Arbitrum DAO: How is the Layer 2 Innovating on Decentralized Governance?

On March 16, Offchain Labs, the team behind the Arbitrum Layer 2, announced the release of the ARB token and the Arbitrum DAO. Previously, we covered the token airdrop and what it could mean for the market. Today, let’s dive deep into their governance structure, its unique features, and how it could influence DAO development in the future.

For context, Arbitrum is a Layer 2 scaling solution for Ethereum built by Offchain Labs. As a Layer 2 rollup, Arbitrum executes blockchain transactions off-chain and uses the Ethereum blockchain to store the transaction data. This creates a system with the same security as Ethereum with significantly greater scalability since on-chain execution can be expensive. Bringing it off-chain allows more transactions to be packed into an Ethereum block. Since its release in 2021, Arbitrum has been able to dominate the Layer 2 market share and currently has $3.8 billion in TVL and 55% of the market share. 

Their token release and DAO creation mark an important milestone for Arbitrum: the decentralization of its governance. Before now, the team behind Arbitrum had a lot of control over the direction and decisions related to the Arbitrum ecosystem, including pausing transactions. This is because Layer 2s are implemented through smart contracts on the Ethereum blockchain, and thus have a greater level of centralization/required governance than a blockchain protocol, which implements upgrades based on consensus from nodes. 

The ARB token will act as the governance vehicle for the Arbitrum ecosystem and DAO, including the more popular Arbitrum One solution and Arbitrum Nova, the faster albeit more centralized solution for social and gaming applications. The Arbitrum DAO will be governed by the Constitution, a document outlining basic principles and the execution process for protocol changes. Anyone who holds ARB can participate in the governance process or delegate their tokens to someone else. 

Interestingly enough, the Constitution specifies paths for both on-chain and off-chain initiatives. All on-chain decisions are implemented through a self-executing governance process, meaning that any on-chain decision is automatically implemented without intervention from a team. This makes the DAO significantly more decentralized than others, as its on-chain activities do not require a team or entity to implement them. Off-chain decisions will require assistance from a core team, as expected.

One of the more interesting parts of the Arbitrum DAO is its Security Council. The council is a group of 12 people chosen as the last line of defense for the solutions and can make emergency decisions quickly without going through the formal governance process. If an exploit is found that needs to be patched urgently, the Security Council can make any change they desire as long as they have a 9-of-12 quorum. Additionally, the Security Council must ratify any on-chain vote with at least seven in favor. The council members are chosen by the DAO, serve one-year terms, and can be removed from their position if they are found not to be acting in accordance with the Constitution. While some may argue that the Security Council adds an element of centralization to the DAO since seven people have veto power over any on-chain proposal and nine can make any change they want, it certainly increases the security and stability of Arbitrum, and the tradeoff may be worth it. 

Other miscellaneous features were announced by Arbitrum, including the DAOs ability to vote to create new L2s governed by the DAO. Additionally, Offchain released Arbitrum Orbit, a framework for creating permissionless L3s that could inherit Ethereum’s security guarantees while having the flexibility and modularity of a new execution layer. They are somewhat similar to Optimism’s Superchains, which create an ecosystem of chains under the Ethereum umbrella.

Given the hype surrounding Arbitrum and its token release, it will be interesting to see how the DAO’s launch goes and how it evolves over time. The Security Council, while inherently centralized, provides a valuable backup option in case of emergency, and could prove to be a necessary component of decentralized autonomous organizations. Even though the DAO launch took a while, the wait appears to be worth it.

By Lincoln Murr

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