Arbitrum Foundation Sold ARB Tokens Ahead of 'Ratification' Vote; ARB Falls

The Arbitrum Foundation began selling ARB tokens for stablecoins even before its governance community of tokenholders had "ratified" the organization's nearly $1 billion budget, according to a blog post from one employee early Sunday.

The price of ARB fell after CoinDesk's report of the post, with the token falling to $1.17, down 9% in the last 24 hours.

According to Patrick McCorry, the Arbitrum Foundation – a centralized organization responsible for promoting Arbitrum, a faster and cheaper blockchain for transacting on Ethereum – thought of the omnibus governance package Arbitrum Improvement Proposal (AIP-1) as a "ratification" of decisions it had already made, such as receiving 7.5% of all ARB tokens.

To that end, the Foundation "has begun to use these tokens in the interest of the [decentralized autonomous organization], including conversion of some funds into stablecoins for operational purposes," McCorry said in the Foundation's first official comment on a mounting governance crisis.

The response adds new uncertainties to Arbitrum's first attempt at community governance. Just one week ago, Arbitrum airdropped ARB governance tokens to hundreds of thousands of wallets of as a way of empowering owners in critical decisions. The first of those was seemingly AIP-1, an omnibus package that covered everything from governance and emergency powers to funding and grants.

In a followup tweet, the Foundation said it loaned 40 million ARB tokens to "a sophisticated actor in the financial markets space," referring to the market maker Wintermute. It sold an additional 10 million tokens for “fiat” to cover operations. Arbitrum promised to "share more information soon" about the situation.

“The point of AIP-1 was to inform the community of all of the decisions that were made in advance,” McCorry said, pushing back at perceptions that token holders had a say in the matter.

McCorry’s post offered Arbitrum’s first official response to a debacle that exploded Friday after governance hawks called out the Arbitrum Foundation’s “special grants” program. According to the proposal, the Foundation is getting 750 million ARB tokens (around $1 billion) to spend without token holders’ approval.

Last week, Arbitrum began airdropping over 1 billion ARB tokens to nearly 300,000 wallets as part of its effort to share power over the network with its users, a common trope in crypto communities. Holders of the ARB token are considered part of ArbitrumDAO, the group that votes on proposals such as AIP-1.

But AIP-1 wasn’t much of a vote at all, according to McCorry’s explanation – at least, not when it came to the budget requests. He said the Arbitrum Foundation has already started spending the tokens it was apparently earmarked to get.

McCorry's post may serve to confound what has turned into an early crisis for Arbitrum governance. Votes in favor of “ratification” were winning until the past few hours. The tide, however, has now shifted strongly toward rejection, raising questions of what will happen if AIP-1 is defeated.

McCorry said there’s a “chicken and egg problem” in setting up decentralized governance structures. In the case of Arbitrum, “certain parameters need to be decided” ahead of time, including the structure of a “security council” that wields emergency powers, deciding voting mechanics, and of course, the funding.

Whereas AIP-1 framed the Foundation’s power to issue “special grants” without community votes as an effort to avoid “voter fatigue,” McCorry said these blank-check powers are “fundamental” to the ecosystem’s competitive edge. He referred to recent efforts by Polygon and other blockchain companies to land deals with the likes of Starbucks, partnerships that happened behind closed doors.

“While it would be incredible if all traditional companies agreed to do everything on-chain, this is not realistically going to happen,” he said.

CORRECTION (April 2, 2023, 13:50 UTC): Corrects spelling of Patrick McCorry's name.

UPDATE (April 2, 2023, 15:44 UTC): Adds ARB movement.