Arbitrum made a number of important announcements on March 16, 2023, including the formation of the Arbitrum Foundation, the implementation of decentralized autonomous organization (DAO) governance for the Arbitrum One and Arbitrum Nova networks, and the launch of the eagerly awaited Arbitrum governance token (ARB). The publication of the Arbitrum DAO Constitution, which was first produced by Offchain Labs, provides clarity about the guiding principles, organizational architecture, and processes. The constitution will be used to manage the DAO Governance contracts, the contracts governing Arbitrum One and Arbitrum Nova, as well as the DAO Treasury.

Arbitrum is a collection of scaling technologies that were created by Offchain Labs and are a part of the Ethereum ecosystem. Arbitrum One, an optimistic roll-up protocol, and Arbitrum Nova, an Arbitrum AnyTrust Chain, are examples of these solutions. These networks intend to allow transactions that are both quicker and less expensive than those possible on the Ethereum mainnet.

Airdrop

The much anticipated ARB token will be dispersed to early investors, key team members, native DAOs, and community members. The airdrop will be sent to everyone who met the requirements to be considered an "Arbitrum user" prior to the snapshot that was taken on February 6, 2022. At around 7:33 a.m. (GMT), on Thursday, March 23, 2023, you would be able to claim your airdrops, which were available in block #16890400.

The point-based mechanism that awards ARB to users in proportion to their activity on Arbitrum One and Arbitrum Nova is what determines whether or not a user is eligible for the airdrop. Users have the potential to amass a maximum of 15 points, with one point awarded for each successfully completed action item. The conditions for participation in the airdrop included a variety of activities that may have been taken on either the Arbitrum One or Arbitrum Nova chains.

The majority of the rating criteria concentrated on Arbitrum One, most likely in an effort to encourage early adopters. Nevertheless, new criteria also included users of Arbitrum Nova, awarding them a maximum of four points or a single additional point in addition to the benefits they received for using Arbitrum One. In addition, points accumulated on Arbitrum One prior to the launch of Arbitrum Nitro are valued at twice as much as they were previously.

Token Allocation

The maximum rate of yearly inflation for the ARB token issued by Arbitrum is set at 2%, and the total quantity of ARB tokens is 10 billion. One of the distinctive features of the airdrop for Arbitrum is that it was distributed to the Protocol Guild, which is a consortium of 130 Ethereum developers. As a result of this, Arbitrum made the decision to not only reward DAOs that are a part of its ecosystem but also contributions to Ethereum L1. While Optimism was working on a strategy to give back to the ecosystem via the provision of backdated financing for public goods, Arbitrum decided to do it through the distribution of airdrops.

The following describes the distribution of ARB:

Source: Arbitrum Foundation

When AIP-1 is finally confirmed, the DAO treasury will be given 4.3 billion ARB, but the actual amount of tokens under DAO control will be closer to 3.5 billion. The proposal details an urgent plan to establish an "Administrative Budget Wallet" that will be managed by the Arbitrum Foundation and will be funded with 750 million ARB, which represents 7.5% of the entire supply. It is anticipated that the wallet will be put to use in the distribution of special awards, the reimbursement of the overall setup expenses incurred by the Foundation (which totaled $3.5 million), and the funding of continuing administrative and operational expenditures.

The Governing Structure

The governance structure of the Arbitrum DAO is made up of multiple different entities, each with a distinct amount of power.

Arbitrum DAO

ARB token holders use the Arbitrum governance contracts to exercise control over the following assets, which gives them governance authority over the Arbitrum DAO.

The Arbitrum DAO Treasury, the contracts and parameters of the Arbitrum One, the contracts and parameters of the Arbitrum Nova, and the Arbitrum governance contracts.

Arbitrum token holders have the ability to make on-chain proposals, vote on those proposals, and put those proposals into action via the use of Arbitrum Improvement Proposals (AIPs). AIPs are responsible for a variety of tasks, including the modification of parameters, the addition of new rights and chains within the scope of the DAO contract, the distribution of funds, and the provision of information or guidance to both the community and the DAO.

Arbitrum Foundation

The Arbitrum Foundation is a firm based in the Cayman Islands that is required to abide by the guidelines outlined in the Arbitrum Constitution. It provides services to the community of users of the Arbitrum DAO in order to encourage the expansion and growth of the Arbitrum ecosystem. The Arbitrum DAO serves as the Foundation's governing body. Since the AIP-1 was passed, the DAO now has the authority to remove or elect directors for the Arbitrum Foundation at any moment, in addition to adjusting the total number of directors.

The Foundation is primarily responsible for managing the fiduciary obligations of AIPs and making certain that AIPs do not violate the Amended and Restated Memorandum of Association of the Arbitrum Foundation, the Arbitrum Constitution, or breaking any legal contracts or agreements.

The Foundation also has the authority to hand out funds by making use of the Special Grants procedure. Special Grants is an on-chain, permissioned application process that enables the Arbitrum Foundation to issue grants from the Administrative Budget Wallet without first going through the Arbitrum Improvement Proposal (AIP) process. This is made possible by the Special Grants application being on-chain and having permission.

The Security Council

The Security Council is in charge of supervising an elected 12-person multi-sig wallet that has the authority to take both emergency and routine measures. The Security Council is permitted to serve both as a normal operating council and as a fallback in the event of an emergency.

With consent from nine of the twelve members, the Security Council is able to take emergency action. After that, it would be able to carry out any software update or other action to safeguard the availability, integrity, or secrecy of an Arbitrum DAO chain. Upon the completion of an emergency measure, the Council is required to produce a report detailing all aspects of transparency.

It is also able to carry out a non-emergency action with the consent of seven out of twelve people in order to carry out normal software updates, maintenance, and parameter changes in a scenario that is not an emergency. Because of these activities, the DAO is able to skip the voting phases of an AIP and go directly to the L2 waiting period.

The twelve seats on the Security Council are divided into two groups, each consisting of six members and being elected every year on March 15 and September 15, respectively. Every member receives a monthly compensation of $5,000 worth of ARB tokens. The twelve first candidates for seats on the Security Council are outlined in AIP-1.

A vote that is open to all holders of ARB tokens will be used by the DAO every six months to conduct Security Elections. There is a possibility that members of the Security Council might be removed from their positions prior to the expiration of their terms at any time, provided that there is a majority vote in support of removal and a quorum of 10%.

Data Availability Committee (DAC)

Arbitrum Nova is an AnyTrust chain, and the DAC is responsible for managing the data availability on that chain. The ability of the DAC to retain data and give it when it is requested is essential to the AnyTrust paradigm. Members of the DAC committee may be nominated or removed from their positions by the use of a constitutional Procedure, or through an emergency action taken by the Security Council in the event that a committee member resigns without being replaced.

The Process of Governing

Under the heading AIP-1, the first governance procedure for the Arbitrum DAO has been made public and can be seen on the DAO forum. To get things started, the DAO will feature three distinct governance mechanisms for the various sorts of proposals that may be submitted: AIPs, Special Grants, and Elections for the Security Council.

Whether or not the AIP is judged to be Constitutional will have an effect on the governance process and how it is carried out. In stages one through three, the procedure for approving AIPs will be the same for all AIPs; however, Constitutional AIPs will be subject to extended waiting periods after the on-chain vote.

Source: Arbitrum Foundation

Phase 1: Initializing (temperature check)

Following the AIP format, new AIPs first take the form of a conversation that is submitted to the Arbitrum forum. At least one week's worth of conversation should be had in the forum about the proposal. Every AIP has to have a label indicating if it is constitutional or not constitutional. There are important distinctions to be made between these several sorts of proposals:

The timeline for the implementation of the constitutional AIPs is 34 days.

Procedure: Alters the wording of the Arbitrum Constitution or the protocols it outlines (e.g., AIP 1).

The term "Software Update" refers to the process of installing or modifying software on any chain.

Core: Performs any operation on any chain that is dependent on obtaining permission from the "chain owner."

Authorizes the creation of a new chain that has been reviewed and accepted by the Arbitrum DAO. This encompasses Governed Chains as well as Non-Governed Chains in its scope.

The timetable for putting non-constitutional AIPs into effect is 21 days.

Funding: Makes requests for funding, grants, or other types of proposals for how to spend or distribute cash from the DAO treasury that is held by the Arbitrum Foundation.

Following at least a week of deliberation, the AIP ought to be put to an off-chain vote in the Arbitrum Snapshot Space. For a Snapshot poll to be created, the author has to own at least 0.01% of all "votable" tokens in circulation. After a week, the results of the Snapshot poll are determined by a vote with a simple majority and there is no quorum. To participate in voting, members need to either own the ARB token or have it delegated to them.

Phase 2: Formal AIP and Call for Vote

AIPs that pass the off-chain temperature check become formal AIPs that are ready for an on-chain vote. AIPs that do not pass the temperature check are not constitutional. The Arbitrum Improvement Proposal (AIP) is presented using governance contracts on Arbitrum One, and members of the DAO may vote on it through the Tally site of the Arbitrum DAO.

In order to establish a proposal, the proposer's voting power must be more than 5 million ARB. Upon the completion of a three-day waiting period following the posting of a vote on the blockchain by the proposer, the vote will then become active. Before the actual allocation of ballots, this waiting time gives interested parties the opportunity to continue discussing the idea and to cast their votes. Snapshot.

Phase 3: On-Chain DAO Voting

After a waiting period of three days, a voter distribution Snapshot will be shown, which will include all voters along with their respective voting power, and the AIP vote will then commence. The voting session typically lasts for a total of 14 days. On the other hand, if certain voting thresholds are met during the final two days of the voting period, then the voting period will be extended by another two days.

In order for an AIP to successfully pass on-chain, it has to obtain a greater number of votes "in favor" than votes "against," and it also needs to satisfy the appropriate voting threshold, which differs depending on the kind of AIP being considered. A constitutional AIP must obtain "in favor" votes equal to at least 5% of all votable tokens, whereas a non-constitutional AIP must earn "in favor" votes equal to at least 3% of all votable tokens.

In the event that there is satisfactory voter participation, non-constitutional AIPs will be able to skip Phases 4-6 and go directly to Phase 7 for implementation. Since Constitutional AIPs take into account network upgrades and other developments that might have an impact on users' finances, an extra waiting time is required before these AIPs can be put into effect.

Phase 4: Waiting Period for L2 Applicants (Exclusively for Constitutional AIPs)

After the end of the first waiting time for a proposal, there will be a second waiting period. This extra time is being provided so that those who disagree with the idea have the opportunity to make adjustments before it is implemented. If there are no problems discovered during the three-day waiting period, the AIP will proceed to the next phase.

Phase 5: Communication from L2-to-L1(Only for Constitutional AIPs)

After an interval of waiting time of three days, a message is sent from L2 to L1 indicating that the AIP was successful. Anybody may redeem it to finish Phase 5 as soon as the message has been completed on L1, which takes at least a week. A record of the modifications made to the Ethereum blockchain is created once the results of the vote are signaled on layer 1.

Phase 6: Waiting Time for L1 Certification — Constitutional AIPs Only in

There is an extra waiting time of three days after the message has been recorded on the Ethereum mainnet. This last waiting period assures that any transactions that are still to be completed on mainnet will have sufficient time to do so before the AIP is implemented, hence preventing any unfavorable implications from occurring.

Phase 7: Implementation, including both constitutional and non-constitutional AIPs

The implementation of the described adjustments in the AIP process constitutes the last step of the overall AIP process. Either directly on the Ethereum mainnet or indirectly via a transaction that is transmitted from L1 to one or more of the L2 chains that are overseen by the Arbitrum DAO, AIPs may be implemented.

The Arbitrum Governor contracts

Source: Github

Arbitrum Governance is made up of a large number of individualized governance contracts, Gnosis Safes, and Arbitrum system contracts that are distributed throughout Arbitrum One, Arbitrum Nova, and the Ethereum Mainnet.

The Non-Constitutional Governor Contract, the Constitutional Governor Contract, and the Security Council are the three primary actors involved in the on-chain governance system. Each Governor Contract is a derivation of the OpenZeppelin Governance Framework and resides separately on the Arbitrum One rollup. These contracts also have ownership rights over two separate timelock contracts.

The Non-Constitutional Governor Contract only has authority over proposals pertaining to the treasury, and it manages the contract ownership of assets owned by the DAO as well as the ARB held by the DAO. Both the Constitutional Governor Contract and the Security Council have the ability to submit recommendations directly to the L2 Timelock (3 days) contract, which then forwards those suggestions to the L1 Timelock on the Ethereum Mainnet.

The L1 Timelock continues to exercise full authority over the Upgrade Executor for the Arbitrum One Governor Contracts, the ArbOwner contracts on Arbitrum One and Arbitrum Nova, as well as all Arbitrum One and Arbitrum Nova Contracts on the Ethereum Mainnet. The L1 Timelock has an additional execution capability in the form of a retriable ticket. This enables the L1 timelock to execute proposals via the Arbitrum One and Arbitrum Nove Upgrade Executer.

In addition to this, the Security Council has a substantial amount of ability to reject proposals on the L1 and L2 3-day Timelocks and to submit modifications directly to the L2 3-day Timelock, thereby sidestepping the DAO governance process. In spite of the fact that multisigs of this sort provide some measure of protection against malicious attacks in the event that the governance of the DAO is undermined, the fact that they do so also makes them a critical weakness, given the prospect of cartelization among the twelve signers.

Optimism and Arbitrum Governance Comparison

The introduction of the Arbitrum DAO signals the second significant rollup to deploy governance for Ethereum. Optimism was the first layer-2 protocol to issue a governance token and publicly disclose its decentralization plan. Optimism also made history by becoming the first protocol to release a governance token.

Both the Optimism Collective and the Arbitrum DAO use different approaches to the distribution of tokens, which results in some noticeable discrepancies. The most significant difference between the two platforms' token distribution strategies is that Optimism places a greater priority on retroactive public goods funding, whilst Arbitrum gives a smaller percentage of tokens to user airdrops and more tokens to Core Team members and advisers. While Optimism's bi-cameral method of governance is novel, the drawback to this strategy is that it concentrates a disproportionately high number of OP tokens in the hands of a small number of decision-makers. In comparison, the distribution of Arbitrum sent roughly twice as many tokens into the hands of tokenholders, with over half of all tokens issued going to the treasury of the DAO.

The release strategy for Arbitrum also includes a few notable deviations from Optimism's debut, the most notable of which is its unwavering commitment to on-chain governance from the very beginning. The present Decentralized Autonomous Organization (DAO) still depends on the Optimism Foundation to carry out the DAO's demands, despite the fact that Optimism is making more strides toward complete on-chain governance. Arbitrum, on the other hand, is capable of self-execution right out of the box and does not depend on Offchain Labs or the Arbitrum Foundation to carry out decisions.

As Optimism continues to decentralize, it will be necessary for it to set up a number of preventative measures. For instance, the Security Council of the Arbitrum blockchain is a great illustration of how on-chain governance measures may serve as essential security points. Almost all essential contracts are subject, at least partially, to some degree of oversight by the Security Council.

On the other hand, Optimism governance and Arbitrum governance have an emphasis in common on maintaining delegates in their roles as guardians of the protocol. Optimism already has a robust ecosystem for delegates and has one of the most user-friendly user interfaces (UIs) available for delegation across the board. A similar attitude was voiced by the Offchain Labs team during a recent Twitter Space. The Offchain Labs team said that they have urged all core teams and advisers to refrain from voting directly on proposals and instead delegate their holdings to members of the community.

Conclusion

Another enormous stride forward has been taken toward the decentralization of Layer-2 scaling solutions with the establishment of the Arbitrum Decentralized Autonomous Organization (DAO) and the ARB token. In addition, the L2 governance module that is included with the Arbitrum governance represents a significant advancement in terms of governance.

While the token allocation is similar to that of Optimism, Arbitrum places a greater number of tokens directly under the hands of DAO voters.

The following few days will mark the beginning of the application process for receiving delegations by delegates. With the introduction of the token, we will have additional information about the governance environment at our disposal. After the first distribution of tokens, the first thing that the DAO will do is confirm the establishment of the Arbitrum Foundation, the Arbitrum DAO Constitution, the Security and Data Availability Councils, financing for the DAO treasury, and the AIP procedure as defined in AIP-1.

When compared with the outcomes of Optimism's governance rollout, the results of Arbitrum's governance rollout will provide future Layer-2 solutions with useful insights that will help them roll out their governance models.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

Inside Arbitrum DAO: Arbitrum governance