The Watchdog: Arbitrum DAO’s Grant Misuse Bounty Program

Abstract

The Arbitrum DAO has allocated several hundred million dollars across various initiatives, including incentive programs, grants, investment vehicles, and service providers. While these allocations have driven growth and innovation, there has been minimal oversight or review of how these funds are ultimately used, and no system currently exists to incentivize the identification and reporting of fund misappropriation. Although three instances of misuse have been uncovered, it is likely that additional cases remain undetected.

In response, Entropy Advisors proposes the establishment of a grant misuse bounty program dubbed “The Watchdog” to incentivize the identification and reporting of misused DAO-allocated funds. The program would utilize an incentive mechanism to reward community contributors and investigators who submit verifiable reports of misappropriation.

Motivation and Rationale

By offering financial rewards for valid reports of misappropriation, there will be a stronger motivation for community members to contribute skills or information that aid in identifying misconduct in the DAO. Today, the identification of wrongdoing can result in retaliation, unnecessary friction within the DAO, and other negative externalities for the investigators.

Moreover, with no incentive to bring forth allegations, it is unlikely that most community members would do so. The Watchdog program creates a decentralized force of accountability, augmenting the DAO’s capacity to detect abuse that would likely otherwise go unnoticed while protecting the submitter from repercussions.

Arbitrum DAO’s successful identification of misappropriated funds, whether by a service provider, protocol, grant recipient, or anyone else that receives funds from Arbitrum DAO has three main benefits:

1. The DAO (mainly through the Foundation, as it has done so in the past) may be able to recapture some of the funds. This could involve legal avenues, smart contract enforcement (clawbacks / stream stopping), or community pressure through the use of the DAO’s blacklisting abilities.
2. The evidence can be used to identify possible improvement opportunities in the underlying programs and make more informed decisions surrounding the recognized bad actors in the future.
3. A mechanism for malicious action deterrence and attracts sophisticated onchain sleuths to Arbitrum.

Just the existence of a transparent and well-publicized bounty program will likely deter some malicious actors from misusing DAO funds in the first place. Knowing that the community has the tools and incentives to identify misallocation increases the risk of exposure for those who might consider abusing the DAO’s trust. Recipients of DAO funds will need to think twice before acting maliciously or in a way that doesn’t align with the DAO’s strategic objectives, rules, and the broader interests of Arbitrum.

By allowing anyone to submit evidence-based reports of misuse anonymously, the program empowers the entire Arbitrum and crypto ecosystem to take an active role in maintaining the financial health and integrity of the Arbitrum DAO. We hope this fosters a culture of vigilance, good intentions, and accountability while bringing white-hat actors into the ecosystem.

Specifications

The Watchdog program will extend to ALL DAO-funded initiatives including end recipients of other programs such as the Questbook Domain program, Stylus Sprint, Arbitrum Foundation grants, and the incentives programs. The process for rewarding those who successfully identify fund misuse will start with a temporary solution utilizing a small committee of reviewers with a long-term plan for the program to eventually fall under OpCo.

Entropy proposes the following definition of misuse of funds:

Any action or inaction by a recipient of DAO-allocated funds that directly violates the stated terms, objectives, agreement, or overall spirit of the allocation under which those funds were provided.

Misuse definitions and examples below are included solely as a point of reference for the DAO and all decisions surrounding severity will be at the full discretion of the committee:

• Low: Cases where there is minor misuse of DAO-allocated funds with limited impact on the DAO’s overall financial health, reputation, or strategic goals.
  • Example: A Questbook domain allocator accidentally sent a double payment for a milestone and the recipient did not report it.
  • Example: A grant recipient uses a portion of the funds for unauthorized purposes, such as non-DAO-aligned marketing, travel, or administrative overhead not included in the grant proposal.
• Medium: Cases involving significant misuse of DAO-allocated funds that impact the DAO’s resources or strategic goals, but where the misuse is still recoverable, or partial results have been delivered.
  • Example: An incentive program recipient uses funds in a way that does not benefit end users, but is a step away from outright theft and fraud.
  • Example: A grant recipient diverts a significant portion of the funds (e.g., 50k+ ARB) to unrelated projects or personal use.
• High: Cases involving large-scale, deliberate misuse of DAO-allocated funds.
  • Example: A fund-recipient fabricates deliverables to obtain funds without working on the approved project, then disappears with the entire grant.
  • Example 2: Theft or unauthorized transfers, such as if MSS members purposefully diverted funds to a recipient not eligible.

The workflow for Watchdog reports will be as follows:

1. Report Submission

• Anyone (watchers) can identify potential misuse of funds that originated from the DAO and submit an evidence-based report to a designated section on a to-be-created GlobaLeaks portal (explained further below).. Throughout the entire process, the identity of the submitter will remain private. As detailed further in step 3, the report will only be made public to the DAO in the instance that attempts at backchannel communications with the alleged party fail and a DAO ban is constituted or on a case-by-case basis where the committee deems it prudent to make the DAO aware of the misuse.
• Reports will follow a standard template to help streamline the review process and collect the initial necessary information.

2. Review Process

• A whitelisted group of three DAO-associated reviewers will have the ability to review the submitted reports. The initial reviewers will comprise the Arbitrum Foundation, Entropy Advisors, and SeedGov. This structure minimizes the operating costs of the program until OpCo is stood up. Entropy and the Arbitrum Foundation will be waiving payment as reviewers. SeedGov will be compensated at a rate of $40 an hour for the time their team puts towards reviewing Watchdog reports each month. The payment will be paid out in ARB with the amount being determined based on the price of ARB at the time of payment. This rate is comparable to the rate SeedGov is receiving as the DIP administrator. We anticipate the review process for a Watchdog report to take a minimal amount of hours, so the ARB used to pay SeedGov will come from the requested 400K ARB budget.
• The three reviewers will discuss reports and, if required, contact the concerned party for clarifications. If two or more reviewers agree (at their discretion) that the submission is based on substance and misuse has occurred, the watcher(s) will receive the bounty. The reviewers will also determine the level of severity of the misuse (Low, Medium, High), which will impact the bounty reward as outlined in step 4.
• In the case that 2 or more reviewers deem there has been fund misuse, and recovery is deemed feasible, the Arbitrum Foundation will open up private channels of communication with the concerned party and attempt to get the funds back for the DAO.
• Reviewers are required to abstain from specific review processes if a conflict of interest (COI) is identified. If two or more reviewers have an identified COI, the reviewers will identify two external parties who don’t have COIs and have the capabilities to review the report. If the report is made public, the reviewers’ identified COIs will be published at the same time. To reduce the need for an additional election process and budgeted compensation, the Watchdog program will leverage trusted community members who have been elected to other Arbitrum DAO initiatives such as, but not limited to, the Domain Allocators from the D.A.O. program, MSS members, or ARDC V2 members.

3. DAO Forum & Snapshot Voting

• On a case by case basis, if all attempts at backchanneling fail and the accused party is nonresponsive, the report may be posted to the forum with all the watcher’s personal and identifiable information redacted in the version posted publicly. Additionally, on a case by case basis, the committee m

... please visit link below to view full proposal

https://tally.xyz/gov/arbitrum/proposal/28485587559812799913134094629469849411398475232393607771326861344548198896843