Arbitrum DAO Faces Controversy Over Vote Buying in Governance Elections

Arbitrum DAO recently faced a significant controversy involving the use of Lobby Finance to buy votes in its governance elections. This incident has highlighted critical vulnerabilities in token-weighted governance systems, raising alarms over the security and integrity of decentralized autonomous organizations (DAOs).

The controversy centers around an individual known as hitmonlee.eth, who paid 5 ETH, approximately $10,000, to acquire 19.3 million ARB tokens’ worth of voting power through Lobby Finance. This platform allows token holders to delegate their votes in return for yield, effectively creating a market for voting power. The acquired votes were then used to elect CupOJoseph to Arbitrum’s newly formed Oversight and Transparency (OAT) Committee.

Lobby Finance has been operating within Arbitrum’s governance ecosystem for several months, enabling vote marketplaces where idle voting power is auctioned off or sold at a fixed rate. The yield from these transactions is returned to token holders. While the platform initially operated under the radar, the recent high-profile transaction has brought its potential to hinder blockchain decentralization into sharp focus. In another instance, 20.1 million ARB votes were bought for just 0.0652 ETH, illustrating how cheaply major decisions in DAOs can be influenced.

The financial incentives for winning the committee seat were substantial, with Joseph standing to earn 66 ETH over 12 months, including a potential bonus of 100,000 ARB tokens. Joseph himself has criticized the mechanism, noting that it is concerning that $10,000 worth of value can be extracted from the DAO by paying just $1,000. This sentiment is widely shared, with many questioning whether vote-buying undermines the fundamental principles of decentralized governance.

In response to the controversy, the Arbitrum Foundation launched an open forum discussion titled “DAO Discussion: Vote Buying Services.” The Foundation acknowledged that while LobbyFi had been used in smaller, less important proposals, this was the first time a considerable amount of money was spent to influence a major governance decision. The Foundation justified its prior silence by stating that it waited until the OAT election concluded to avoid influencing the outcome.

The DAO’s summary of the statement was based on the logic behind LobbyFi’s pricing. It stated that since the Foundation had already vetted the OAT candidates through a KYC and conflict-of-interest screening process, the election was deemed secure enough to allow vote-buying. However, the DAO acknowledged that this vetting process does not guarantee that elected individuals are ideal stewards of DAO governance, as the judgment was left to the open market of token holders, which has now been demonstrably distorted.

In response, some members have proposed mechanisms to defend the DAO from vote manipulation. These include disqualifying purchased votes from the final tally and requiring funds to be routed through trusted multisigs that can withhold payment if manipulation is detected. However, each solution introduces trade-offs between decentralization, security, and fairness. The Foundation has made it clear that it will not unilaterally ban vote-buying but is instead calling on the community to lead the discussion.

The path forward must be carefully considered, whether through new rules in the code of conduct, temperature checks via Snapshot, or updated governance mechanisms. The controversy surrounding Lobby Finance has forced the crypto community to confront uncomfortable truths about decentralized governance, highlighting the tension between market economics and democratic principles that blockchain communities must now address.