An Ecosystem of Aligned Entities & Teams
As we recently passed the two-year anniversary of the ArbitrumDAO, it is a time to reflect on its journey and how the community has evolved. We would also like to share a potential new future for the direction of Arbitrum. This vision is a culmination of many discussions with key stakeholders, including major delegates, investors, developers and vendors that provide services to the Arbitrum ecosystem. The hope is that we, as a community, can align around this vision of the future of Arbitrum.
The ArbitrumDAO is the most unique organization in the entire industry. It has been fully entrusted with the technical upgrades of the Arbitrum protocol, the assets and revenues of the platform and the ability to truly effectuate change. None of that should ever change. The ArbitrumDAO should and will continue to remain the source of power. But, there are areas we need to improve. The two most significant are:
- The overall operational efficiency across the ecosystem.
- Expectations and responsibilities of key stakeholders.
We believe that the vision laid out in this document can provide an evolved framework for how Arbitrum can operate more effectively and efficiently, continue to position itself to attract the best builders, grow its treasury and compound its growth with new business lines and initiatives. We also believe that revised expectations of the scope of work of stakeholders and delegates will allow Arbitrum to more effectively receive guidance and iteratively improve on its value proposition.
Before diving too deeply into our proposed path forward, we want to spend a few paragraphs focusing on the historical success that the ArbitrumDAO has seen, as well as some of the bottlenecks that we have identified for its continued growth and sustained success.
Short History & Success
From its inception in March 2023, control of the Arbitrum protocol alongside a significant treasury was transferred to the ArbitrumDAO. The Arbitrum Foundation and Offchain Labs took a backseat to governance with the intention of enabling the community to grow and develop as a new key stakeholder. Over time, the community began forming, and a collection of members and participants within the ecosystem took charge in stewarding the future direction of the DAO, its treasury spend and made meaningful contributions to Arbitrum.
It is very clear that the DAO has successfully formed its own identity and represents a significant force in the Arbitrum ecosystem. So much so that we have witnessed the rise of several key Arbitrum Aligned Entities (âAAEâ) (a concept discussed in further detail below) emerging with Entropy Advisors, the Gaming Catalyst Program, and the forthcoming OpCo. Additionally, there are many individual contributors who give their time, knowledge and care, towards progressing Arbitrum forward.
Since inception the ArbitrumDAO has approved ~57 on-chain proposals, voted on ~360 temperature check votes and most significantly has started establishing business initiatives and support programs that benefit Arbitrum stakeholders. Key examples of this include the acquisition of RWAs as a mechanism to onboard leading global financial institutions, the incentive programs designed to support applications on Arbitrum, the launch of the GCP, and the active deployment of the DAOâs treasury into Arbitrum DeFi.
The ArbitrumDAO, including its contributors, delegates, vendors, and Arbitrum Aligned Entities should be exceedingly proud of what has been accomplished to date. They have shown up and made full use of the unprecedented control that was bestowed upon them.
Bottlenecks in Arbitrum
Despite all of the progress mentioned above, Arbitrum can do better. It can be more effective, more efficient and better positioned to compete with increasingly sophisticated competition. It can increase its chances of winning.
If we had to diagnose the source of some of these inefficiencies, many of the bottlenecks facing the ArbitrumDAO is due to the lack of participation from The Arbitrum Foundation and Offchain Labs in the efforts and initiatives of the DAO. We think it is time to rectify it and to be more actively involved to support the ArbitrumDAO to solve many of the bottlenecks.
The DAO lacks experts that have a holistic context of all things happening within the Arbitrum ecosystem to assist in the drafting of proposals, to provide commentary and recommendations on the state of proposals, and to steer the DAO as a whole in a direction that will propel Arbitrum forward. The Arbitrum Foundationâs backseat role led to operational vacuums that service providers and vendors were required to fill. These are tasks that The Arbitrum Foundation and other Arbitrum Aligned Entities, could have undertaken more effectively and in a cost-efficient manner.
This lack of participation led to proposal gridlock, inefficient processes, above-market-rate priced proposals, minimal cohesiveness, and a lack of accountability for executing proposals. Letâs discuss each of the above in further detail.
Proposal Gridlock. It is not uncommon for proposals with great ideas to become stuck within the DAO during the feedback process and eventually abandoned by their authors. Often, this results from multiple vendors competing for the same proposal, an emphasis on creating elaborate frameworks and committees over picking a few vendors, and authors receiving comments from different delegates and community members/contributors leading to confusion on whether they have collective buy-in and how to progress the proposal. The overall approval process is complex and lengthy, typically stretching over four weeks and often several months. This process discourages competent teams who are interested in Arbitrum and instead they opt to work with competitors due to a simpler and more streamlined process.
Inefficient Processes & Execution. While the involvement of part-time contributors in managing the execution of proposals is a testament to the DAOâs community-driven nature, it often leads to unnecessary delays and custom and obscure processes. The net effect is that new and impactful actors find it more difficult to engage with Arbitrum and are ultimately discouraged from participating. Additionally, proposals often lack clearly assigned owners of tasks with clear responsibilities, which leads to inactivity in the execution. The DAO does not currently have a strong mechanism where feedback can be provided when an initiative should either be wound down or pivoted. This leads to wasted time and resources that could be more effectively used elsewhere.
Issues with Proposal Pricing. Currently, the DAO acts as a collective counterparty in negotiations with vendors, which has proven to be neither efficient nor effective. This arrangement sometimes allows vendors to propose prices that exceed market rates and for delegates to eventually approve them. This is not due to negligence on the part of the DAO or its delegates. It stems from a lack of awareness about current market rates, the lack of a single entity that is directly in charge of negotiating with vendors, the lack of service providers (and teams) willing to work with DAOs, and given the size of the ArbitrumDAO treasury, it is sometimes a strategic decision to accept higher prices and break free from proposal gridlock.
Minimal Cohesiveness. Many of the initiatives undertaken by the DAO could have been strengthened by complementary initiatives undertaken by the AF, its service provider, Offchain Labs, and in other proposals within the DAO. The result of the current structure is that each DAO program lives on an island, leading to unnecessary friction with partners, redundant monetary and time-based spend, and a general non-optimal use of resources toward specific goals.
Lack of Accountability. After a proposal has passed, there is a tendency in the DAO to overlook its execution and final output. Although a proposalâs author will publish progress reports, not all delegates will read the report as they are often burdened with numerous other responsibilities ranging from reviewing proposals, offering feedback, and voting on proposals. This has allowed proposals not to fully deliver on their promises to the DAO without significant recourse. The DAO has attempted to experiment with oversight committees to aid accountability, but this is sometimes overkill depending on the nature of a proposal and it makes more sense to rely on existing structures for oversight like leveraging an Arbitrum Aligned Entity.
There are several instances when The Arbitrum Foundation has had to step away from its backseat role and support the DAO in its endeavors without a clear responsibility to do so in the original proposal. For example, coordinating multiple stakeholders in a proposal to work together, chasing vendors to execute what they promised the DAO, acting as a policeman to retrieve misused funds (with the support of Blockworks and others), and enforcing public disclosures by proposal authors to the DAO. In every case, our involvement has been a net-positive for a proposal, and our new vision is seeking to explicitly include the involvement of any Arbitrum Aligned Entity as the default case for all initiatives.
We believe that with The Arbitrum Foundation and other Arbitrum Aligned Entities committed to utilizing their resources to ensure that Arbitrum will operate effectively and efficiently, Arbitrum will be in a better position to continue to build out its business interests and succeed. Arbitrum will be better positioned to win.
Paradigm Shift: Arbitrum Aligned Entities Conducting Strategic, Discretionary and Operational Decisions For The DAO
Arbitrum is made up of a wide array of different stakeholders. Investors, developers, builders, users, delegates and all of the organizations that are contributing to making sure that Arbitrum is positioned to succeed. The DAO is missing many of these key stakeholder groups participating in governance (i.e. as delegates) as they find it too political, too time consuming, and difficult to assess all aspects of a proposal to make an informed decision. That does not mean they donât want to participate in Arbitrum or provide feedback to ensure Arbitrumâs success. Many of them, particularly native builders on Abitrum One or Orbit, have tied their businessesâ success to Arbitrum succeeding.
It is up to us to bring them back.
This requires evolving the DAOâs decision-making process and we believe two key improvements will help us achieve it:
Recalibration of Expectations. The workload placed on contributors and delegates needs to be reduced, while focusing their efforts. This requires providing delegates with condensed information from reputable teams to help streamline their decisions alongside refining their scope of roles and responsibilities to participate. They should be voting on the merits of an idea or strategy with the guarantee that a dedicated, professional and Arbitrum-focused team will undertake its execution. Additionally, once the proposal has passed, they can rely on the OpCo and the OAT, to keep track of the proposalâs progress.
Arbitrum Winning as a Mandate. Too many operational decisions are tasked to people and organizations that do not have Arbitrum winning as their number one priority. In fairness, The Arbitrum Foundation and Offchain Labs did take a backseat role, but it is now an appropriate time to change this in a thoughtful way. Operational efficiency can be achieved by ensuring that people working on initiatives are not only highly competent and capable, but have Arbitrum winning as their core mandate. A proposal is not simply an additional pay stream or consulting task, but fundamental to the success of their team and, ultimately, Arbitrum. In fact, we should ensure the compensation structure for an AAE aligns with their business model, and in the case of capital deployment, with the potential to benefit the ArbitrumDAO as well.
In order to achieve the key improvements, we are proposing two transformational paradigm shifts in the operations of Arbitrum:
Transformational Change #1 - Operations: Once a proposal is approved by the DAO, then there should be no discretionary, strategic or operational decisions conducted by anyone other than Arbitrum Aligned Entities. It will be up to the respective AAE to pick, negotiate the scope of work and hold accountable the involvement of any vendors and service providers.
Transformational Change #2 - Delegates: Delegates should continue to maintain control of the technical upgrades of the protocol and control of disbursements from the treasury, but with a renewed focus on approving or denying Arbitrum Aligned Entities with the authority, funds and mandate to act.
Letâs discuss each of these in further detail.
Transformational Change #1 - Operations: The first question that comes up is what does it mean for an organization to be an Arbitrum Aligned Entity. The definition we would propose contains three prongs:
- AAE is competent to accomplish the responsibilities that it has been assigned
- Arbitrum is its primary focus
- Arbitrum winning is mission-critical to the organizationâs success
As of today, there are five organizations that have been identified as Arbitrum Aligned Entities. Each of these entities has a specific role and responsibility and will be tasked with achieving its goals for the DAO. Importantly, there should NOT be two AAEâs that are performing overlapping tasks. The collective of AAEâs will need to align on their obligations and ensure they have the resources to accomplish their tasks.
As of today, we have identified five different organizations that are set up to be AAEâs with a high-level breakdown of different functions (to be finalised):
- Arbitrum Foundation. DAO legal wrapper, Marketing, Education & Technical Advancement, Community, and Strategic Growth and Grant Initiatives,
- Offchain Labs. Engineering, Product, Business Development and Technical Research, Contracted Service Provider to Foundation,
- OpCo. DAO Control Panel, Operations, Coordination and Governance,
- Gaming Catalyst Program. Arbitrum Gaming Investment and Grant Arm,
- Entropy Advisors. Strategic proposals, shepherd key partners through the DAO, align essential stakeholders, data analytics, DAO financials, and late-stage ecosystem support.
That does not mean that additional AAEs should not be established. In fact, we would embrace the opposite under the following conditions.
- The proposed new entityâs primary focus is for Arbitrum to win,
- The proposed scope does not overlap with an existing AAE,
- The DAO has approved funding for the new entity including its scope of work and they have been properly onboarded with the appropriate controls by OpCo.
Regardless of this change, vendors and service providers will still play a critical role in the growth and success of Arbitrum. They will continue to provide support, just reporting to an AAE that defines its scope of work. In fact, we have spoken with numerous vendors who have wholly endorsed this shift because they feel that they will be able to operate their services more effectively. They will have more direct feedback, a clear reporting structure, and more guidance on when a shift in their services or offering would be most beneficial. Where today they are frequently getting contradictory guidance and feedback and are often uncertain what their priorities should be.
Transformational Change #2 - Delegates: If there were a Venn Diagram today of delegates and other Arbitrum stakeholders, there would be very minimal overlap across most categories of stakeholders. The delegate pool is well represented by professional governance participants and vendors, but its participation rates among investors, power users (e.g., liquidity providers), and arguably most importantly, builders, leaves a lot to be desired. We need the two circles of groups (delegates and other Arbitrum stakeholders) to significantly converge so AAEs receive the information and direction they need from stakeholders in a structured and aligned fashion.
Currently, we are placing far too much demand on delegates, which distracts them from focusing on major initiatives and proposals in the DAO. The root cause of this issue is the requirement for all proposals to have the same amount of attention.
The goals of this change are the following:
- Expand the range of stakeholders willing to participate in governance by decreasing the burden placed on delegates,
- Ensure delegates remain the high-level authority for protocol upgrades and disbursements from the treasury,
- Empower AAEs with approval and disbursements of funds to conduct operations
- Feedback to AAEs on areas to improve Arbitrum,
- Source of idea generation for new initiatives for Arbitrum to conduct (via an existing AAE or a newly-formed AAE for purposes of the initiative).
OpCo â Accountability Bridge Between the DAO and Arbitrum Aligned Entities
The ArbitrumDAO approved the creation of a new operations entity called the OpCo. It is envisioned to support project management of DAO proposals, the ability to negotiate and enter into agreements, and act as the operational mesh layer for the DAO. Put simply, it allows the DAO to hire a full-time team whose only focus is to help achieve DAO-defined goals.
One of the most important components for the OpCo is the OAT (Oversight And Transparency). It is a committee that is directly elected by the DAO to represent their interests and to oversee all initiatives that fall under the OpCoâs remit. We view the OAT and OpCo as critical to the new vision for Arbitrum as they will not only help share information across contributors, vendors, and Arbitrum Aligned Entities, but hold accountable the authors of any proposal that is passed by the DAO.
The OAT, alongside the OpCo, can work with the Arbitrum Aligned entities to:
- Recommend that a proposal should progress through the DAO,
- Decide on the operational and execution details of a proposal,
- Require regular updates from the Arbitrum Aligned Entities on whether the proposal is progressing as anticipated,
- Authorise pivots as long as it retains the spirit of what the ArbitrumDAO approved,
- Cancel a DAO initiative that is not making satisfactory progress,
Since the OpCo is the living fabric of the DAO, it can act as a quick authoriser to help teams pivot their operational plans for how to execute a DAO-approved strategy which is useful in many cases to avoid delays, bottlenecks, and continued work down the wrong path simply because it is exactly what the DAO approved.
Additionally, we expect the OpCo, OAT and, depending on the structure of the AAE, potentially a collective of other stakeholders (e.g. GCP) will decide a proposal should be cancelled and remaining funds returned to the DAO. This is because the OpcO and OAT will gain access to information that is typically difficult to release publicly. As well, there will be a dedicated team whose job is to keep track on how a proposal is progressing alongside all the context surrounding it to date. They will be in a very strong position relative to the DAO to make judgements on whether a proposal was successful or failed.
Social Change to Proposal Process
The intention of this vision is not to make any constitutional changes to the proposal process to the ArbitrumDAO. Anyone currently eligible should remain eligible to make a proposal. However, we do expect that there will be significant changes to the cadence and scope of proposals.
AAE Submitted Proposals: In the event an AAE makes a proposal, the expectation is that the proposal should sufficiently describe the vision, strategy and business plan of what the AAE intends to accomplish pursuant to that proposal. The proposal should not be so inflexible and granular in detail that the AAE cannot exercise its business judgment to pivot or shift without having to submit a follow-up vote to the Arbitrum DAO. The control and removal rights of initiatives should sit with the OpCo and OAT. These proposals should be less frequent than we may see today, as they will have more flexibility for the organizations to operate.
Non-AAE Submitted Proposals: As mentioned above, the eligibility requirements for submitting to the forum should not change. But we expect the number of proposals will significantly diminish in favor of more informal feedback loops between the idea generator and the relevant AAE undertaking such an initiative. Our expectation is that new proposals would largely be for new initiatives not within the scope of any existing AAE that are developed in conjunction with OpCo.
Yet, should a delegate choose to submit a proposal, the following process should be followed:
- Step 1: Proposal Submitted
- Step 2: OpCo should identify the relevant AAE tasked with this scope of work and solicit feedback on the proposal.
- Step 3:
- Viewed Favorably: If the AAE thinks that this initiative is a good idea and can be completed within existing budgets, they can either add it to its existing work and the proposal should not proceed to vote, or if additional funding is required to execute on the proposal, the OpCo should inform delegates that the proposal should proceed to vote, with a recommendation to vote in favor of the proposal.
- Viewed Unfavorably: If the relevant AAE thinks that the proposal is not a good idea, the OpCo should report back to the delegates the position of the AAE with a recommendation to vote against the proposal.
- Step 4: If necessary, the proposal proceeds and delegates vote to accept or reject the proposal.
- Step 5: If it was a proposal viewed favorably by the relevant AAE and the proposal has passed, the AAE should be tasked with implementing the scope of the proposal. If, however, the proposal passes despite the recommendation of the AAE and OpCo to vote against, the AAE should not be responsible for implementation. We do not want the AAE to be distracted from its goals by initiatives that it does not think are worth prioritizing. In the event that such a scenario occurs, OpCo should be responsible for ensuring that the proposer complies with all of its obligations pursuant to the proposal.
This new process places significant emphasis on the AAEs to provide to the community its feedback, thoughts and opinions on the effectiveness of new proposals. The OpCo is tasked with acting as the control panel between the community, delegates and the AAE. Our hope and expectation is that this mechanism will reduce the workload of delegates by providing them with elected sources of information, enabling them to make informed voting decisions.
We expect that delegates will largely listen to the feedback of the OpCo and relevant AAEs and will generally dismiss proposals that are not endorsed by those working for Arbitrum in that area. Of course, if the DAO is adamant that a proposal should pass, then the current proposal process still exists to permit that to happen. It will be up to the OpCo to hold the proposalâs author accountable and ensure it is carried out. This should only happen in exceptional cases and not as standard practice.
To conclude, after two years of growth, it is clear that the ArbitrumDAO is the most advanced DAO in the world. The treasury and protocol are controlled by the community, and it has engaged actors and participants that are dedicated to ensuring Arbitrum succeeds. Yet, there are always things that can be improved upon, and we firmly believe that this new vision and approach will allow Arbitrum to expand the collection of stakeholders participating in governance and strengthen the collection of talent contributing to Arbitrumâs success.
The AAE structure, teams who have naturally arisen from the DAO already, positions Arbitrum for long-term success by fostering greater alignment and operational efficiency within the DAO. By empowering Arbitrum Aligned Entities to drive key decisions and streamline processes, we believe this approach will enable Arbitrum to more effectively compete and thrive in a rapidly evolving blockchain industry.
We encourage all contributors, delegates, ecosystem projects, and the broader Arbitrum community to take this time to discuss the new vision. Participation is vital to our success and we hope to move forward with this plan of action soon. We will organise a governance call for Friday at 10am EST to discuss the vision and your feedback.