Arbitrum Governance Fiasco: Foundation Under Fire for Selling Tokens Without Approval

First Arbitrum Governance Attempt Faces Hurdles 

Arbitrum decentralized governance suffered a blow after Arbitrum Foundation began selling $ARB tokens for stablecoins ahead of community ratification.

As reported, the proposal (AIP-1) to fund the Arbitrum Foundation with 750 million ARB tokens, worth nearly $1 billion - sparked controversy within the ARB community on March 1.

AIP-1 proposes using the 750 million $ARB tokens for Special Grants, reimbursement of service providers, and to support Arbitrum Foundation's ongoing operations. 

The Arbitrum community found out over the weekend that the vote was only supposed to ratify a previously made decision. That means almost 750 million ARB ($885 million) have already been moved to a separate treasury without token holders' approval. An additional 40 million ARB ($47.2 million) was allocated to a "sophisticated actor in the financial markets" space, according to the Arbitrum Foundation. 

The foundation further noted that 10 million of ARB ($11.8 million) had been converted into fiat for operational costs. Over 76% of ARB tokens have been cast against AIP-1's proposal.

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Responses From the Arbitrum Foundation and the Community 

Patrick McCorry from the Foundation explained the Arbitrum Foundation considered the Arbitrum Improvement Proposal (AIP-1) ratification of decisions already made.

To that end, the Foundation "has begun to use these tokens in the interest of the [decentralized autonomous organization], including conversion of some funds into stablecoins for operational purposes," McCorry said 

The Arbitrum official believes a number of parameters must be determined in advance, such as the structure of a "security council" that is empowered to declare emergencies, voting mechanics, and funding.

While some crypto community members criticized the Foundation's actions, others suggested they buy back the tokens sold.

Some community members also claimed Arbitrum is dumping tokens initially announced as locked tokens. They claim the tokenomics page only shows unlocked User airdrop tokens and DAO airdrop tokens, with the rest to be unlocked by March 2024.

According to others, the anticipated sale would be considered fraud under United States securities laws, and U.S. citizens could sue.

Last week, Arbitrum airdropped over one billion ARB tokens to nearly 300,000 wallets to share power over the network with its users. $ARB token holders are considered members of ArbitrumDAO, the group that votes on proposals such as AIP-1.

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Arbitrum Will Submit a New Proposal

Arbitrum has now decided to take the DAO's advice and split the AIP into parts. This will allow community members to vote on different sections. 

In addition, the team affirmed that it is exploring options to add more accountability, such as a four-year vesting period, to the decision to send 750 million $ARB. Further, the team said the program would be renamed the "Ecosystem Development Fund," and the fund's use will be explained in greater detail. 

The Arbitrum team admitted it should have communicated the proposal more clearly and confirmed that some tokens were converted to stablecoins. 

“The Foundation does not exist to sell tokens, only sold enough to fund its current operating expenses and has no near-term plans to sell more tokens,” Patrick McCorry stated.

The Arbitrum Foundation plans to propose measures to address transparency concerns regarding how the Foundation's tokens will be spent.

As a result of the Foundation's actions, ARB's price performance has suffered. The price of $ARB dropped 15.7% from $1.277 on March 2 to $1.117 on March 4 before rebounding to $1.21 at press time.

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What is Arbitrum:

Arbitrum is an Ethereum layer-2 network that allows developers to build and deploy highly scalable smart contracts for a low cost. Arbitrum chain will enable developers to use Web3 apps, deploy smart contracts, etc., but transactions will be cheaper and faster. The flagship product for the team, Arbitrum Rollup, is an Optimistic roll-up protocol that inherits Ethereum-level security.

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