawsuit in the next few days. […] Immediately, the Arbitrum Foundation is advised to halt all illegal sales of the token that are being done without any authorization and against the provisions of the law,” said a community member.

Arbitrum’s blockchain holds 65% of the Ethereum layer 2 market share, shows data from the layer-2 analytics site L2Beat. The highly anticipated launch and airdrop of its native governance token took place on March 23, with hundreds of thousands of eligible users and DAOs claiming ARBs. Overwhelming user demand led the airdrop claim page to crash shortly after its launch, Cointelegraph reported.