Arbitrum, the top Ethereum Layer-2 scaling solution by TVL, is at an inflection point. The Arbitrum DAO is at a tipping point. With a crashing token price, voter apathy and fears of centralized control, it is now scrambling to change its governance structure. While these new changes are well thought out to increase participation, they come with new risks that could set off even more risks to the ecosystem. Pulling Token takes a deeper look, comparing what scamming could accomplish with what it might be hiding under the surface.

The Proposed Governance Overhaul

At the heart of these proposed changes is raising the submission and adoption thresholds for proposals to unprecedented levels. These changes are intended to make it easier for more people to participate, making it more inclusive and boosting community participation. Here’s a breakdown of the key elements:

  • Proposal Thresholds:
    • Constitutional AIPs: Reduced to 5% of votable tokens.
    • Non-Constitutional AIPs: Reduced to 3% of votable tokens.
  • Passing Thresholds:
    • Requires more votes in favor than against.
    • Approval necessitates that more than 50% of the votable tokens that participated in the vote must be in favor of the proposal.
  • Call for Votes:
    • Initiated by ARB token holders who hold (or represent) at least 1,000,000 votable tokens.

The intention is clear: to democratize Arbitrum's governance and ensure that decisions reflect the broader community's will. Increased participation promises several potential advantages. According to the proposal, greater involvement in Arbitrum's governance model will foster more decentralized decision-making, empowering the community to exert greater influence over the protocol's trajectory. Thousands of other ordinary people now have a stake in governance. With everyone’s best interest in mind, this diverse group will make the protocol more robust to security vulnerabilities and performance bottlenecks.

The proposal goes onto describe how increasing user involvement in governance increases the transparency and accountability of decision-making processes. This important shift lessens the threat of top down control and encourages a more localized, community driven process. A broader inclusion of stakeholder perspectives is expected to lead to more equitable, informed, and holistic decision-making results. Arbitrum’s governance framework is designed to ensure progressive decentralization. Over time, it cedes governance of the protocol to the community, using the growing engagement of the community as one of the main factors pushing this transition forward.

Risks and Challenges

These changes come with risks, as well. Reducing the burden to submit a proposal might welcome gaming the system and spam. This deluge of low-quality or potentially malicious proposals could easily besiege the DAO.

The resulting concentration of voting power — often among the few large token holders — is a big one. Even with this newfound uptick in participation, whales would still disproportionately affect outcomes, possibly neutralizing the intended advantages of the governance overhaul.

Token Performance and Market Sentiment

The timing of this governance overhaul is even more sensitive, considering the current state of the $ARB token. ARB has recently made a comeback, having risen 28% from its April all-time low. Now, it is hitting stiff resistance at $0.36 since many former investors are sitting on unrealized losses of considerable magnitude.

Technical analysis paints a concerning picture. ARB has been trading in a descending triangle pattern since January 18, indicating strong ongoing bearish momentum. This pattern indicates that breaking through this resistance will not be simple. Therefore, bringing about a long-term price recovery should prove difficult in the near term.

Factors Contributing to Downward Pressure

These three factors are colluding to create a challenging environment for Arbitrum. So in many ways, the success or failure of this governance revamp has become the most important variable.

  • High Selling Pressure: As Arbitrum's price nears certain levels, it may encounter intense selling pressure, hindering further upward movement.
  • Token Unlocks: Arbitrum has already unlocked approximately 68% of its total token supply, releasing 479,068 new tokens daily. This constant influx of tokens into the market can exacerbate downward pressure on the price.
  • Bearish Technical Indicators: The Money Flow Index (MFI) is trending downward, and the token has fallen below its 50-day moving average, signaling the potential for further price declines.

To mitigate the risks and maximize the potential benefits of the governance changes, Arbitrum needs to actively incentivize engagement and address the issue of voter apathy. Here are some potential strategies:

Strategies for Incentivizing Engagement

By adopting these strategies, they’ll create a more inclusive and resilient governance ecosystem. They will make sure that the Arbitrum DAO is the true voice of its community.

  • Quadratic Voting and Hybrid Models: Implementing advanced voting systems can counterbalance the influence of large token holders and promote fairness.
  • Next-Generation Voting Mechanisms: Exploring and integrating new voting mechanisms can prevent manipulation and encourage broader participation.
  • Decentralized Proposals: Allowing any community member with a sufficient number of tokens to submit proposals can reduce the risk of centralized control.
  • Proposal and Voting Process Transparency: Ensuring transparency in the proposal and voting process can clarify how proposals are submitted, voted on, and implemented.
  • Voter Apathy and Engagement Strategies: Implementing strategies to increase voter engagement and participation, such as education and outreach programs, is essential.

Arbitrum’s suggested governance changes are an admirable first effort at correcting these known challenges of voter apathy and centralized control. The success of this revamp largely depends on how well it is implemented and whether we take a proactive approach to avoid potential pitfalls. Pulling Token will be following this situation very closely. We’ll provide some of the best and most incisive analysis of the evolving dynamics of Arbitrum’s governance and tokenomics.

Arbitrum's proposed governance changes represent a bold attempt to address the challenges of voter apathy and centralized control. However, the success of this revamp hinges on careful implementation and a proactive approach to mitigating potential risks. Pulling Token will continue to monitor the situation, providing sharp insights into the evolving dynamics of Arbitrum's governance and token performance.