In theater, actors often have a say in determining their character's actions, but the overall vision of the play is ultimately determined by the director. For better or worse, in the world of DAO governance, some critics claim it’s all theater. This view stems from instances when tokenholders were promised decision-making power in an important process, but the reality was more like a staged performance, where the script was predetermined by the centralized core team.
Something similar transpired during the recent launch of Arbitrum’s DAO. The Layer 2 project ran into trouble when tokenholders discovered they didn’t actually have influence in the inaugural proposal of the DAO. Controversy ensued, as it touched on a sensitive issue plaguing some DAOs today: Governance is all a theater, and we are the actors.
In this post, we’ll explore Arbitrum’s recent go-to-DAO stumble and the lessons we can draw from it.
How We Got Here
First, a quick timeline of the events that transpired.
On March 15th, the Arbitrum Foundation posted a draft of AIP-1 to the forums alongside The Constitution of the Arbitrum DAO.On March 16th, the Arbitrum Foundation published a blog post detailing plans to decentralize the Arbitrum One and Nova networks through a DAO governed by the ARB token.On March 23rd, the ARB token airdrop went live for eligible users.On March 27th, voting began on AIP-1 through Snapshot.On April 3rd, AIP-1 failed to pass with a 76.67% ‘Against’ vote.On April 5th, the Foundation addressed community concerns with the three new documents.
What AIP-1 Proposed
Arbitrum Improvement Proposal 1 contained the foundational process by which the newly created ArbitrumDAO would operate.
Broadly, the document details:
A breakdown of the governance powersARB Tokenholders, Arbitrum Foundation, Directors of the Cayman Foundation, Security Council, Data Availability CommitteeA breakdown of the AIP processThe voting procedure required to implement changes including the ratification of the ArbitrumDAO ConstitutionA breakdown of the total cost3.5B ARB earmarked to the DAO Treasury fully controlled by on-chain governance.750M ARB earmarked to an “administrative wallet” controlled by the Arbitrum Foundation for “purposes of making Special Grants, reimbursing applicable service providers for the Total Setup Costs and covering ongoing administrative and operational costs…”
This last detail is where the controversy begins.
The Mistake
As often occurs in governance forums, feedback and comments from the community trickled in and then poured in all at once. Among the issues highlighted was the nature of the proposed “Administrative Wallet” and the total amount of ARB tokens proposed it receive.
Late Thursday into Friday, community members began questioning who and why this unknown group would control such a large piece of the token supply (7.5%). Among those asking clarifying questions were Westie and MattOnChain from Blockworks Research. The team persisted in uncovering the details of the admin wallet and its proposed funds. They were also the first team to come out publicly as an “Against” vote. Then, Dan Smith (also from Blockworks) stepped in. He argued, “The Administrative Budget Wallet (0xc2) was funded 15 days ago during the initial distribution phase – before the user airdrop occurred. Why does AIP-1 speak in the future tense, implying 0xc2 has not been created yet?”
This was the missing piece and root of the issue. The community revealed the admin wallet had already been funded and had even sold off some of the ARB prior to any governance proposal or vote happening.
The Arbitrum Foundation was forced to mobilize over the weekend in which they clarified that the proposal was in fact more of a procedural ratification than an actual request from the community. A ceremonial proposition. AIP-1 failed to pass the vote.
Shortly after its failure, the Foundation announced AIP-1 would be divided into smaller proposals in the hopes that a much more focused and detailed proposition would succeed. On April 5th, the Foundation published three more documents: Transparency Report about the Foundation, AIP-1.1: Lockup, Budget, & Transparency, and AIP-1.2: Founding Documents Amendments.
The drama surrounding AIP-1 offers us valuable lessons to draw from. Let’s highlight a few of them.
Lesson 1: Public Trust Matters
When launching a protocol with the intention of decentralizing it by including various public stakeholders, start building the foundations for trust either through on-chain mechanics, off-chain accountability measures, or clear communication. When you effectively communicate what you are building and why, third parties can fully understand the motivation and vision as they develop trust.
Progressive decentralization, when you progressively hand off parts of the protocol structure to your community, introduces unique coordination dynamics that can quickly devolve into scrutiny and mistrust if ignored. When executed effectively, this is what makes these organizations so revolutionary and when you fail to do so, the narrative can quickly get away from you. In addition, protocol core teams deal with the added challenge of knowing what aspects of this process can and/or should be disclosed.
In the case of Arbitrum, they admitted in their mea culpa that they overlooked details and failed to adequately prepare the Foundation with enough resources to provide effective communications. Arbitrum found itself in a tricky situation because the language and communication confused and misled the involved stakeholders. Arguably, there was no ill will, only oversight on their end.
So, set up great communications and be fully transparent as much as possible where possible because everyone will and should have an opinion on what is being built.
Lesson 2: Be Honest About Your Structure
One of the running jokes about the incident was that it showcased yet another example of “Governance Theater” occurring within DAOs. In other words, a DAO pretends or acts as if they have a governance process by which the community is able to meaningfully influence the internal decision-making process.
In reality, when you progressively decentralize and hand over the keys to the kingdom, there will be moments when it appears as if the community has more power than they actually do. This is totally normal. Coming out and making it blatantly clear what parts of the organization are still centralized will keep everyone participating in governance accountable and on the same page. What is not okay is when your community feels duped or tricked. Mitigate this as much as possible and be brutally honest with yourself and the community when many of the important decisions will be made internally by the centralized team.
Arbitrum did a great job by communicating early on that parts of the initial process will be centralized. However, where the Foundation stumbled was in its communication of what AIP-1 actually changed.
Although their intentions were arguably pure in that they wanted to signal and almost ceremoniously give the DAO the illusion of this decision, community members were not happy. This produced tension in an already early-stage and immature community.
Lesson 3: Launches Matter, But Think Long-Term
The launch of a new protocol is a crucial moment for setting the tone and expectations for the project. However, it is just the beginning of a long-term journey that requires careful planning and consideration of both short- and long-term implications. While token airdrops and launches may attract individuals with a short-term mindset, it is important to focus on building a strong community of contributors and builders who are committed to the project's long-term success.
Arbitrum has recovered for now regardless of price action and noise generated from short-term thinking individuals. The success of a protocol falls on the execution of its strategy and the ability to navigate unexpected challenges that may arise.
Conclusion
Overall, the controversy surrounding AIP-1 has provided us with valuable lessons to reflect on. As more protocols move towards launching DAOs, it is essential for them to establish trust with stakeholders from the outset. To achieve this, effective communication is vital, as is maintaining honesty regarding the degree of centralization. Furthermore, it is crucial to keep the long-term vision of the project intact, even in the face of new obstacles. The shortcomings of AIP-1 serve as a great reminder that even the best intentions can be derailed by miscommunications, oversight, and unclear expectations.
Ultimately, successful decentralized organizations depend on a strong foundation of trust and transparency built and established early on by the centralized team. At StableLab we created DAOmeter, a DAO maturity rating system, as a nudge for protocols to increase this very foundation. As we move forward, it is important to remember that progress is not always linear, and mistakes are inevitable. However, by being proactive and communicative, we can mitigate risks and ensure a more successful and sustainable path towards decentralization.
Let us all take these lessons to heart as we continue to build and improve the DAO ecosystem. By doing so, we can create a more transparent, accountable, and equitable world for all.
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