ARB Staking Working Groups - Final Recommendation

[SEEDGov]

This report is the result of a collaborative effort between SEEDGov, Entropy, Tally, and numerous other contributors who actively participated in both Working Groups. We extend our gratitude to the Arbitrum DAO community for their support throughout this challenging process. Additionally, we would like to express our sincere appreciation to the members of the Arbitrum Foundation, Offchain Labs, and L2Beat for their valuable contributions during the interviews conducted last week.

Background Information

Tally passed a proposal in June 2024 to build ARB staking, with the primary goals of increasing governance participation, making the DAO more resistant to governance attacks, and enhancing ARB utility. Any ARB token holder can deposit ARB into an ARB staking contract. ARB token holders can alternatively deposit into a liquid staking contract built on top of ARB staking, and a receipt token (stARB) that is redeemable 1:1 for the same amount of ARB initially deposited in addition to any rewards that have accrued to the contract pro rata. Each staker/depositor can actively participate in ARB voting and/or delegation both from the native staking contract and as a stARB holder. If the stARB is deployed in a DeFi protocol by the user or if their chosen delegate becomes inactive, the original delegation will be redirected to a DAO-designed redelegation strategy. The Arbitrum DAO has three critical powers in Tally’s proposed design: controlling rewards source parameters, redelegation strategies that control where voting power from actively deployed stARB is redirected, and defining an active delegate to determine whether or not stakers earn rewards.

The primary goals of the ARB Staking proposal are as follows:

• Increase governance participation
• Provide ARB increased utility through the introduction of an LST
• Enhance the overall security of the Arbitrum governance system

We encourage Arbitrum community members to deeply consider how Tally’s ARB staking implementation, in conjunction with the recommendations made by the rewards source and delegation working groups, achieves these goals.

Delegation Working Group Final Recommendation

The Delegation Working Group had two primary responsibilities:

1. Define an Active Governance Participant: This ensures that users staking their ARB tokens delegate their Voting Power (VP) to delegates who actively contribute to Arbitrum DAO’s governance.

2. Establish a DAO Redelegation Strategy: This mechanism manages VP under specific scenarios:

   • When users deposit ARB into the Liquid Staking Token (LST) and use their received stARB in a DeFi protocol that doesn’t support 1:1 delegation.
   • When users delegate to an active participant who later becomes inactive, triggering automatic VP redelegation.

Below, we present a diagram to illustrate the process flow as originally approved on Tally.

Active Governance Participant Definition

Significant discussions were held on defining an Active Governance Participant. The WG consensus was to establish a simple, accessible definition to encourage new delegates to join the DAO.

It is critical to note that active participants do not receive rewards, meaning they lack a direct financial incentive to game the system. However, malicious actors aiming to monopolize VP might have an incentive—an issue that exists today even without staking.

To mitigate this, the Working Group recommends incorporating a Verified Delegate List, a UI feature that helps delegators make informed choices. While it doesn’t impact protocol-level decisions, this feature could reduce the likelihood of malicious actors receiving VP.

Proposed Definition

A combination of on-chain and off-chain voting metrics (Snapshot and Tally):
An Active Governance Participant could be defined as someone who has participated in both on-chain proposals and off-chain votes on Snapshot.

Each delegate’s Score will reflect their participation in on-chain votes over the past 90 days and their off-chain votes over the past 30 days. To be considered active, a delegate must achieve a score of 75 or higher, which will be calculated as follows:

• On-chain votes (past 90 days): 65% weight
• Off-chain votes (past 30 days): 35% weight

Delegate Score = (% On-chain votes (90d) * 0.65) + (% Off-chain votes (30d) * 0.35)

Every voter who meets the activity criteria established above will be considered an “Eligible Delegate” to whom holders can delegate their Voting Power to receive their share of the rewards.

The Working Group recommends this option for the following reasons:

• Inclusion of Snapshot Votes: Temperature checks on Snapshot play a key role in Arbitrum DAO’s decision-making. Many elections already take place there.
• Timeframe Considerations: Snapshot’s voting frequency can vary significantly. For instance, in April 2024, there were 79 votes, compared to only 9 in October 2024. A shorter timeframe (30 days) ensures fairness for new delegates while accounting for voting fluctuations.
• Avoiding Overcomplexity: Adding sybil-resistant mechanisms (e.g., Forum Karma Scores, delegation time, amount of delegators, only DIP eligible participants, historical participation and gitcoin passports) was deemed counterproductive, as these could:
  • Create high entry barriers for new delegates.
  • Centralize VP among a few “eligible” delegates.
  • Introduce undesirable dependencies or risks.

Verified Delegate List - UI Feature

Rationale

A preliminary analysis was conducted on user behavior when it comes to delegating voting power. It is almost certain that users tend to be “lazy” in this regard. As observed during various airdrop claims, the majority tends to choose either the first delegate they see in the UI or the one they recognize due to reputation.

Based on this behavior, we propose the creation of a Verified Delegate List, where selected delegates would be highlighted with a badge in the UI during the staking and delegation process. While users will still be free to choose any delegate, the aim is to provide tools to help them make informed decisions. Additionally, this approach reduces the likelihood of malicious actors receiving Voting Power, as it would be highly improbable for them to qualify for this list.

Key Features

• Randomized Order: The delegate list’s order changes each time the UI updates, ensuring no delegate has a positional advantage.
• Eligibility Criteria: Verified delegates must be part of the Active Participant List and meet additional criteria based on community forum engagement and rationale provided through the DIP program.

Having said this, we will proceed to explain the proposed methodology for determining whether or not a delegate is eligible to be part of this list:

Active Participants from DIP

A Verified Governance Participant may be defined as someone who not only votes on on-chain and off-chain proposals but also regularly contributes to community forums and engages with other members to foster a collaborative environment.

Each delegate’s Score will reflect their participation in on-chain and off-chain votes completed over the last 30/90 days and a score accounting for their Communication Rationale and Delegates’ Feedback in the Forum coming from the DIP. To be considered for this list, a delegate must achieve a score of 75 or higher, which will be calculated as follows:

Delegate Score = (Active Participant List Score * 0.70) + (DIP CR+DF Score * 0.30)

Note that delegates must meet the base requirement (i.e., be part of the Active Participant List) to be considered for inclusion in the Verified Delegate List.

All delegates on the Verified Delegate List will be displayed in the delegation UI with a badge indicating their status as "Verified”, based on the criteria established by the DAO. This visual distinction will help holders identify which delegates have undergone further vetting and validation.

In this particular option, it is necessary for the Delegate to at least be enrolled in the DIP (not necessarily to have been compensated). It is worth clarifying that in this case, the cadence for updating the Delegate Score on this list should be at least monthly, in alignment with the monthly issuance of the DIP results.

If DIP as a program is deprecated, DAO will ratify the former participants as eligible for the Verified Delegate List via Snapshot vote or establish new criteria for being “Verified”’

In the case of the Program Administrator, since does not participate in the Program as a delegate, PA will only be included in this list as long as complies with the requirements to be in the list of Active Participants.

Benefits and Drawbacks of Leveraging the DIP

Firstly, it’s important to highlight that involving the DIP at this stage is fundamentally different from using it to determine whether a participant is active or not. The Verified Delegate List is merely a UI feature that does not affect delegates’ eligibility to be considered active or the rewards users may receive.

That said, there are very few reputational tools sufficiently aligned with the DAO to determine who qualifies as “verified” or top-tier delegates. Below, we will outline the advantages and disadvantages of leveraging the DIP, as well as other alternatives that were previously considered:

Advantages:

• Sybil Resistant: DIP requirements, such as holding +50k tokens and undergoing KYC, reduce the risk of malicious actors infiltrating the Verified Delegate List.
• DAO Aligned: The Delegate Incentive Program is nowadays the most complete tool for verifying that delegates align with DAO values, adhere to the Code of Conduct, and contribute actively.
• Delegate Competition: Verification incentivizes delegates to improve performance to gain better visibility among potential delegators or even to be on the Verified List if they are not performing well enough.
• Efficient Resource Use: Leverages existing frameworks and resources (e.g., Karma metrics).
• Straightforward to understand: Delegates who are already familiar with the DIP and part of it don’t need to adapt their behavior to a new parameter or structure. This also avoids friction between the DIP’s scoring methodologies and any potential alternative methodology from the Staking program.

Disadvantages:

• Dependence on the Program Administrator: The Program Administrator would have significant influence over who joins the Verified Delegate List. While this might initially seem negative, it also increases the incentive for enhanced oversight of delegates through the monthly results published by the Administrator. Moreover, the Administrator can be removed from their position if they act maliciously against one or more delegates, thus risking their own reputation when evaluating others’ performance.

• Exclusion of Delegates Outside the Program: One key limitation of this approach is that delegates who are not part of the program—and choose not to join—would also be excluded from the Verified Delegate List. Two potential solutions to this issue are:

  • Joining the Program: Delegates who wish to be verified and meet the DIP requirements can always register. For individuals or entities who decline registration to avoid receiving compensation, the program could consider allowing them to participate solely for scoring purposes, enabling them to join the Verified Delegate List without receiving payment.
  • Creating a Parallel Inclusion Mechanism: Another option is to establish a separate whitelist for delegates who neither wish to join the DIP nor accept compensation. This could involve a monthly Snapshot vote to consider applicants for the Verified Delegate List. However, this approach raises concerns about the fairness of allowing other delegates to decide who gets into the Whitelist.

• Risk of Discontinuation (Dependence on the Program): In the event that the DIP is discontinued entirely, the DAO would lose its primary mechanism for determining who qualifies for the Verified Delegate List. This risk can be mitigated by implementing a temporary fallback mechanism to ensure continuity during such scenarios.

Previously Considered Alternatives

During the last two months, the SEEDGov Team, along with the members of the Delegation Working Group, discussed possible alternatives for defining an ‘Active Participant in Governance’ and spent many hours leveraging possible strategies for re-delegating the voting power that would have fallen into the ‘default strategy.’

You can check here the full research with feedback from delegates, Arbitrum Foundation members, and various stakeholders.

Also, you can check the WG calls here:

• Recording 1
• Recording 2
• Recording 3 (Partial)
• Recording 4

Forum Karma Score

One previously explored option was leveraging the Forum Karma Score for the Verified Delegate List. While its use for determining whether a participant is active within the DAO has been discouraged, the Verified List’s case warrants a different analysis.

However, this methodology exhibits similar drawbacks to those identified when considering it for defining activity levels:

1. Vulnerability to Gaming: The Karma Score system can be easily gamed, potentially incentivizing bots and malicious actors to flood the forum and other communication channels with spam to manipulate their score. This increases the likelihood that a malicious actor could qualify for inclusion on the Verified Delegate List.
2. High Error Propensity and Oversight Costs: The system is highly prone to errors and requires significant oversight to ensure that scores are being calculated accurately. This would necessitate allocating additional resources to monitor and validate the scoring process.
3. Misalignment with DIP Scoring Methodology: Adapting to the Karma Score methodology could be challenging for delegates already accustomed to the DIP scoring system, as the two algorithms differ substantially. This divergence could create confusion and additional friction for delegates.

For these reasons, The Working Group recommends that the DAO choose the DIP as an alternative to determine which delegates are eligible to be included in the Verified Delegate List. Instead, the Forum Karma Score could serve as a temporary fallback mechanism in the event the DIP is eventually discontinued.

DAO Redelegation Strategy

After extensive discussions with stakeholders, consideration of current limitations for implementing a plural strategy (e.g., the lack of features such as Partial Delegation or Flexible Voting), analysis of potential legal implications, and challenges in reaching a consensus on a strategy, we concluded that eliminating its necessity from the design would be the most effective path forward.

As such, Tally has committed to revisiting the implementation of the LST to enable its functionality without requiring the redelegation of Voting Power. The goal is to create a design that allows users depositing their stARB in DeFi and to retain their chosen delegation. This redesign would also address cases where users delegate to an active delegate who later becomes inactive, ensuring that these users would need to take action (e.g., manually redelegating to an active delegate) to continue receiving rewards.

In summary, the Working Group recommendation is to proceed with the implementation of Native Staking based on the previously suggested parameters and to allow Tally the opportunity to redesign the LST. This approach ensures that the DAO can launch a platform aligned with its principles—a crucial consideration given that the creation of LSTs is currently 100% permissionless (i.e., anyone could create one without engaging with the DAO to discuss its design).

Other Considerations

Oversight Committee and Special Case Resolution

To maintain responsiveness to changing circumstances, we recommend establishing an oversight committee. This committee could handle exceptional cases and make/promote adjustments to the staking system when necessary, safeguarding the coherence and adaptability of ArbitrumDAO’s governance. The committee ensures that unforeseen situations can be managed effectively, protecting the integrity of the governance process.

Rewards Source Working Group Final Recommendation

The rewards source working group has come to the conclusion that the only feasible rewards sources to subsidize ARB staking activity are Timeboost revenue, sequencer revenue (also referred to as chain profit), and ARB inflation. Sequencer revenue/chain profit has become quite volatile post EIP-4844 and the ArbOS Atlas upgrade, bringing in a majority of revenue on days in which there is an abnormal spike in activity that results in a drastic increase in L2 surplus fees. Timeboost has yet to go live in a mainnet environment, so it is difficult to accurately estimate how much revenue it will generate in practice, and the revenue is likely to be sporadic as well. Additionally, a vast majority of the DAO’s treasury is denominated in ARB, so pulling from ETH revenue sources to subsidize ARB staking would come at the detriment of continually diversifying the DAO’s treasury. The working group believes that sequencer revenue/chain profit and Timeboost revenue should be considered in the future as potential reward sources for ARB staking, but that for the V1 implementation, ARB inflation makes the most sense.

If we assume a 17.5% ARB staking participation rate with a target yield of 5.5%, the following table shows the amount of ARB that would need to either be added via inflation or spent from the DAO treasury to achieve the mentioned targets based on the projected ARB supply schedule over the next 2.5 years:

Note: Data from rewards source model, courtesy of Vending Machine

Advantages of ARB Inflation

• No dependency on ARB price: Inflationary rewards are denominated in ARB tokens, removing the need to adjust for ARB price fluctuations to estimate projected staker yields.
• Immediate Accessibility: Rewards become available without dependence on a tangible revenue source, enabling immediate incentives for stakers.
• Decoupling from Revenue Size Constraints: This approach avoids linking token value to a specific revenue magnitude, freeing token rewards from absolute revenue caps and token price speculation.
• Industry Norm Acceptance: Token rewards as an incentive mechanism have broad industry acceptance, adding legitimacy to their use.

Disadvantages of ARB Inflation

• Inflationary Impact on Token Value: Token issuance-based rewards introduce inflationary pressures that can erode token price over time.
• Sustainability Challenges without Revenue Growth: Inflation-based staking rewards are unsustainable without corresponding growth in token value or network revenue.
• Dilution of Non-Staker Holdings: Inflationary issuance dilutes the holdings of non-stakers.

After conversations/interviews with members from the Arbitrum Foundation and Offchain Labs, as well as feedback gathered from @coinflipcanada and @l2beat, the working group recommends starting with a lower level of rewards for the first version of ARB Staking. There are 327M ARB tokens actively delegated out of the 3.98B tokens in circulation. A 17.5% target staking ratio used in the table above implies an increase in participation by more than a factor of 2 from today’s ~8% participation rate. This would make quorum much easier to reach for constitutional proposals (5% of votable supply quorum), but we believe that a lower staking ratio can be targeted to reduce costs and ultimately achieve the same goal.

Therefore, if the DAO elects to move forward with enabling rewards for ARB staking, the working group recommends 15M ARB from the DAO treasury should be spent over a 12 month period. This will provide ample time for Tally to refine the staking mechanism’s implementation, give mainnet environment data for the DAO to evaluate/improve upon, and work towards achieving the original goals of Tally’s ARB Staking proposal at a reasonable cost.

Please find the full research findings from the working group here. We drastically reduced the amount of information in the final recommendation in an effort to make it more digestible/quicker to read.

[NathanVDH]

I strongly doubt that stARB is the right response to the very real problems you’ve identified.

Let’s look at the stated goals:

1. Boost governance participation: It’s unclear whether it would boost real participation or just people going through the motion for max yield. There’s a real danger of increasing noise for the same amount of signal.

2. Improve token utility: I’m skeptical here. Instead of enhancing ARB’s utility, this approach arguably shifts utility from ARB to stARB, adding significant complexity. Users now must not only buy ARB but also stake it for it to be fully functional. This complicates the user journey and could create unnecessary friction.

3. Reinforce governance security: I’m not convinced it achieves this effectively. The added layers and redelegation mechanisms seem more likely to create administrative overhead without directly addressing the risk of governance attacks.

In general, I think there are better, simpler options to achieve these goals. Governance staking for ARB feels like an over-engineered solution that may dilute the value of ARB itself—particularly for investors on centralized exchanges who would essentially be penalized for not staking. This approach risks alienating certain segments of the ARB user base while disproportionately benefiting stakers.

Additionally, parts of this system further entrench the current delegates, making it harder for new participants to break into governance. This is a real issue that could worsen over time, undermining the inclusivity and decentralization of Arbitrum governance.

I’m not a fan of introducing staking for ARB in this form. We should explore simpler, less dilutive methods to increase governance participation and improve ARB utility without creating unnecessary complexity or barriers for users and new delegates.

Finally, why are we not exploring other methodlogies, and why aren’t other service providers involved in this process to offer new and potentially better solutions? This is an incredibly important decision for the DAO and I don’t think enough measures have been taken to find the best solution.

[cp0x]

@NathanVDH

It’s unclear whether it would boost real participation or just people going through the motion for max yield

Yes, indeed, we don’t know, but I think it’s worth a try. I don’t see how this makes things worse.

@NathanVDH

shifts utility from ARB to stARB

I disagree here,
ARB hasn’t gone anywhere, it will also play the same role in voting.
stARB is an additional token that allows you to use ARB so that it doesn’t just sit in your wallet

[dennison]

Hi @NathanVDH great to see you here.

Background

I think it’s worth taking a step back and looking at what the problem is.

Participation in the DAO

This isn’t hypothetical. It’s real. And so far it happens to all DAOs.

A great primer to read by AVSA in ENS which also encountered this problem.

Note that while ENS earns revenue, has no investors to dump, is a truly “Decentralized” community offering a genuinely successful product that is having great success, the token isn’t able to maintain the security of the DAO.

Uniswap has spent years on the downwards trajectory. The only thing that has been driving their toekn security of late has been the reopening of the opportunity to launch staking.

I could go on and on, from the the Compound Attack to even the attack and subsequent collapse of the Aragon DAO. A good read specifically on how to attack a dao.

I gave a talk at Devcon about Staking in DAOs that addresses many of the high level components DAO staking that have already resonated with the Arbitrum Community.

The working groups have dug into many of your concerns, and I would highly encourage you to look into the meeting recordings and notes to see how the Arbitrum community is thinking about this.

1. Boost governance participation: The community is highly aligned to ensure that rewards are being directed to actively participating members. The need to ensure that this system evolves itself towards productive participation is something everyone agrees is important.

2. Improve Token Utility: stARB is little more than a thin wrapper around a staked position. It’s hardly adding any complexity and additionally is 1:1 redeemable at any time.

Users now must not only buy ARB but also stake it for it to be fully functional.

I think most folks here would appreciate anything that causes folks to buy ARB, but I’m confused by what you mean ‘fully functional’? ARB isn’t used for anything other than governance and staking doesn’t change that in anyway.

3. Reinforce governance security - I think the door is still open about how everyone is thinking the about the best way to implement this. I’m pretty excited to continue research into this with all the folks in the working groups.

This is an incredibly important decision for the DAO and I don’t think enough measures have been taken to find the best solution.

While best is subjective, I want to push back on the suggestion that the DAO isn’t hard at work at searching for optimal solutions. I also (give that it’s thanksgiving today) want to double down on thanking all the delegates, and DAO members who have participated over the past couple months and who have brought all manner of diverse opinions, pros and cons to the discussion across the various working groups. I think everyone who has participated believes we’re crafting something new and exciting and challanging.

Additionally I think most folks who have participated in the open process would agree that experimentation is better than paralysis. The DAO participants are more aligned than ever on the challenges and opportunities that Arbitrum has before it.

[NathanVDH]

I agree that participation is a problem, however that chart is misleading. It’s about voters, not about voting power. What matters most remains voting power engaged - and if we disagree on this then we should walk back delegation all together.

Obviously governance attacks are an issue, especially against a DAO like Arbitrum that is truly putting everything on the line - and fair play to them for that. My point that this doesn’t especially solve this remains though. The mechanism redistributing unused voting power is going to continue entrenching current delegates - that’s a dangerous centralization vector.

My point about stARB being the “fully functional” version of ARB is financial. You won’t want to hold ARB if stARB makes money - meaning a rational actor will always want to hold stARB. I don’t think it would cause anyone to buy more ARB, but simply to switch. If anything, introducing inflation could have a negative impact.

I respect the work that the working group has been doing, very much so in fact. In particular I commend the decision to start slow with this. I will make sure to increase my participation in this working group to make sure that other alternatives to this system can be explored.

[pedrob]

@NathanVDH

The mechanism redistributing unused voting power is going to continue entrenching current delegates - that’s a dangerous centralization vector.

Note that, based on the conclusions of the Staking Working Group, the decision has been made not to proceed with an LST for now (this includes redistribution). Instead, staking will be enabled through inflation funding.

@NathanVDH

You won’t want to hold ARB if stARB makes money - meaning a rational actor will always want to hold stARB

This is not necessarily true. Holding an LST carries additional risks compared to the underlying native asset. Moreover, the primary goal of the staking system is to increase the participation of active delegates (as defined by the group) by incentivizing ARB holders to delegate to these active delegates. If delegation is not made to an active delegate, no rewards are received. That has implications for the LST, which were discussed and ultimately led to the decision not to implement it for now.

@NathanVDH

If anything, introducing inflation could have a negative impact.

although I was not part of the group that discussed this particular aspect, I believe inflation makes a lot of sense. It benefits those who use the governance token for its intended purpose: governance.

[dennison]

@pedrob

If delegation is not made to an active delegate, no rewards are received. That has implications for the LST, which were discussed and ultimately led to the decision not to implement it for now.

Yeah I think thats the primary issue we’re looking to solve in investigating different design structures for the LST. It’s a challenge to have a fungible token that conditionally distributes rewards, but we’ve got some interesting ideas to ensure participation is required for rewards.

[GensDAO]

The stARB proposal addresses important goals, but some aspects seem to raise more questions than answers, particularly when considering its practical implications.

First, regarding the aim to “boost governance participation” I share the concern expressed:

@NathanVDH

It’s unclear whether it would boost real participation or just people going through the motion for max yield

While incentives may increase activity, how can we ensure this participation is informed and strategically oriented rather than just a mechanical accumulation of interactions? A system that fosters “noise” instead of “signal” could dilute the effectiveness of governance.

On token utility, it’s worth pointing out that

@NathanVDH

Instead of enhancing ARB’s utility, this approach arguably shifts utility from ARB to stARB, adding significant complexity.

By introducing an additional layer, the process becomes not only more complicated but also risks fragmenting users between those who understand and engage with staking and those who don’t. This could deter new users or limit adoption. Has there been any consideration of how to avoid this fragmentation creating entry barriers or negatively impacting investors on more traditional platforms like centralized exchanges?

Regarding governance security, I agree with this:

@NathanVDH

The added layers and redelegation mechanisms seem more likely to create administrative overhead without directly addressing the risk of governance attacks.

Increasing administrative layers may introduce new points of vulnerability and might not effectively mitigate fundamental risks like Sybil attacks or collusion. Is there concrete evidence that the proposed system would substantially improve security against these threats, or could more specific and direct solutions be explored?

Finally, the impact on inclusivity is another worrying point. As the original comment of @NathanVDH mentions, “parts of this system further entrench the current delegates, making it harder for new participants to break into governance.” This poses a significant challenge, as it could consolidate power in the hands of a few established delegates while discouraging the entry of new voices—voices essential for maintaining diversity and innovation in governance.
What mechanisms are being considered to level the playing field and ensure the system remains decentralized and accessible to new participants?

Overall, I agree that with him (again):

@NathanVDH

Governance staking for ARB feels like an over-engineered solution

The current design seems to introduce complexity without effectively addressing the key issues it seeks to solve. Perhaps it would be more productive to open the discussion to simpler, more collaborative solutions—such as incentives tied to participation quality, reputation systems, or gamification—before moving forward with an implementation that might create unnecessary friction.

[cupojoseph]

@NathanVDH

In general, I think there are better, simpler options

What are your alternative ideas?

@NathanVDH

entrench the current delegates

this is a humungous problem. As an example, I’ve made several posts about Arbitrum governance that have gotten well over 100k views each, and in each ask folks who agree with me to delegate their ARB. not a single person ever has. I’ve personally DM’d over 200 ARB holders who have not delegated their holdings with personal messages and never been able to convince anyone to care enough to spend a moment to delegate. Very very little delegation has changes since airdrop day or without the will of a huge institution like wintermute etc…

I actually think with an LST new participants have more options to be creative and find new strategies for getting delegation: finding ways to layer yield, give loans against staked arb with special better condition, do crowdfunding to buy ARB that delegates to a member of a group chat which the funds are held by the chat collectively, etc…

---

@SEEDGov

When users deposit ARB into the Liquid Staking Token (LST) and use their received

Users should have the option of depositing ARB and NOT getting an LST. it should be optional. Ideally the design should allow other LSTs to be built using this option. Imagine if Ethereum said you had to use Lido for deposits? All the other innovation and competition may not have had such a Cambrian explosion as a result.

[JoJo]

As one of the person who worked the most, alongside @jameskbh, on the delegation (and redelegation) part, I would like to chim in.

Is pretty clear that, while the DAO voted for a proposal, the Tally one, that was about building not only the mechanism for Arbitrum staking, but also an LST with redelegation mechanisms embedded, most of the DAO and delegates are not ready.
Seems clear by several comments, both in this thread but also in the calls we have had in the last 2 months.

I can understand how a strategy that, algorithmically, moves delegation around, might be perceived as dangerous/complex/overhead/other. I really do. But what most currently fail to understand is how, without it, the DAO might be exposed to governance attacks.

A governance attack is currently tied, from an economical standpoint, to the arb prices and to the amount of total actively delegated arb, in a linear way (emphasys on linear). Is not unlikely a future in which we might have a bribing market for governance that could lead in a short period of time to have an unaligned, enormous delegate: economic conditions are currently there, knowing that our dao is one that has effectively onchain governance.

While the current rise in price in arb is shielding a bit to a situation that, a few months ago, was effectively dangerous, we don’t want to drop the ball here. It is unlikely that we will have the conditions in the next year for this type of attack, assuming bull market lasts for another 12 months, but the conditions will be there in the next bear market.

For this reason, I think is paramount to start from what was crafted and studied so far, and use the next quarter to deliver a set of strategy that can increase the amount of actively delegated arb, to shiled ourself from future scenarions in which there might not be optimal conditions in our governance.
As a consequence I invite all delegates to read the document linked in the first post of the proposal and, at the same time, starting to reflect on the potential next steps for increasing active governance power to aligned parties in our DAO.

[Vertex_Protocol]

@JoJo

Is not unlikely a future in which we might have a bribing market for governance that could lead in a short period of time to have an unaligned, enormous delegate: economic conditions are currently there, knowing that our dao is one that has effectively onchain governance.

We noticed a few days ago that at least one market already exists and has been used several times since July.

@lobbyfi has just under 830k ARB delegated to them, which has been used to vote on both Snapshot and onchain proposals.
https://snapshot.org/#/profile/0x7a45eE0be5C4BdC938A5F00A2AEF393f46502D26

LobbyFi's Delegate Profile

Though we only noticed recently, they’ve been open that this is running. They have a delegate statement posted and you can see their pitch during redelegation week here.

[SEEDGov]

@GensDAO

While incentives may increase activity, how can we ensure this participation is informed and strategically oriented rather than just a mechanical accumulation of interactions? A system that fosters “noise” instead of “signal” could dilute the effectiveness of governance.

To qualify as an active participant, voting alone is sufficient, yes it’s true that this does not guarantee that the act is being carried out in an informed manner, but establishing this on-chain and as a requirement to be considered an active participant presents significant challenges for several reasons:

• Whether participation is “informed” and strategically oriented is subjective. Who determines if a delegate/voter is making an informed decision?
• Mechanisms exist to “quantify” reputation, such as the Forum Karma Score or the DIP itself. However, including such dependencies at the protocol level is at least risky and controversial.
• Therefore, in an attempt to foster “quality” participation, we proposed the Verified Delegate List which does not impact the protocol level but can help holders delegate their tokens to active participants who perform due diligence and contribute to discussions.

@GensDAO

Increasing administrative layers may introduce new points of vulnerability and might not effectively mitigate fundamental risks like Sybil attacks or collusion. Is there concrete evidence that the proposed system would substantially improve security against these threats, or could more specific and direct solutions be explored?

The Working Group recommended eliminating redelegation and having Tally redesign its LST accordingly. We do not understand this concern or that of @NathanVDH regarding redelegation.

@GensDAO

Finally, the impact on inclusivity is another worrying point. As the original comment of @NathanVDH mentions, “parts of this system further entrench the current delegates, making it harder for new participants to break into governance.” This poses a significant challenge, as it could consolidate power in the hands of a few established delegates while discouraging the entry of new voices—voices essential for maintaining diversity and innovation in governance.

What mechanisms are being considered to level the playing field and ensure the system remains decentralized and accessible to new participants?

“parts of this system further entrench the current delegates, making it harder for new participants to break into governance”

Indeed, the “First Level” in the system is to be an Active Participant, which requires only voting. We can’t see how the entry of new voices is discouraged when the threshold is set to be as accessible as possible. Once a delegate reaches the first level, they become “eligible” to receive more delegations, potentially qualify for the DIP, and join the Verified Delegate List (second level).
From our perspective, under the current recommendation, the staking mechanism would provide more and better pathways than currently exist to bootstrap a new delegation.

How would you make the mechanisms more inclusive? How would you prevent Sybils and malicious actors from being included in a Verified Delegate List?

@GensDAO

Perhaps it would be more productive to open the discussion to simpler, more collaborative solutions—such as incentives tied to participation quality, reputation systems, or gamification—before moving forward with an implementation that might create unnecessary friction.

We believe such a solution already exists and is called the Delegate Incentive Program. Incentives for delegates to provide quality participation, maintain a reputation, and implement gamification strategies fall under the purview of the DIP. There seems to be some confusion here; we are discussing incentives for ARB holders to stake and delegate their tokens to active participants. Today, over 300 million ARB tokens are delegated, yet we have rarely surpassed 200 million votes. This is, in part, what this proposal aims to address.

@cupojoseph

Users should have the option of depositing ARB and NOT getting an LST. it should be optional. Ideally the design should allow other LSTs to be built using this option. Imagine if Ethereum said you had to use Lido for deposits? All the other innovation and competition may not have had such a Cambrian explosion as a result.

Depositing into the LST is already optional. Users can directly deposit into the Native Staking, as illustrated in the diagram we attached:

@SEEDGov

1600×1030 155 KB

[WinVerse]

The Staking WG has been a good one and happy we were a part of that.

Diving into the verified UI recommendation, I love the idea. My only question is if there would be an option for stakers to sort by verified list. This way, stakers can decide to see the list of only these verified delegates rather than seeing them highlighted in a pool of delegates.

@SEEDGov

Based on this behavior, we propose the creation of a Verified Delegate List, where selected delegates would be highlighted with a badge in the UI during the staking and delegation process.

If this is implemented, would it be possible to randomize that process too? This is just as you have explained here but for just the verified delegates.

@SEEDGov

Key Features

• Randomized Order: The delegate list’s order changes each time the UI updates, ensuring no delegate has a positional advantage.
• Eligibility Criteria: Verified delegates must be part of the Active Participant List and meet additional criteria based on community forum engagement and rationale provided through the DIP program.

[rafso]

For this reason, I think is paramount to start from what was crafted and studied so far, and use the next quarter to deliver a set of strategy that can increase the amount of actively delegated arb, to shiled ourself from future scenarions in which there might not be optimal conditions in our governance.

I agree with JoJo’s point here. If an unaligned LST starts getting traction, Tally has the original proposed version of the aligned LST standing by and ready to deploy if needed and desired. As discussed in the proposal and the working group, an aligned LST is MUCH better than an unaligned one.

[Entropy]

First of all – we cannot thank the contributors involved enough for all of their time and effort spent on the Staking Rewards Working Group. Our budget for contributors was only $10k, and we received what was likely ~$35-45k worth of man hours. The contributions truly impressed our team and made us very optimistic about the future of Arbitrum and DAOs more broadly. We also want to thank the Tally team for bringing this complex proposal forward in addition to everything else they do to service the DAO – without them, governance in Arbitrum would be much different than what we know today.

With all of that being said, we find it important to highlight that although the two working groups have made their recommendations, there are still notable open questions concerning known and unknown risks that should be explored further before the implementation takes place. We have concerns about edge case scenarios that arise from the system’s permissionless nature. For example, nothing is stopping an external protocol from building a competing LST with stARB, which would be eligible to receive any rewards the DAO is providing. This protocol could, in theory, throw additional incentives at its LST on top of the rewards being provided by the Arbitrum DAO, thus giving it a higher APR than stARB and making it a more attractive place to park idle ARB. A protocol could use this strategy to accumulate a large amount of voting power to gain influence over Arbitrum governance to its own benefit rather than for the good of the entire Arbitrum ecosystem. This risk should be alleviated if the original delegation can be maintained, but it remains a risk until then. Staking also opens the door for leveraged looping strategies for accumulating governance power (LTVs are typically more aggressive for pegged assets), changes the incentive to hold the underlying asset, etc. These are just a few simple examples of unintended consequences the system might introduce, and our opinion is that these types of scenarios should not be taken lightly.

The projected noteworthy cost (15M ARB for 1 year) also begs the question of whether or not this endeavor is worthwhile in the first place. We should identify the actual problem we’re trying to solve here, and if there are alternative solutions to do so. If the two most important goals of Tally’s proposal were to increase governance participation and to make the Arbitrum governance system more resilient against attacks, then Entropy lacks confidence in a firm recommendation to spend this amount of ARB to subsidize staking activity. The DAO could achieve the same goals for free and with arguably fewer unknown risks by just delegating a portion of its treasury to worthy delegates in order to increase voter participation. This solution would similarly make a governance attack more difficult to conduct and would not open up similar attack vectors like the ones previously mentioned. The DAO could even omit larger delegates from the redelegation strategy in an effort to increase the balance of voting power while giving more power to those who regularly contribute with much smaller delegations. We aren’t suggesting that we SHOULD do this; we are merely pointing out that there are alternative approaches with their own advantages and disadvantages. As such, we feel as though it’s important that these solutions are explored against each other, in addition to diving deeper into value accrual mechanisms for the ARB token as well as whether or not Arbitrum’s governance participation really is at an alarmingly low rate relative to other DAOs.

We are happy to see that Tally has decided to postpone any additional work towards the immediate deployment of an LST until the redelegation component is scrapped and the original delegation of the initial ARB staker can be maintained, thus demonstrating respect for community feedback and reinforcing trust in their decision-making process. However, before more quantifiable research has been conducted, our belief still remains that this feels like we are finding problems that fit this specific solution (ARB staking and an LST). As it currently stands, we believe that increasing governance participation, making governance more resilient to attacks, and increasing ARB utility throughout DeFi likely have simpler/cheaper solutions that can be applied.

Lastly, we want to reiterate our confidence that there most certainly are edge case scenarios we have yet to consider, which could pose a risk to Arbitrum governance through the introduction of staking and an LST. ARB’s primary utility is governance, and we believe that it should remain in its current form until the ecosystem reaches a more mature state since, in our minds, Arbitrum’s main focus should be on attaining a state of sustainable growth over the coming years before value is redistributed to token holders. Additionally, More research into ARB staking, its risks, as well as alternative solutions is needed in general before we are comfortable moving forward with such an important change.

Considering our thoughts above, we believe that the best path forward is for Tally to continue building out ARB staking’s design so that it is ready for implementation if/when the DAO is ready to deploy it, but that no rewards should be applied upon its initial rollout. This does not mean that rewards cannot be applied retroactively, and, in fact, we believe this should be considered. We would also like to see more research into how ARB staking could be leveraged to provide crypto-economic security for things like decentralizing the sequencer.

[pedrob]

@Entropy

This protocol could, in theory, throw additional incentives at its LST on top of the rewards being provided by the Arbitrum DAO, thus giving it a higher APR than stARB and making it a more attractive place to park idle ARB

There are several things we need to consider here.

Nothing would prevent someone from setting up a bribing system right now to receive ARB delegations and use that voting power to claim DIP rewards or to gain a stronger position within governance, and then potentially perform a governance attack.

In my opinion, the staking system does not create new incentives beyond those that already exist for operating in this manner. There is no difference between the opportunity cost of receiving 0 or a bribe, and the opportunity cost of receiving n (staking reward) or a bribe.

However, it could be argued that by creating incentives to delegate, someone might try to exploit this new wave of delegators to concentrate power and carry out a governance attack by offering temporary extra incentives to quickly acquire voting power.

That said, this possibility seems to be mitigated by the definition of “active delegate” proposed by the working group.

@SEEDGov

A combination of on-chain and off-chain voting metrics (Snapshot and Tally):

An Active Governance Participant could be defined as someone who has participated in both on-chain proposals and off-chain votes on Snapshot.

Each delegate’s Score will reflect their participation in on-chain votes over the past 90 days and their off-chain votes over the past 30 days. To be considered active, a delegate must achieve a score of 75 or higher, which will be calculated as follows:

• On-chain votes (past 90 days): 65% weight

• Off-chain votes (past 30 days): 35% weight

If someone intends to create an LST and propose a new “malicious” delegate, they would first need to participate in governance for 90 days to become eligible for rewards. Therefore, it’s not as simple as someone setting up an LST overnight, soliciting delegations with bribes, and launching an attack on governance. It’s more costly and complex.

Regarding this, it could be argued that one of the current active delegates might have such an intention in the future. That’s valid, but your potential “free” solution:

@Entropy

The DAO could achieve the same goals for free and with arguably fewer unknown risks by just delegating a portion of its treasury to worthy delegates in order to increase voter participation.

carries essentially the same risk: relying on one or several of the current active delegates. Even though there are entities with significant reputation and track records, we ideally need to create a system that is trustless. Otherwise, it will not be sustainable in the long term.

With all that in mind, a potential way to mitigate the risk of a “malicious” LST emerging (I strongly dislike this framing, btw, as I view it as competition in the open market) is to introduce certain conditions for receiving staking rewards.

One option is to define a lock-up period after the delegation is removed. This would ensure long-term commitment and act as a disincentive to undermine governance, as the token’s price would likely be heavily impacted if such actions occurred, and the lock would prevent immediate benefits from breaking governance. This is obviously just a preliminary thought and would require a thorough analysis. The downside of this approach is that it reduces liquidity in the system, which could discourage staking and work against the intended goal.

Another alternative is to follow Maker’s new MKR staking model (SKY). The protocol allocates part of its surplus to holders who choose to stake their MKR, but exiting the system incurs an exit fee of 5% to 15% (starting at 5% at launch and increasing to 15% over time). This approach ensures long-term commitment while still allowing participants to exit staking if they need liquidity.

The downside of this alternative is that it undermines the creation of the LST itself. However, it is still a way to prevent an LST from existing at all, whether “aligned” or “misaligned”.

These are just quick ideas that come to mind for exploration. I believe there are many measures that can be implemented to protect the system against attacks.

@Entropy

As it currently stands, we believe that increasing governance participation, making governance more resilient to attacks, and increasing ARB utility throughout DeFi likely have simpler/cheaper solutions that can be applied.

I agree with this statement, but at the same time, pursuing cheaper or simpler solutions carries the risk of ossifying those measures. The bull market brings appreciation of the ARB token, which makes attacks on the DAO more expensive. This is an opportune moment to wait and focus on developing the (kind of?) ideal solution rather than rushing into a suboptimal alternative that could later be difficult to modify.

@Entropy

Additionally, More research into ARB staking, its risks, as well as alternative solutions is needed in general before we are comfortable moving forward with such an important change.

I agree with this, and if the DAO concurs, it should be a topic for the ARDC to evaluate. If I have the privilege of being part of the committee, I would be eager to bring it to the table.

[rafso]

@Entropy

This protocol could, in theory, throw additional incentives at its LST on top of the rewards being provided by the Arbitrum DAO, thus giving it a higher APR than stARB and making it a more attractive place to park idle ARB.

Governance bribery protocols are already possible today without staking. In fact, bribery protocols are already live, such as LobbyFi, mentioned upthread.

If anything, staking gives the DAO tools to respond because the DAO can blacklist unaligned LSTs from receiving staking rewards.

@Entropy

The projected noteworthy cost (15M ARB for 1 year) also begs the question of whether or not this endeavor is worthwhile in the first place.

I am not sure that issuance of ARB to ARB holders is a “cost”. I would describe it as diluting the ARB holders who don’t participate in governance. Any ARB holder is welcome to stake and avoid dilution.

@Entropy

The DAO could achieve the same goals for free and with arguably fewer unknown risks by just delegating a portion of its treasury to worthy delegates in order to increase voter participation

Solutions like this one dramatically increase centralization and capture risk. We have seen that exact scenario play out in other DAOs. I think open, incentive-based systems are much fair and healthier long-term.

@Entropy

Lastly, we want to reiterate our confidence that there most certainly are edge case scenarios we have yet to consider, which could pose a risk to Arbitrum governance through the introduction of staking and an LST. ARB’s primary utility is governance, and we believe that it should remain in its current form until the ecosystem reaches a more mature state since, in our minds, Arbitrum’s main focus should be on attaining a state of sustainable growth over the coming years before value is redistributed to token holders. Additionally, More research into ARB staking, its risks, as well as alternative solutions is needed in general before we are comfortable moving forward with such an important change.

I agree that it’s important to learn about edge cases, known risks and especially unknown risks. However, I don’t believe that we can learn much with further research. I think that path leads to analysis paralysis.

At this point, IMO, the best way to learn is to turn on rewards. The DAO can learn and react from the experiment.

[dennison]

Hello Folks! We want to thank everyone who has participated in the working groups for helping us craft and refine our idea of Staking for the Arbitrum DAO.

We definitely agree there are a few open questions regarding the LST and we’re going to be working hard to implement changes that meet the working groups recommendations.

As requested, we going to continue our work in developing the system in order to present to the DAO a functioning prototype for testing in the new year. Having a tangible system to evaluate will go a long way towards addressing the concerns and hypotheticals edge cases that have been brought up.

A quick notes:

@Entropy

The DAO could achieve the same goals for free and with arguably fewer unknown risks by just delegating a portion of its treasury to worthy delegates in order to increase voter participation.

Kindly, I think this is the sort of solution we should be afraid of. It is a vastly more risky proposition.

The treasury represents unaccountable voting power. The people to whom we give it are required to voluntarily relinquish it. All of the delegates in Arbitrum are worthy delegates, but by distributing to them allocations of power that have no token holders, we have not increased voter participation at all, we have entrenched ourselves without recourse.

Regardless we are excited to continue building out the infrastructure for staking in the Arbitrum DAO. There are a number of other advancements coming down the line that we are excited to share, and I think will go a long way towards getting the ecosystem excited about the oppertunity!

[cp0x]

I agree with both @Entropy 's concerns and the comments to their post that such dangers already exist.

Indeed, nothing prevents them from making an alternative LST now, getting a very large share of votes and in six months getting a blocking number of members of the security committee. After that, nothing will stop them.
And of course, we need to be very careful with this, but it seems to me that LST does not give any advantages to attackers.

On the other hand, without giving any rewards for staking, we most likely will not increase involvement in governance (we need to give at least some points).

[dennison]

Hello folks!

I’m giving an update here, although I’ll most likely open a new thread to start communicating our progress on building out ARB Staking.

Currently the timeline looks like this:

• Starting an Audit Contest (Today!)
• Finish Audits (~end of the year)
• Incorporate Feedback (Early Jan)
• Move towards Deployment without rewards (Late Jan)

We’re going to do some work to communicate with the community more as we build everything out. This is new and exciting and we want to be sure to involve as many folks as possible.

In the meantime, the Audit Contest has gone live!

Here it the Codebase: GitHub - withtally/staker
And here is the Sherlock Contest: Tally ARB Staker Contest - 36,000 USDC