What happens to a DAO when its governance token crashes?

Plenty, it turns out, including a revamp of voting rules that are typically deemed sacrosanct in DeFi.

Arbitrum, Ethereum’s second-biggest layer 2 network with $2.3 billion in investor funds, has tumbled 71% in the last 12 months.

Now investors are dumping the token, and the remaining holders are too jaded to care about the protocol’s governance and take part in key votes.

In a bid to revive participation, the Arbitrum DAO, the digital collective of investors, delegates, and developers that run the protocol, is considering a change to its voting rules.

‘The real problem is that tokenholders need actual reasons to stay in Arbitrum.’

—  Zeptimus

The change outlined in a DAO proposal calls for the quorum — the minimum number of votes required to pass a proposal — to be lowered to 4.5% of Arbitrum’s voting tokens from 5%.

These votes aren’t just routine admin checks. They are proposals that aim to change the DAO’s voting processes, funding structures, or governance mechanics.

In other words, this is a really big deal.

With DAOs controlling almost $16 billion in reserves, voter apathy can have serious financial implications.

So-called LobbyFi players can game the system, scooping up enough cheap Arbitrum tokens to sway pivotal decisions.

At least that’s what happened on Compound, a major lending protocol.

Treating the symptom

Last year, an investor group bought enough Compound tokens to sway a DAO vote and give themselves almost $25 million.

Even delegates who support the plan say the move is only a temporary solution.

“This is treating a symptom, not the disease,” said one DAO delegate who goes by Zeptimus.

“The real problem is that tokenholders need actual reasons to stay in the Arbitrum ecosystem.”

Fewer votes

Low voter turnout is a worrying trend. The proposal’s authors said fewer votes mean good proposals will fail. Voter apathy on Arbitrum has seen governance participation slump 50% in the last year.

During this period, Arbitrum’s token price has slumped 87% from its peak.

Turns out, when token bags are down, so is the urge to participate in DAO governance, according to Arbitrum DAO delegate with the username EzR3aL

And as governance inertia festers and the token value fails to inspire, the existential dilemma for Arbitrum shifts from how to govern better to how to incentivise enough participants to care about running the DAO.

But Arbitrum isn’t the only DAO grappling with the problem. Voter apathy is a malaise haunting DAOs across the DeFi sector, even as the market segment has lost 34% in total investor funds this year.

Delegates who support the plan say the DAO needs to act fast and can focus on more long-term solutions after lowering voting threshold.

Osato Avan-Nomayo is our Nigeria-based DeFi correspondent. He covers DeFi and tech. Got a tip? Please contact him at osato@dlnews.com.