AIP-1: Arbitrum Improvement Proposal Framework

Proposals Finalized AIPs
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SUMMARY

In short, as the 5th largest delegate, Camelot will be voting ‘ABSTAIN’ on AIP-1. After internal discussions and listening to the thoughts from our community and the broader Arbitrum ecosystem, we feel we cannot vote FOR or AGAINST the AIP-1 in its current state, given that it’s a signaling vote rather than a binding governance proposal.

For a summary of our position on AIP-1, please see the points below:

  • Due to the ratification of AIP-1, the proposal is purely a signaling vote and not binding; therefore, we will be abstaining
  • Whilst we are supportive of the allocations, which we feel are in line with industry standards and appropriate, we are strongly against the concept of ratification
  • Considering the size of the allocation, more details are required to detail the breakdown for short, mid, and long-term purposes
  • In addition to more details on the use of the allocation, further precisions are required on the vesting and custody, in which there is still a lack of transparency and communication that is desperately needed to maintain trust within the community
  • Transparency regarding the grant process and how these will be enacted & clearly communicated to the community is also required
  • Finally, the format of the proposal is not conducive to community discussion and debate, and we would suggest a more broken-down approach that is appropriate for the average community member

RATIONALE

Firstly, when discussing the contents of the initial proposal, we are generally supportive of the allocation towards the foundation, which we feel objectively aligns with standard practices we have seen in the industry so far and is appropriate in the context of a network-level foundation. The Arbitrum ecosystem has grown significantly in its relatively short history, and this rapid success would not have been possible without the team who built and drove it to where it is today, and therefore the allocation itself is something we deemed as fair.

However, we also believe that governance obviously has an absolutely crucial role in the future of decentralized networks. When AIP-1 was first proposed, we were under the impression that it was a genuine vote, as it was portrayed. Therefore, we strongly disagree with the concept of proposing a vote on something to then amend it to a ‘ratification’. Not only does this invalidate the role of governance, but it further undermines the role of the ecosystem in such an important early decision - the first AIP. This point is the main rationale behind voting abstain, as the proposal is no longer a valid governance vote and is merely a signal that bears no impact on the end outcome.

We do not support the ratification of AIP-1 and would further suggest several items to improve the initial proposal. Firstly, we feel that there is a lack of detail in regard to how the allocation of these tokens is actually used and distributed. The current allocation represents a significant amount of tokens, and yet AIP-1 does not sufficiently explain how it will be used. This amount of tokens will not only bootstrap grants for the short-term but for the life of the Arbitrum network, and therefore it’s imperative that the ecosystem is aware of the approach to how this allocation is intended to be used over both the short and long-term.

In addition to the lack of detail on how the tokens will be used, there is a subsequent lack of information about the grant process itself. The community cannot make an informed decision without knowing how the tokens are intended to be allocated. This requires understanding how grants will be conducted and communicated with the rest of the ecosystem. Without this process formalized and communicated, it’s unclear as to how the tokens might even be used and over what periods and structure.

The proposal also lacks transparency in terms of vesting and custody, both of which are highly sensitive factors that the community is very conscious of. Any large movement of tokens will result in instant reactions online, so having these details included in such an important proposal is critical.

Finally, we strongly recommend that the next AIP follows a different format that is more conducive to community discussion and debate. As the first proposal, AIP-1 provided a significant amount of information for the broader ecosystem to digest, opening room for misunderstanding as various interpretations were spread online. Community involvement is a fundamental element of decentralized governance, and therefore we suggest that future proposals not only contain all the relevant details but also follow a more digestible and user-focused approach.

CONCLUSION

Due to the lack of details within the proposal and the amendment of AIP-1 to a ‘ratification’, Camelot will be voting ABSTAIN and waiting for further information and clarity from the Arbitrum DAO and foundation. Despite the shortcomings mentioned above, we remain committed to supporting the Arbitrum DAO and foundation and strongly believe that the ecosystem will find an amicable path forward that takes this as an important lesson that strengthens future governance proposals.

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At L2BEAT we took our time to thoroughly analyze the situation around the AIP-1 proposal:

  • We read what’s been written in this forum post and on Twitter.
  • We went through the official legal documents.
  • We analyzed the on-chain history.
  • We have read the ArbitrumDAO smart contracts.

These are our main findings:

  1. The vote to adopt AIP-1 is irrelevant for AIP-1 going into effect.
  2. ArbitrumDAO remains in full control of the funds, and has to approve funds in the Arbitrum Foundation’s wallet.
  3. ArbitrumDAO has governance control over the Arbitrum Foundation (as per foundation founding documents).
  4. ArbitrumDAO has upgrade power over all Arbitrum contracts including the ARB token itself.
  5. AIPs can only be proposed and voted on by the DAO and its members and not any external actors.

After this careful consideration, we decided to vote: ABSTAIN in the Snapshot temperature check. We think that this proposal shouldn’t even be voted on and it should rather be treated as an initial setup of procedures for ArbitrumDAO. Future AIP proposals should address all the contentious issues to amend those procedures.

Below we try to summarize our understanding of the current situation, what we think should happen now and how we should avoid such issues in the future.

Important documents:

  1. AIP-1: Arbitrum Improvement Proposal Framework - the controversial AIP
  2. The Amended Constitution of the Arbitrum DAO | Arbitrum DAO - Governance docs - The ArbitrumDAO constitution that directly refers to AIP-1 several times
  3. The Arbitrum Foundation - Bylaws - Google Docs - The Arbitrum Foundation Bylaws, that define how Arbitrum Foundation is functioning and also refers to AIP-1 several times
  4. The Arbitrum Foundation - A&R Mem & Arts (Final Form) (16.3.23) - Google Docs Arbitrum Foundation companies act that established Arbitrum Foundation

Timeline:

The vote to adopt AIP-1 is irrelevant for AIP-1 going into effect

The ArbitrumDAO was set up by publishing the ArbitrumDAO Constitution together with AIP-1 that specified the framework for ArbitrumDAO operations and initial token distribution according to the initial token allocation ($ARB airdrop eligibility and distribution specifications | Arbitrum DAO - Governance docs).

In our opinion, the AIP-1 is not really votable, as the ArbitrumDAO Constitution clearly refers to AIP-1 as a source of truth regarding the structure and processes of ArbitrumDAO. Furthermore, legal documents establishing Arbitrum Foundation also refer to the AIP-1 as a document that defines the structure and processes of the ArbitrumDAO. In that case this structure and those processes are already in motion and ArbitrumDAO needs to abide by them. In a sense, were there no AIP-1, there would be no ArbitrumDAO to even decide on any AIP.

In that way it’s not up for ArbitrumDAO to decide whether to accept or reject AIP-1. The vote for this AIP should proceed according to the Constitution, but there seems to be no substantial consequences of this vote passing or not passing.

However, it is in the power of ArbitrumDAO to amend the rules set in AIP-1 by submitting and accepting new AIPs that change those rules.

The AIP-1 proposal is a large proposal that mixes several different aspects of setting up the ArbitrumDAO. The majority of the aspects outlined in the AIP-1 are non-controversial statements of facts that are not debatable or votable - the initial set of directors, the security council, the initial data availability committee members, the AIP processes - all of these already happened and are considered an initial setup. These also seem not controversial. It is not the case however, in our opinion, with the funds allocated to the Foundation.

The DAO remains in full control of the funds, and has to approve funds in the Arbitrum Foundation’s wallet

According to the distribution specification 42.78% or 4.278B of ARB tokens were allocated to ArbitrumDAO treasury. However, if we look into the on-chain transfers that were executed on the 16th of March ($1.02 | Arbitrum (ARB) Token Tracker | Arbiscan), we can see that this amount is split into two portions: 3,527,046,079 ARB has been sent to the ArbitrumDAO Treasury contract, and 750,000,000 ARB has been sent to another address, that is not listed in the official list of deployment addresses (DAO contract addresses | Arbitrum DAO - Governance docs).

From the AIP-1 proposal we assume that this address is a multisig wallet controlled by Arbitrum Foundation. AIP-1 mentions this as Administrative Budget Wallet and that these funds will be used for “making Special Grants, reimbursing applicable service providers for the Total Setup Costs and covering ongoing administrative and operational costs of The Arbitrum Foundation”. Furthermore, Administrative Budget Wallet is also defined in the Foundation Bylaws (The Arbitrum Foundation - Bylaws - Google Docs) in section 2 point a:

(a) “Administrative Budget Wallet” means the account that contains ArbitrumDAO approved Foundation assets, which will be utilized by the Foundation for purposes of operational and administrative costs as well as administration of Special Grants.

The Bylaws state that the assets held by Administrative Budget Wallet are “ArbitrumDAO approved”. In our opinion that means that, no matter the amount held by this account, those assets are still part of the general ArbitrumDAO Treasury and ArbitrumDAO still needs to decide on how much should be approved as disposable by the Foundation. The DAO remains in position to approve any funds held by the foundation’s wallet. Without the DAO’s approval, the Foundation is not authorized to spend the funds. We believe that the DAO still has the possibility to amend this amount (by proposing another AIP related exactly to that issue) and, for example, it could ask the Foundation to return all or some of the funds.

ArbitrumDAO’s control over Arbitrum Foundation and ARB token

It is worth noting that even though the initial setup of the Arbitrum Foundation and ArbitrumDAO has been proposed within the AIP-1 (and has been also set up legally), the ArbitrumDAO still remains able to:

  • Exercise “control” over the Foundation (as specified in Foundation’s bylaws).
  • Remove or appoint Foundation directors.
  • Ask the Foundation to provide transparency over how funds at the disposal of the Foundation are used.
  • Approve assets in the Foundation’s wallet, which in our opinion should also include the possibility to ask the Foundation to return all the funds that are currently under control of Foundation’s Multisig.
  • Wind-up the Foundation.

We have never seen any other high-profile project that gives so much power to the community and as such we hope that the community will use this power wisely, assuming first and foremost good intentions of people having to do the “initial setup”.

Furthermore, it is worth reminding the community that the ArbitrumDAO also holds control over the ARB token, so theoretically it can propose such an upgrade of the token contract that would for example circumvent the current restriction that mint can happen only once a year and the inflation cannot exceed 2% (by upgrading to a new implementation with new mint() logic).

Our vote

Given what we have summed up above, we decided to vote: ABSTAIN. We believe that no matter the results of this vote, the merits of the AIP-1 are still in effect and ArbitrumDAO should abide by them. However, we also believe that the ArbitrumDAO should already propose additional AIPs to amend the contentious aspects and that it should be accompanied by a healthy debate.

We would like to see Arbitrum succeed as a decentralized ecosystem with strong community and good governance mechanics. We think that ArbitrumDAO Constitution, together with AIP-1 is a good starting point for that and we believe that all involved actors will work together to make it better in the future.

The ArbitrumDAO itself has been given enough power to have a meaningful impact on the future of the Arbitrum ecosystem. Going forward, new proposals should be submitted as soon as possible to address the most contentious issues, especially the amount of funds that are accessible for the Arbitrum Foundation. Our stance is that the funds currently held in the Administrative Budget Wallet should not be considered as ArbitrumDAO approved and therefore should not be used until such approval from ArbitrumDAO is granted. We don’t believe trying to recover already spent funds would be beneficial for anyone, but all spending should immediately stop until the DAO gives its approval.

We are declaring our availability and willingness to work on those proposals and we believe that the focus of the ArbitrumDAO should be moved towards that.

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While Gauntlet is in favor of forming the ArbitrumDAO and supporting the Arbitrum Foundation, we agree with other delegates that more detail is needed around the Foundation’s plans for structuring and operational procedures. As such, Gauntlet is abstaining from this vote.

All said, we are excited by the governance activity displayed here and are looking forward to reviewing ideas and proposals that remedy the community’s concerns.

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Blockworks Research team here with an update on our views surrounding AIP-1 and the next steps from here.

We have been very impressed by the level of participation and quality of discourse surrounding this proposal. While we voted “Against” on the snapshot proposal, we still believe there is a way to move forward that ensures success for the proposed Foundation and the Arbitrum Ecosystem. To recap, we believe these are the primary issues the community sees with the proposal in its current state:

  1. 750M ARB tokens with no vesting period to be sent from the community allocation.

    • These tokens were moved prior to the voting period for AIP-1, which was received very poorly by the community.

  2. 50M ARB tokens were already spent by the Foundation. 40M were loaned to Wintermute, and 10M were sold to cover operating costs.

    • Again, these tokens were moved prior to the voting period for AIP-1, which was received very poorly by the community.

  3. Lack of clarity surrounding the Arbitrum Foundation: the selection of the initial directors, the justification for 750M ARB, the process for creating and allocating “Special Grants,” and the necessary operational expenditures need further elaboration.

  4. AIP-1 contained too many elements to fit into one proposal. Each individual element should be its own AIP that is discussed and voted on separately.

  5. High ARB requirement of 5M to submit proposals.

A Path Forward

With all this in mind, here is what we are proposing the next steps should be for the DAO:

  1. Provide a detailed budget breakdown to justify the funds sent to the Arbitrum Foundation that will be held in the Administrative Budget Wallet.

  2. Once a budget has been submitted for DAO review, create a vesting contract that aligns with the Foundation’s annual budget requirements. The vesting contract should be set up in a manner that gives the DAO the ability to halt funding if KPIs are not met.

A Foundation focused on creating a vibrant and sustainable ecosystem is beneficial to the success of Arbitrum. In our view, a 7.5% allocation to an ecosystem fund is fair and necessary for competitive advantage, especially when looking at other comparable foundation token allocations. However, it was a misstep to fund the wallet prior to DAO approval. Sending these funds back to the DAO treasury would hamper the Foundation’s ability to act in the DAO’s best interest for the next 2-3 months as it would severely slow the rate of implementation.

In order to rectify the initial missteps, we request a detailed budget breakdown to justify a 750M ARB allocation to the Arbitrium Foundation. This plan should include information on the Arbitrium Foundation’s mission, scope, team (full-time and contract), and budget. It should address the Foundation’s goals and include KPIs to measure success.

Once a budget has been agreed upon, there can be further discussion about how the funds should be delivered from the DAO to the Administrative Budget Wallet. We are generally in favor of vesting over a set period of time with the ability to request quicker distribution if necessary, however, more information will be gleaned once a plan has been presented.

Uniswap set a great example of how funds should be requested from the treasury to form a foundation that works in the protocol’s best interest, which includes budget breakdowns, OKRs, a detailed roadmap, and clarity surrounding the foundation’s key stakeholders and decision makers. While it may not be possible to go into as much detail as the Uniswap Foundation was able to, much more clarity into the Arbitrum foundation’s roadmap, KPIs, and contributors would go a long way.

This should eliminate the community concerns surrounding the lack of transparency in the foundation’s decision making and budget allocation. It should also help clarify the need for a 750M ARB allocation and present the best method of distributing the funds over time.

While this is not typical of other network foundations, we can set a strong precedent for efficient capital allocation and complete transparency.

Other less notable changes we also support:

  1. Splitting up AIP-1 into many different AIPs.
  2. Lowering the ARB required to post an AIP on chain.
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After renewed examination of the AIP-1 together with the arguments presented by the community and in view of new circumstances, I hereto change my position on the AIP-1 and consider it important to underline the following points:

  1. The Arbitrum Foundation cannot and should not be blamed for the steps it undertook in order to implement the AIP-1, as it turns out these were actually necessary decisions with a view to commence the functioning of the DAO and ensure its resilience in this highly competitive environment. What it should be blamed for is the miscommunication and presenting of the AIP-1 as something to be decided by the vote. The AIP-1 should have clearly be presented as the foundational document being implemented for the commencement and development of the DAO and it should have been clearly stated that what was really sought were comments on the AIP-1 by the community.

  2. The argument about exorbitance of the sum allocated to the Foundation as such cannot but be inadequate, that is in view of comparisons with similar cases (like Polygon, for example). Arguably, this argument could be based upon the fear of existence of a strong centralised body within the DAO, as it would undermine decentralisation. Although being to some extent justified, such fear should be weighted against the necessity of a strong centralised body of high-skilled professionals within the DAO to effectively carry out its decisions. But at the same time it’s undeniable fact that such body cannot be a part of the DAO without being duly checked and balanced.

Thus, the AIP-1 should be presented as a document being already implemented. The most ubiquitous comments/complaints to the AIP-1 should be transformed into the AIP(s), that is if the AIP-1 could be accordingly amended in case of positive vote and adoption of such AIP(s).
The system of aforementioned checks and balances should be speedily devised and implemented. It means that although being strong the Foundation must be accountable to the DAO.

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The proposal itself is troubling for several reasons:

  1. AIP-1 was a ‘ratification’ of actions already carried out by the Arbitrum Foundation - clearly against the decentralised ethos they are attempting to create
  2. Almost no transparency was given to the allocation of 750m ARB to the Arbitrum Foundation
  3. An extremely expansive proposal with no clear focus on a particular subject matter

AIP-1 Overall Failure
In our opinion, this is an incredibly bad precedent to set where the first vote is a ‘ratification’ of past actions and something the DAO would disagree with. We are sympathetic in that a huge cost is associated with setting up and operating such a large organisation, not only efficiently but successfully.

Arbitrum had every opportunity to outline these funds for allocation to the Foundation in their token distribution schedule when the ARB token and Arbitrum DAO were announced. We believe that as this road was not chosen, the Foundation must remain on it and stay true to its outlined governance process.

Unfortunately, from the outside, AIP-1 looks like an attempt to squeeze a large amount of funding for any number of things into an all-encompassing proposal hoping to fly under the radar (we understand this is likely not the case but optics are everything in this space).

Frankly, AIP-1 was a proposal to bypass the governance process, which was already bypassed due to the actions that have already taken place. Instead of attempting to be as decentralised as possible with the ratification of actions, they have undermined the entire DAO and its governance power.

The ARB token’s main purpose is governance and this simple yet critical purpose has been walked all over. In light of this, we will be abstaining from voting on AIP-1.

Transparency
AIP-1 gives almost no transparency as to the allocation of funds, how they will be spent, or when.

The following is required to move forward regarding the Special Grants Program:

  • What framework is to be used to select grants to ecosystem participants and how will these benefit the Arbitrum DAO?
  • What types of grants will be targeted (sectors) and why?
  • How will such grants be reported to the community?
  • How will a return on investment (ROI) be calculated for these grants to determine program efficacy?

In addition to the Special Grants Program, ARB has been moved from supposedly locked wallets (with vesting) without any prior communication. We call for a full report on the details of all wallets and their locked/vesting status. Transparency on circulating/liquid tokens, vesting and selling schedules are paramount.

Multi-faceted Proposal
As echoed by many others here and specifically in our original ARB Delegate Application, AIPs must be targeted at a single goal. AIP-1 misses this by a long way and can be split into several more focused proposals.

Summary
As a result of the above comments, Castle Capital has Abstained from voting on AIP-1. We look forward to the above comments being implemented for the revision.

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Hi @Atomist , please find the new proposals here:

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Standing on this protocol, this is my stand too.

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DAO-based governance over the Arbitrum One and Arbitrum Nova network protocols, and they are generously offering an airdrop of the ARB token to communities that have played a role in the growth and health of the Arbitrum ecosystem. And guess what? Lido Protocol has been selected as an eligible recipient for this airdrop!
As a crucial player in the Arbitrum DeFi ecosystem, Lido DAO is entitled to claim a whopping 772,621 ARB tokens! These tokens can be used to further the growth of staking and the wstETH DeFi ecosystem on Arbitrum One and beyond. But first, we need to take some important steps.
We propose designating a representative or group of representatives to accept the airdrop and process the claim. And who better than our very own Lido DAO reWARDS committee to lead the charge? They will be our designated representatives and have the authority to use the ARB tokens to pursue the growth and expansion of stToken use across all supported networks.
To kick things off, we will initialize a 4/7 reWARDS Committee multisig on Arbitrum, which will receive the ARB tokens. The multisig composition will include some of our top community members,. Once operationalized, the committee will announce its readiness on this thread and the original proposal thread.
Let’s make the most of this incredible opportunity to strengthen and grow the Arbitrum ecosystem, and continue to pave the way for DeFi innovation!

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