Arbitrum proposal to return $1 billion in governance tokens slated to fail (and it's not even close)

With only one day remaining for governance votes to be cast, Arbitrum Improvement Proposal 1.05 — which aims to return 700 million ARB tokens "unjustly allocated to the Foundation from the DAO" — is slated to fail by an overwhelming majority.

As of this writing, 113 million Arbitrum governance tokens — representing more than 83% of the total vote — have voted against the proposal. 20 million ARB tokens have voted for the proposal, while 2.2 million have abstained.

What is Arbitrum Improvement Proposal 1.05?

Titled "AIP 1.05: Return 700M $ARB to the DAO Treasury [REAL]," the Arbitrum governance proposal claims that the pre-emptive and unapproved allocation of 700 million ARB tokens — worth more than $1 billion — "was a clear overreach of the DAO's power of treasury resources."

The drama started during the first weekend in April, when the Arbitrum Foundation backtracked on a key governance proposal, AIP-1, that controversially planned to send 750 million ARB tokens to itself — which it claimed would be used to fund investment initiatives built using Arbitrum's technology.

The proposal seemingly went ahead without the approval of token holders — the decentralized autonomous organization that theoretically governs Arbitrum — who voted overwhelmingly against the proposal.

AIP 1.05 claims it "is a symbolic gesture to demonstrate that the governance holders ultimately control the DAO, not the Arbitrum service provider nor the Foundation."

Why is AIP-1.05 failing?

Prominent token holders voting against AIP-1.05 include "0x0eB5," olimpio.eth, 0xBbE9, galxe.arb, chainlinkgod.eth and blockworksres.eth — all of which have voted with millions of ARB tokens.

Possible reasons for accounts voting against the proposal include a belief that small voters may be solely interested in maximizing the price of Arbitrum's governance token. At the same time, large holders — primarily delegates — are more focused on long-term sustainability and the Arbitrum Foundation's ability to distribute tokens.

Others may view the proposed forced buyback as an "extremist approach" that is a call for attention rather than a realistic option.

Furthermore, others claim AIP-1.1 already addresses the issue of the problematic funds, as the Arbitrum Foundation plans to send the tokens to a smart contract with vesting — which the DAO can modify. Because of this, AIP-1.05 could conceivably overcomplicate the issue.

Setting an example for optimistic rollups' governance

Whichever side one is on, one thing is sure: DAO governance, as a whole, will remain a hot topic for the foreseeable future.

"I think that this is pretty impactful," Arnold Toh, research analyst at The Block, said, explaining: "The fact that there is still a hotly debated matter shows the ramifications of Arbitrum's unsolicited actions will continue to pervade their governance for the foreseeable future."

"Arbitrum is the largest Optimistic Rollup — both in total value locked and in valuation — meaning that how its governance pans out will likely set an example for many other rollup communities ahead," Toh added.

The price of Arbitrum's governance token is up 24.4% over the past 24 hours. It is currently trading at more than $1.50 per token.

The price of Arbitrum's governance token has increased substantially over the past week. Source: TradingView

Updated with additional information about AIP-1.1.