How Arbitrum wants to solve its $1.8bn voter apathy problem

Arbitrum’s decentralised autonomous organisation, the steward of Ethereum’s largest rollup blockchain, is sitting on crypto worth $1.8 billion.

Some of its members think it’s a prime target for attack. But not from hackers.

Members of the digital cooperative are now voting on key changes to Arbitrum’s native token, ARB, to protect its treasury from a different kind of threat: Hostile takeover.

Support for changes has been overwhelming, according to an informal poll that ends Thursday.

“Voter participation in the DAO has been steadily declining,” pseudonymous delegate Frisson wrote in Arbitrum DAO’s governance forum. At the same time, “it is becoming economically attractive for a malicious actor to launch a governance attack on the DAO treasury.”

Like other so-called rollups, Arbitrum is a blockchain within a blockchain, giving users a cheaper way to access Ethereum. It is by far the largest of Ethereum’s rollups, with more than $2.7 billion in its DeFi ecosystem, according to DefiLlama data.

Among the most committed blockchain evangelists, decentralised autonomous organisations, or DAOs, are to business what cryptocurrencies are to traditional, government-issued money: a completely digital, borderless alternative without a single point of failure. Something no government can shut down.

In reality, they have struggled. Few are truly decentralised, with the largest token holders often forming an oligopoly. Some have folded after running afoul of regulators. Members rarely participate. And that apathy has been exploited by committed attackers.

In July, Compound, an Ethereum-based lending protocol, was the target of a $25 million governance attack for precisely these reasons.

Arbitrum is now the latest crypto giant seeking to avoid the same fate.

Make it make cents

The list of major crypto cooperatives attempting to address member apathy includes MakerDAO, the issuer of the DAI stablecoin, and Lido, by far the largest protocol in decentralised finance with more than $25 billion in user deposits, according to data from DefiLlama.

All feature a version of the same basic idea: make it worth members’ time.

Members of Lido recently approved a six-month pilot program that will pay “delegates,” members that vote on others’ behalf, much like politicians in a representative democracy.

Under the controversial leadership of founder Rune Christensen, MakerDAO is pursuing a top-to-bottom revamp called Endgame intended to enliven the lumbering cooperative.

Standard savings account-style options, along with “gamified” alternatives that offer higher reward for higher risk, will give users new ways of earning yield on their tokens, Christensen told DL News last month.

Both will reward users who choose to participate in MakerDAO governance.

The cost of voter apathy

The apathy has real consequences.

Last month, a group calling itself The Golden Boys bought enough of Compound’s governance token to swing votes that came before the cooperative that manages the lending protocol.

The Golden Boys voted to transfer $25 million in tokens held by Compound to their own protocol. They returned the tokens after Compound leaders agreed to share protocol revenue with certain DAO members.

Frisson cited the “attack” in his Arbitrum proposal.

“The potential profit of attacking the DAO treasury is increasing as more ETH accumulates in the treasury,” he wrote.

“A more developed version of this dynamic exists in the [Ethereum Name Service] and Compound DAOs, both of which are actively fighting off governance attacks.”

The Ethereum Name Service lets users turn their crypto addresses — a string of letters and numbers — into simple names and titles. It, too, is managed by a cooperative.

Raising the stakes

A formal vote on the Arbitrum proposal isn’t expected until October.

If it passes, however, people who hold ARB would be able to “stake,” or lock up, their tokens in exchange for a modest annualised reward.

Staked ARB could be used to vote on proposals that come before the cooperative. Arbitrum leaders hope the reward will encourage ARB investors to become active members of the DAO or lend their voting power to delegates.

But there are more lucrative ways to use ARB in DeFi besides locking them up for voting purposes.

To address that opportunity cost, Frisson proposed issuing IOU tokens for staked ARB. Those IOUs, “liquid” staked tokens in crypto parlance, would trade as if they were ARB, making it possible to stake — and, in turn, participate in Arbitrum governance — while also, say, lending the token elsewhere.

As originally written, the proposal would fund staking rewards using half of the fees generated by Arbitrum’s sequencer, which posts the chain’s transactions to Ethereum.

Sceptics questioned whether the proposal created a conflict of interest in which delegates approve measures that would make Arbitrum more expensive, boosting their own profits at the expense of the blockchain’s users.

ARB token’s ‘speculative premium’

Frisson scrapped the idea, and said he would convene a working group to determine when to begin distributing staking rewards, as well as their source.

Another critic said it could, paradoxically, tank the value of ARB.

“We introduce the risk of people valuing ARB relative to its revenue generation,” they said.

“If we do see price come down as a result of this proposal, it could actually make it cheaper to conduct a governance attack while also hurting the value of the DAO treasury.”

Ben DiFrancesco, CEO of ScopeLift — the firm that would help design the new staking feature — pushed back.

“What’s implied is that the current value of the ARB token enjoys a speculative premium that might erode if investors have ‘real’ numbers to do calculations on,” he said.

“Right now the incentives to hold ARB are purely speculative. As such, they are also fickle.”

Aleks Gilbert is DL News’ New York-based DeFi correspondent. You can contact him at aleks@dlnews.com.