Introduction

Arbitrum is a protocol that makes Ethereum transactions faster and cheaper. Developers use Arbitrum to build user-friendly decentralized apps (dApps) that can take advantage of the scalability benefits of the Arbitrum Rollup and AnyTrust protocols.

Arbitrum's flagship chain, Arbitrum One, was launched in 2021. This was quickly followed by the launch of Arbitrum Nova, a separate AnyTrust chain built for ultra low-cost transactions. In August 2022, Arbitrum One was upgraded to the Arbitrum Nitro stack, bringing a 7-10x upgrade to its scaling capabilities.

The distribution of $ARB governance tokens decentralizes governance of Arbitrum One and Arbitrum Nova and their underlying protocols. $ARB tokens can be used to vote on Arbitrum DAO governance proposals, allowing $ARB holders to collectively shape the future of Arbitrum protocols and chains. Token holders can also delegate their voting power to delegates.

What is Governance?

Governance is the way that decisions get made. To understand what this means, let's compare traditional web2 governance to web3 governance.

Web2 technologies are traditionally built by corporations governed by a board of directors. This board is usually a small group of people elected by shareholders.

When a corporate decision needs to be made, members of the board meet and vote. The board's decision-making protocols aren't always visible to shareholders. Although the board has a fiduciary duty to its shareholders, shareholders must trust the board. This is a sort of social contract expressed as corporate legalese and enforced by law.

Web3 technologies (like Arbitrum's protocols and chains) are often built initially by corporations governed by a board of directors. Once these technologies achieve product-market fit and a community of users and stakeholders develops, decision-making authority can be gradually decentralized. This is called progressive decentralization, and it's what Arbitrum is doing. Progressive decentralization is usually facilitated by three key ingredients:

1. DAO formation: The Arbitrum DAO (decentralized autonomous organization) is a new entity with decision-making authority over the Arbitrum One and Arbitrum Nova chains, along with their underlying protocols. This DAO is governed by The Constitution of the Arbitrum DAO, which is a set of rules that describe how the DAO will operate. The Constitution is enshrined within a number of social contracts that are used by the Arbitrum DAO to govern itself and its technologies.

2. Governance token launch: Ownership of governance tokens represents membership within the DAO. Token holders can vote on DAO proposals. Arbitrum's governance token is $ARB, and will be distributed to eligible wallet addresses via an upcoming airdrop.

   
   

3. Code: DAO governance is usually facilitated by a series of open source smart contracts that enforce a specific decision-making protocol. These trustless smart contracts are used to gradually replace a traditional board's trusted social contract. Arbitrum DAO uses smart contracts to codify the decision-making protocol articulated within The Constitution of the Arbitrum DAO.

$ARB Compared to $ETH

Similarities:

• Both are powered by decentralized blockchain technology.

  
  

• Both can be owned by any cryptocurrency wallet that supports $ETH.

  
  

• Both can be bought, sold, and traded.

Differences:

• $ETH is a transactional token, while $ARB is a governance token.

• $ETH is used to pay for transaction fees, while $ARB is not.

• Governance of Arbitrum is facilitated by $ARB and governance smart contracts, while Ethereum's governance is handled socially.

• Holding $ARB gives you the ability to govern Arbitrum, while holding $ETH doesn't impact your ability to govern Ethereum's protocol.

Why It's Important

Decentralization of Arbitrum's technology governance represents an important step towards community governance of Ethereum's scaling technologies, and further aligns the Arbitrum community's incentives with those of the Ethereum community at large. This is a big deal because it means that the Arbitrum DAO will be able to democratically make decisions that are in the best interest of the Arbitrum and Ethereum communities, rather than having faith in the good will of a small group of people.

$ARB tokens represent stake in Arbitrum's - and by proxy, Ethereum's - decentralized future. You can use $ARB to collectively determine how we as a community scale Ethereum's infinite garden into the future.

More generally, possession of $ARB tokens places you at the cutting edge of governance mechanism design. This is a new frontier with society-scale implications, and your voice matters. $ARB tokens give you an immutable voice!

How Arbitrum's Governance Works

Governance of the Arbitrum Rollup protocol is driven by two governing bodies: the Security Council and the Arbitrum DAO.

• The Security Council is a 12-member council of entities elected by members of the Arbitrum DAO. This council is responsible for ensuring Arbitrum's security and performance through the selective application of emergency actions if/when necessary. See Delegates and delegation for a conceptual overview of Arbitrum DAO's delegation mechanics.

• The Arbitrum DAO is the worldwide community of $ARB token holders and the delegates that they select. The DAO is responsible for governing Arbitrum and its Security Council. The DAO can use constitutional proposals to modify the Security Council's powers, or even to eliminate the Security Council entirely. The Security Council's powers are delegated to the Security Council by the DAO, and are to be exercised in the best interests of the DAO.

Decisions Arbitrum's Governance System Makes

Arbitrum's governance system is responsible for making many types of decisions. One important responsibility is upgrading Arbitrum chains’ core contracts, which define and enforce the Arbitrum protocols. An upgrade like this could be motivated by any of the following reasons:

1. An upgrade could improve the system in some way, like increase its decentralization or optimize its performance and lower fees.

2. An upgrade could fix a critical vulnerability.

3. An upgrade could address a non-critical decision that affects the Arbitrum ecosystem at large.

The Arbitrum DAO is also responsible for authorization of the creation of new L2 chains.

You can think of Arbitrum stakeholder groups as a stack of layers. The web3 user layer is at the top of the stack. All other layers work together to support the web3 user layer:

• Web3 user layer: Includes decentralized app (dApp) users - users of web3 applications.

• Web3 app layer: Includes all of the developers, dreamers, and makers who are building decentralized apps and tooling to support dApp development.

• Layer 2 (L2): Includes Arbitrum DAO, the Arbitrum community, node operators, sequencers, and other Layer-2 builders (including Offchain Labs) who are working hard to fulfill Ethereum's rollup-centric roadmap.

• Layer 1 (L1): Includes consensus & execution layers.

  • Consensus layer (CL): Includes Prysm and other consensus-layer teams who support Ethereum's beacon chain with consensus-layer client software.

  • Execution layer (EL): Includes Geth and other execution-layer teams building execution-layer client software.

• Research layer: Includes researchers and protocol engineers who are working on the cutting edge of cryptography, mechanism design, and governance protocols.

As long as you hold either $ARB or are a delegate, you can govern Arbitrum One and Arbitrum Nova.

Arbitrum DAO Votes

The Arbitrum DAO is governed by a protocol that allows $ARB governance token holders to propose and vote on different actions, such as changes to the DAO's Constitution or funding for specific projects. These votes are crucial for making decisions that shape the future of Arbitrum and the technologies it governs.

There are two types of votes in the Arbitrum DAO:

1. Temperature check: This is a preliminary vote that gauges the community's interest in a proposal before it moves on to the next stage. Temperature checks are conducted on the Snapshot platform and are only open to $ARB token holders who hold (or represent) at least 0.01% of votable tokens.

2. On-chain vote: If the proposal passes the temperature check, it will move on to an on-chain vote facilitated by Tally. This "call for votes" can be initiated by $ARB token holders who hold (or represent) at least 1,000,000 votable tokens. To be approved, more than 50% of the votable tokens that voted on the proposal must have voted in favor of the proposal; constitutional proposals must receive votes from at least 5% of all votable tokens in existence; non-constitutional proposal must receive votes from at least 3% of all votable tokens in existence. Refer to the Constitution for a more precise description of Arbitrum DAO's governance protocol.

Token-weighted Voting

The amount of voting power you have is determined by the number of $ARB tokens you hold. However, you also have the option to grant your voting power to a delegate who can vote on your behalf. This is a great option for token holders who may not have the time or resources to actively participate in the DAO's governance.

Values-based Voting

It's important to note that the Arbitrum DAO operates on a set of values outlined in its Constitution. These values include decentralization, security, and scalability. When evaluating proposals, voters should consider whether the proposal aligns with these values and if the proposal furthers the interests of the DAO as a whole (as opposed to special interests that don't represent the DAO as a whole).

Voting is an important aspect of the Arbitrum DAO's governance and allows token holders to make decisions that shape the future of the DAO. By understanding the different types of votes, your voting power, and the values that guide the DAO, you can help the DAO make collectively informed and incentives-aligned decisions.