A recent incident involving vote-buying within Arbitrum DAO has sparked discussions about the effectiveness of decentralized governance, as investors are exploiting on-chain mechanisms to gain influence through borrowed voting power.
According to a report by crypto analyst Ignas on April 8, a user known as hitmonlee.eth spent 5 Ethereum (ETH), roughly $10,000, to acquire 19.3 million ARB tokens’ worth of voting power through the Lobby Finance (LobbyFi) platform. This voting power, valued at over $6.5 million in tokens, was used to sway the election of Joseph Schiarizzi to Arbitrum’s oversight and transparency committee, surpassing the delegated voting weight of established DAO participants like Wintermute and L2Beat.
Lobby Finance enables token holders to delegate governance power in exchange for yield, which is then sold to interested buyers through fixed pricing or auction formats. In one documented case, 20.1 million ARB votes were acquired for a mere 0.0652 ETH, equivalent to under $150 at current market rates.
The economic structure of Lobby Finance significantly reduces the capital needed to influence governance decisions. By outsourcing voting power, token holders receive passive yield while buyers can direct DAO decisions without long-term commitment or exposure. This introduces vulnerabilities similar to past governance attacks, such as the 2021 Compound DAO incident, where a participant acquired tokens to approve a $24 million payout in COMP tokens.
In the case of the recent Arbitrum incident, Schiarizzi stands to earn around 66 ETH over 12 months from his DAO committee role and potential bonuses, amounting to nearly $100,000 at current ETH prices, which is 10 times larger than the initial investment. This scenario highlights the potential for a $1,000 investment to yield $10,000 in DAO-controlled resources, posing economic and structural risks.
Schiarizzi, the beneficiary of the vote-buying activity, acknowledged the threat it poses, calling it “underpriced and risky.” He emphasized the need for governance structures where the cost of extracting value from a DAO exceeds the value itself to deter opportunistic behavior.
Despite acknowledging the report, LobbyFi disagreed with concerns about potential security risks to governance models. The voting protocol claims to disclose available proposals for borrowing votes and their prices while allowing time for the market to react.
The Arbitrum DAO is currently exploring responses to vote-buying markets, with proposals ranging from disqualifying purchased votes to imposing penalties for violations. Forum discussions reflect the ongoing debate around Miner Extractable Value (MEV), where efforts to curb manipulative practices face persistent circumvention.
Critics argue that significant changes to tokenomics may be necessary to counteract the effects of on-chain lobbying. The current setup of Arbitrum’s ARB token, lacking revenue sharing or staking-based rewards, makes token holders more willing to lease voting rights for yield, while buyers face minimal downside in acquiring votes with no long-term exposure.
As platforms like LobbyFi continue to expand, governance participants are calling for technical, structural, and economic reforms. Without new incentives or governance mechanisms, DAOs remain vulnerable to manipulation by actors who can easily accumulate short-term voting power.
The tensions between decentralized ideals and market realities in on-chain governance continue to grow, highlighting the need for ongoing discussions and potential structural reforms within DAOs like Arbitrum.