Arbitrum Co-Founder Addresses DAO Vote Fiasco, Waves Off Allegations of ‘Decentralization Theater’

AUSTIN, Texas — What is real “decentralization?” Though it may be the biggest buzzword in crypto, ambiguity around the definition of decentralization – heralded as a core use-case for blockchain technology – remains constant fuel for controversy.

The most-hyped event in the cryptosphere of the past two months was the ARB airdrop, when Arbitrum – a layer 2 rollup that allows users to transact on the Ethereum blockchain with lower fees – distributed its long-awaited token to early users, builders and investors.

Arbitrum’s creators said they built and distributed the ARB token as a way of decentralizing control of the network, handing the reins from Offchain Labs, the company that originally built Arbitrum, to the newly created Arbitrum DAO – a group comprised of newly-minted ARB token-holders.

Read full coverage of Consensus 2023 here.

Abitrum’s decentralization narrative came under fire soon after the ARB airdrop, however, when the decentralized autonomous organization (DAO) moved nearly $1 billion worth of its new tokens to the Arbitrum Foundation – an organization established to serve as a kind of formally registered steward of the Arbitrum DAO – before a formal vote on what to do with the funds had run its full course.

In a conversation with CoinDesk reporter Margaux Nijkerk at the Consensus 2023 conference on Thursday, Offchain Labs CEO Stephen Goldfeder referred to the incident – which sparked outrage in the Arbitrum community – as an “unfortunate miscommunication.”

In an explanation mirroring one provided by the Arbitrum Foundation earlier this month, Goldfeder told the audience at Consensus that a “ratification” vote on what to do with the funds – which was ongoing when the funds were transferred – sowed unnecessary confusion.

He hedged his response, however, by drawing a line between his company, Offchain Labs, and the new Arbitrum Foundation: “I can't speak to what the Foundation did, but leading up to creating this, that was the thought process at least,” Goldfeder said.

He also said the vote fiasco resulted in a pledge from the Foundation that it will give regular transparency reports regarding its operations and the use of its treasury.

“I as a community member think the place where this ended is even better,” said the Arbitrum co-founder. “The community seems happy and I also think, you know, transparency and accountability is a great thing.”

Although Offchain Labs is, formally speaking, distinct from the Arbitrum Foundation, it would seem reasonable to question if Labs – which built Arbitrum – might be pulling strings behind the scenes. If there was any takeaway from Goldeder’s address at Consensus, it was his acute awareness that this relationship between the two organizations – or lack thereof – remains top of mind for people trying to suss out whether Arbitrum is, in fact, decentralized.

Asked explicitly by Nijkerk whether Offchain Labs and the Arbitrum Foundation are linked, Goldfeder stressed that they were not. “Who controls the Arbitrum Foundation? It’s really actually the DAO and the token holders,” adding later that “the important thing I’d focus on is that the DAO is the most decentralized DAO that exists.”

When ARB launched, however, 44% of its initial token distribution went to Offchain Labs investors and employees. Asked by Nijkerk whether this large percentage of insider tokens undermines Arbitrum’s decentralization narrative, Goldfeder responded that “principle number one was there always has to be a majority in the hands of the community.”

“The counterside” of 44% of tokens going to insiders, according to Goldfeder, “is 56% were given to the community in different capacities: the airdrop, the foundation, the DAO, etcetera.”

Goldfeder added that all tokens granted to insiders were subjected to “four-year transfer restrictions” to prevent any kind of mass sell-off, “with nothing unlocking before one year.” He said that Offchain Labs employees are not allowed to vote on Arbitrum DAO governance proposals, though they are allowed to delegate their tokens to like-minded voters.

Repeatedly, Goldfeder placed the foundation at arm's length. “The foundation has a set of excellent people,” he said at one point, adding that “Offchain Labs gave them a lot of technical guidance as they were setting up, in servicing their goals,” but remains a distinct entity.

“There's a real community,” he said towards the end of the Consensus session. “When we say it's controlled by the community, the community is not me. It's not Offchain Labs. There's a massive community with many different interests and companies and protocols and projects that care deeply about this.”