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Why decentralize Arbitrum governance with $ARB?


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$ARB is the governance token for the Arbitrum ecosystem. This document aims to explain the rationale behind introducing the $ARB governance token, and how it plays a necessary role in the progressive decentralization of the Arbitrum protocol.

Protocol upgrades and "chain ownership"

Arbitrum chains like Arbitrum One have a concept of a "chain owner." A chain owner isn't strictly part of the Arbitrum protocol, but is rather essentially an administrator of the chain, responsible for managing how changes are made to the system. More specifically, a chain's owner can modify core system parameters, pause incoming transactions, and - most importantly - update any of the contracts that define and enforce the core protocol.

It's necessary to have some way to upgrade an Arbitrum chain's core contracts for several reasons. First, planned improvements need to be made to the system. Arbitrum has already gone through several such upgrades (most notably, its evolution to Arbitrum Nitro from the "Arbitrum Classic" tech stack), and there will likely be more that no one can anticipate as technological progress continues. Additionally, if a critical bug in the Arbitrum codebase is discovered, upgrades may be necessary to fix it. Finally, changes will be necessary to remain compatible with Ethereum as Ethereum undergoes its own hard-fork improvements.

The ability to arbitrarily change how an Arbitrum chain works obviously makes the chain ownership role quite powerful, and thus it can't be taken lightly when considering the decentralization of the Arbitrum technical stack.

The necessity of L2 on-chain governance

Given the potential vector for centralization that chain ownership introduces, it's worth asking whether Arbitrum can simply do away with ownership entirely and handle protocol upgrades some other way. Ethereum itself, for example, has no explicit notion of a "chain owner", and yet has gone through numerous upgrades over its ~7 year life span, both to improve the system (new features, better performance, etc.) and to fix critical bugs.

Here though, there's a crucial difference between Ethereum and Arbitrum: Ethereum is a Layer 1 (L1) protocol, and L1 protocols (and in turn, changes to L1 protocols) are ultimately defined by social consensus. When the community wants to upgrade Ethereum, those running the Ethereum node software install the software upgrade, and if the community at large agrees that the new change represents the "real Ethereum," then it implicitly, inherently, is so. Everyone chooses for themselves whether to adopt the change, and the choice that has critical mass becomes canonical.

Layer 2 (L2) protocols like Arbitrum One, however, are fundamentally different in that their rules are ultimately *not* governed implicitly by social consensus, but rather explicitly by L1 smart contracts. For Arbitrum One to upgrade, it isn't enough to simply upgrade the Arbitrum node software; its contracts must upgrade as well, which are controlled not by the social consensus of the Arbitrum community, but by Ethereum itself.

The upshot is that the consensus to upgrade Ethereum can be an informal and off-chain process, whereas the consensus to upgrade Arbitrum must operate through a formal decision making process governed by on-chain contracts. In other words, governance.

There's a possible future scenario that would enable Arbitrum chains to upgrade without any explicit ownership: the Ethereum community may someday deem it acceptable to modify L1 consensus in order to upgrade Arbitrum One. That is, Ethereum's social consensus could allow hard forking of the L1 for the sake of particular L2s. L2 chains under this hypothetical arrangement have been deemed "enshrined rollups".

While it's possible that Ethereum's L2s eventually become enshrined in this way, this likely isn't happening any time in the near future. Such a change to the Ethereum/L2 ecosystem would have to eventuate from wider discussion and debate within the Ethereum community; a decision like this is largely outside of the control of the Arbitrum community. In the meantime, the community needs a solution that can be implemented today.

So given that there's a need for a path towards protocol upgrades, and that enshrined rollups are (at least currently) off the table, the only viable option remaining, then, is explicit on-chain governance.

Enter $ARB governance token for decentralized governance

The introduction of the $ARB governance token provides the ability to propose and carry out protocol upgrades in a decentralized manner.

Tokens were initially airdropped via transparent criteria meant to be as fair as possible1. The goal was to spread out ownership to a large set of parties with stake in the Arbitrum ecosystem who are geographically distributed and have diverse backgrounds and affiliations. The chain ownership role is given to this “Arbitrum DAO”, a shorthand for the collective of all holders of the ARB token (and those delegated voting rights by token holders).

There are two paths through which a protocol upgrade can take place. The first is a decentralized upgrade path that allows the DAO (and only the DAO) to carry out every step in the process: proposing an upgrade, publicly debating it, voting on it, and ultimately activating it.

Several important properties are preserved in a decentralized upgrade process, all of which are enforced at the smart contract level:

  • No permissioned parties are required at any step; the DAO itself can carry out the entire process.
  • The DAO is given time to view a proposal before voting on it and, if it gets to that stage, given sufficient time to vote on it.
  • Once a proposal passes, Arbitrum users are given time to withdraw assets from the system, should they disagree with the direction and prefer to opt out.

Security Council

The second protocol upgrade path is similar to the first path, except that it allows the Security Council, a permissioned group of publicly named entities, to skip certain steps in specific situations. Notably, the Security Council has the ability to upgrade the protocol directly and without delays in case of emergency.

This is a critically necessary role to protect against emergencies like the discovery of exploitable vulnerabilities, in which case the typical slow governance path is not viable for two reasons:

  1. If there's a critical vulnerability that can be exploited, it's counterproductive to broadcast it on the public governance forum before it has been mitigated.
  2. The fix to such a vulnerability should go into effect immediately and not have the several weeks' delay of typical governance changes.

The Security Council is bound by The Constitution of the Arbitrum DAO to only use its powers when necessary for these sorts of emergencies, and to issue a transparency report when appropriate whenever its powers are used. To keep the Security Council in check, the DAO votes in semi-annual elections (split by cohorts) for the Security Council's members.

The Security Council can also trigger non-emergency upgrades, such as routine software upgrades and maintenance. These upgrades don't require a DAO vote to pass; they instead go through a delay period before taking effect, giving users time to opt out by withdrawing (as with decentralized DAO upgrades).

To learn more about the Security Council, refer to the Security Council concept doc. For a formal articulation of the Security Council's role within Arbitrum DAO's governance process, refer to The Constitution of the Arbitrum DAO.

The future of Arbitrum governance

The initial governance launch provides the community with the tools it needs: a means of decentralized governance, along with a faster, permissioned upgrade path to ensure the system remains safe in case of emergencies. As for how this system will change moving forward, many open questions remain:

  • Can the governance process be further decentralized?
  • How and when can the Security Council's power be further minimized, or eliminated entirely?

These don't have easy answers and will continue to be the topic of lively discussion within the community as the Arbitrum technology continues to mature, and as the perceived risk profiles of various states of decentralization change along with it. But crucially, the Arbitrum governance system controls all aspects of the Arbitrum protocol, including the governance process itself.

With the DAO in control, decisions about how Arbitrum should evolve over time — including the governance process itself — are in the hands of the Arbitrum community.

  1. Refer to $ARB airdrop eligibility and distribution specifications to learn more about the airdrop specifications. Refer to Arbitrum Sybil Hunting for an overview of our Sybil mitigation methodology.