Arbitrum Foundation Faces Backlash After Selling ARB Tokens Before Governance Vote

The organization behind the popular Ethereum scaling solution Arbitrum, the Arbitrum Foundation, has been accused of selling ARB tokens for stablecoins before its governance community had approved its budget and grantmaking powers.

What happened?

According to a blog post on April 1 by the Arbitrum Foundation, the company sold 10 million ARB tokens for USDC and DAI in order to pay for its operations and grants for the following year. The sale took place through an over-the-counter (OTC) transaction with a “reputable” market maker, and the foundation then received the proceeds in a multisig wallet.

But the token sale happened before ARB token holders could vote on a March 31 proposal to approve the foundation’s budget and governance structure. The proposal asked for a blank check authorization for the foundation to spend up to 1 billion ARB tokens (worth about $1 billion at current prices) on grants, salaries, legal fees, marketing, and other expenses.

The proposal also stated that the foundation would not sell any ARB tokens until after the ratification vote, which was scheduled to end on April 7. However, the foundation claimed that it had already sold the tokens before submitting the proposal and that it was not bound by its own promise.

Why does it matter?

Some people who owned ARB tokens felt betrayed and lied to by the foundation because of the token sale. They argued that the foundation violated its own rules and acted in bad faith by selling tokens before getting approval from the community. They also questioned the transparency and accountability of the foundation, which did not disclose the details of the OTC deal or the identity of the market maker.

Some token holders also expressed concern that the foundation had too much power and influence over the network and that it could use its large token supply to manipulate the market or vote in its own favor. They demanded that the foundation cancel or reverse the token sale, and submit a new proposal with more reasonable and specific budget requests.

The backlash led to a sharp drop in ARB’s price, which fell from $1.05 on March 31 to $0.76 on April 2, according to CoinGecko. The token has since recovered slightly to $0.82 at the time of writing.

What’s next?

In response to the criticism, the Arbitrum Foundation wrote another blog post on April 2 in which they said they were sorry for causing “confusion” and “frustration” with their actions. The foundation said that it would not sell any more ARB tokens in the “near-term” and that it would submit a new proposal with more details and clarity on its budget and governance plans.

The foundation also said that it would conduct a new vote on its proposal and that it would respect the outcome of the vote regardless of whether it was in favor of or against its request. The foundation added that it was committed to decentralizing Arbitrum and empowering its community, and that it welcomed feedback and suggestions from ARB token holders.

The new vote is expected to start soon and last for seven days. The outcome of the vote will determine whether the Arbitrum Foundation will be able to continue its operations and grantmaking activities as planned or whether it will face more resistance and scrutiny from its community.