So focused on rolling out interesting blockchain features, the Arbitrum Foundation never learned what a proposal or a DAO is.

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The Arbitrum Foundation said late last Sunday it will break up a controversial governance package into a series of separate votes, bending to community pressure after holders of its ARB token staged a loud revolt.

“AIP-1 is too large and covers too many topics. We will follow the DAO’s advice and split the AIP into parts,” said the Community Lead “Eli_Defi” in Arbitrum’s Discord server.

What did the AIP-1 proposal cover and why did it receive so much community backlash?

What is AIP-1?

A “Lemma Ltd” has submitted a proposal for the community to follow the structure of a decentralized autonomous organization (DAO) — hence ArbitrumDAO — which would be governed by holders of ARB tokens. The proposal’s aim was to “foster the growth and development” of the Arbitrum ecosystem.

The Arbitrum Foundation, a Cayman Islands foundation company, was to serve and be governed by the ArbitrumDAO community. The foundation would administer the wishes of the community and adhere to its guiding values. The ArbitrumDAO will be able to submit Arbitrum Improvement Proposals (AIPs), vote on them, and make them a reality through The Arbitrum Foundation.

All seemed standard for a DAO, until further scrolling revealed proposed “special grants” and other extra power to be held by Directors and a Security Council.

• The Special Grants will be issued by The Arbitrum Foundation out of the Administrative Budget Wallet without undergoing a full on-chain AIP process.
• The Directors are responsible for ensuring that AIPs do not compromise their fiduciary duties, violate any applicable laws or regulations, or cause The Arbitrum Foundation to be in breach or violation of any contracts.
• The Security Council is a committee of 12 members of a multi-sig wallet, and it has the ability to perform both Emergency and Non-Emergency Actions.

And while the proposal aimed to create a “trustless, transparent, and verifiable Arbitrum ecosystem by allowing governance over it to be governed by those for whom such a public good is intended for”, this proposal seemed to skew very far from the idea of a decentralized organization, closer to the warped democracy enjoyed by the United States. Naturally, an overarching majority voted against the AIP-1.

What is Arbitrum?

Arbitrum is a technology suite designed to scale Ethereum. Arbitrum chains can be used to do all actions possible on Ethereum — using Web3 apps, deploying smart contracts, etc., but with cheaper and faster transactions. The “flagship product” — Arbitrum Rollup — is an Optimistic rollup protocol that inherits Ethereum-level security.

Arbitrum Network hosts numerous promising DeFi projects, including Hydranet — a decentralized exchange (DEX) which also operates as a DAO, albeit one where community votings and opinions actually hold value.

The rest of the story

The backtracking came after a day of rage in the Arbitrum community over how the Foundation held a “ratification” vote over decisions it had already implemented, including sending nearly $1 billion in tokens to itself.

Following the overwhelming opposition, Arbutrim was forced to pledge to hold redos over each section of its omnibus bill. But the audacity which propelled the initial proposal into being posted remains.

And what of the near $1 billion ARB tokens the Foundation allotted itself?

In the Discord post, Eli_DeFi said the 750 million ARB token allotment will now be subject to a standalone vote. “We’re working on options to add more accountability,” he said, noting Foundation tokens will not be used in votes. The current vote treats the Foundation’s power over that sum as a foregone conclusion; it started spending and sending tokens even before passage.

The Arbitrum Foundation’s “special grants” program – at the heart of the controversy – will be rebranded the “Ecosystem Development Fund.” Arbitrum pledged to “provide context on how the funds will be used,” as well as a “transparency report” on the Foundation’s budget.

“The objective in setting up the Arbitrum DAO was to lead by example to create the most decentralized rollup, and despite this blunder of communication, we will continue to aggressively pursue this goal,”

Arbitrum Foundation should not be giving any other governing entities any ideas on how to redefine decentralization to their benefit, although it may be more of a ‘what came first?’ kind of case.