Are Arbitrum, Wintermute, Terra, FTX, and Alameda related?

Arbitrum Foundation, the team behind the popular DeFi scaling project Arbitrum, has come under fire from the community for selling its ARB token without permission. The foundation issued a staggering 2.7 billion ARB tokens, valued at 3.2 billion USD, with the intention of selling 700 million of them to cover operating expenses and provide special subsidies. This amounts to 840 million USD, or roughly 65 million USD per member of the team if the LinkedIn profile is accurate.

While the Arbitrum ecosystem has been garnering attention as a DeFi scaling solution for Ethereum, some blockchain developers are questioning the need for such a large issuance of tokens without governance. Optimism, a competitor, has only 315 million OP tokens in circulation, which is one-ninth of Arbitrum’s.

The issue was further compounded when the community realized that the foundation was selling ARB tokens without obtaining approval from the ARB holders. The foundation had promised to switch to a decentralized autonomous organization (DAO) to give ARB token holders a voice in the governance of Arbitrum. However, when the foundation proposed allocating $1 billion worth of ARB tokens to itself in the name of administrative costs and special grants, ARB holders voted against the proposal.

The foundation then proceeded to sell some of the ARB tokens before the proposal had even been put to a vote. When challenged by the community, the foundation claimed that the first proposal was only to ratify a decision the foundation had already made. This incident has brought to light governance issues within the Arbitrum ecosystem and raised questions about the effectiveness of the community’s checks.

Jordan Atkins, a COINGEEK author and graduate of the University of Auckland Law School, weighed in on the issue, stating that “Arbitrum’s promise of decentralization is just a veneer.” He pointed out that the foundation will not give token holders any decision-making power unless they agree, indicating that it is not a decentralized autonomous organization.

Atkins also raised concerns about Arbitrum’s relationship with Wintermute, its market maker. Wintermute received 40 million ARB tokens as part of a $1 billion dividend deal. The London-based digital asset hedge fund has gained notoriety for its rapid growth in profits in 2021, jumping from around $23 million in profits at the end of 2020 to over $500 million by December 2021. It gained even more during the Terra crisis last year.

Wintermute conducted a $250 million UST-LUNA arbitrage transaction at the time of Terra’s collapse in May and made tens of millions of dollars in profits. Forbes reported that Wintermute bought UST at $0.80, exchanged it for $1 worth of LUNA, and then sold LUNA again to make a profit. This trade continued until UST fell to around $0.10.

Wintermute’s competence and revenue-generating work during the Terra crisis has been attributed to its CEO, Evgeny Gaevoy. Forbes compared Gaevoy to Sam Bankman-Fried (SBF) of Alameda Research, praising his ability to adeptly navigate the cryptocurrency market and win big during a crisis. According to Gaevoy, Wintermute had $400 million in equity and $720 million in assets as of December last year.

The CEO’s wife also serves as the COO of Wintermute’s venture capital subsidiary. Despite its success, Wintermute does not have an exchange and is reportedly dreaming of filling the void left by FTX.

With these controversies surrounding Arbitrum and its relationship with Wintermute, many are beginning to question the legitimacy and governance of the ecosystem. It remains to be seen how the foundation will respond to these concerns and whether the community will regain trust in the project.

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