A recent incident involving vote-buying in Arbitrum DAO has sparked concerns regarding the sustainability of decentralized governance, as investors utilize on-chain methods to gain influence through borrowed voting rights.
On April 8 a report from crypto analyst Ignas revealed that a user known as hitmonlee.eth invested 5 Ethereum (ETH), roughly $10,000, to secure 19.3 million ARB tokens’ worth of voting power through the Lobby Finance (LobbyFi) platform.
This voting power, amounting to over $6.5 million in tokens, was utilized to bolster Joseph Schiarizzi’s bid for a position on Arbitrum’s oversight and transparency committee, surpassing the delegated voting influence of major DAO participants like Wintermute and L2Beat.
Lobby Finance facilitates token holders in delegating governance authority in return for yield. Voting rights are then offered to prospective buyers through fixed pricing or auction mechanisms. In one notable case, 20.1 million ARB votes were acquired for a mere 0.0652 ETH, which is under $150 based on current market prices.
Threatening the integrity of voting
Ignas observed that the economic model of Lobby Finance considerably lowers the capital threshold for gaining governance influence. By outsourcing their voting rights, token holders earn passive returns while buyers can influence DAO decisions without long-term commitment or accountability.
Such practices create vulnerabilities reminiscent of previous governance exploitations, including the 2021 Compound DAO incident, where a participant purchased tokens from the open market to endorse a $24 million payout in COMP tokens.
In the case of Arbitrum, Schiarizzi stands to gain around 66 ETH over the next 12 months from his committee position and potential bonuses. At the current price of ETH at $1,476.37, this equates to roughly $100,000, ten times the amount invested.
This includes 47.1 ETH as base compensation and an anticipated value of 100,000 ARB in bonuses. Ignas remarked that the current environment allows for scenarios where a $1,000 investment could yield $10,000 in DAO-controlled assets, which is economically unfeasible and structurally perilous.
Schiarizzi, who benefited from the voting activity, openly recognized the hazards associated with vote-buying, labeling it as “underpriced and risky.”
He emphasized that he did not seek out the votes and advocated for governance mechanisms that ensure the cost of extracting value from a DAO is greater than the value itself to deter opportunistic actions.
No security concerns
While LobbyFi acknowledged the report, it disagreed with the notion that the platform could pose security risks to governance structures.
The voting protocol asserts that it publicly discloses the proposals available for voting power borrowing along with their prices, allowing the market time to respond.
LobbyFi further stated:
“We would not hesitate to refrain from making a proposal available if we or the community believe it presents substantial dangers and we have adjusted our auction model significantly to enhance security based on the nature of our activities.”
It also claimed that the prevailing governance model resembles a “7-party plutocracy,” asserting that LobbyFi aims to invigorate on-chain governance by making it more “engaging, beneficial, or ideally both at once.”
Discourse on DAO responses
The Arbitrum DAO is currently contemplating possible reactions to the emerging vote-buying markets. Discussions in governance forums have led to various proposals, including disqualifying purchased votes and imposing penalties for confirmed infringements, while some contributors argue for allowing free-market dynamics to dictate outcomes.
As forum contributor OlimpioCrypto noted, this situation mirrors the ongoing discussions surrounding Miner Extractable Value (MEV), where efforts to curb manipulative practices often face consistent circumvention.
If economic incentives are misaligned, platforms like LobbyFi may flourish irrespective of regulatory or community opposition.
Currently, delegating to DAO-aligned representatives yields lower returns compared to LobbyFi, diminishing passive token holders’ motivation to back established governance actors.
Consequently, the financial architecture of token voting systems, particularly those adhering to 1:1 models for voting power allocation, is under renewed examination.
Ignas claims this model lacks robust defenses against short-term capital deployment for strategic voting and hasn’t adapted to the advent of vote leasing protocols.
Potential need for structural changes
Critics contend that substantial reforms to tokenomics may be required to mitigate the effects of on-chain lobbying.
The ARB token, which does not provide revenue sharing or staking rewards, derives most of its value from governance functionality. This situation prompts token holders to be more inclined to lease their voting rights for yield, while buyers perceive minimal risk in purchasing votes devoid of long-term commitments.
Without novel incentives or governance mechanisms, DAOs remain vulnerable to manipulation by individuals capable of cheaply amassing short-term voting power.
As platforms like LobbyFi extend their influence, participants in governance are increasingly urging for technical, structural, and economic reforms.
The Arbitrum DAO has yet to finalize a clear strategy. These events exemplify the mounting tension between decentralized principles and the realities of operable market conditions within on-chain governance.