Circle Releases Arc Network Whitepaper: Can the New Economic Mechanism Propel It to Become the "Clearing Coordination Layer" for Institutional Stablecoin Payments?

Author: ShirleyLi, Researcher at Web3Caff Research

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Compliance Note: Stablecoins are virtual currencies (Tokens). Please be aware that issuing and participating in investments in Tokens are subject to varying degrees of strict regulatory requirements and restrictions in different countries and regions. Notably, issuing Tokens in Mainland China may constitute "illegal issuance of securities," and providing services such as matching orders for cryptocurrency transactions is also considered "illegal financial activity" (Readers in Mainland China are strongly advised to read "Summary and Key Points of Laws and Regulations Related to Blockchain and Virtual Currencies in Mainland China"). The following content is solely an objective analysis of the progress of the Arc Network and its market feasibility strategy, intended to explore and analyze how blockchain-based application scenarios can develop responsibly within the global regulatory environment. Therefore, please do not use this information for decision-making, and strictly abide by the laws and regulations of your country or region, refraining from participating in any illegal financial activities.

Stablecoins have always been a crucial component of the on-chain financial ecosystem. Recently, with the rapid development of scenarios like RWA and cross-border payments, their role is evolving from a simple on-chain transaction medium to an important value bridge connecting traditional finance and the on-chain economy in some countries and regions globally. Consequently, stablecoin payments are emerging as a new form of financial infrastructure.

In May last year, Circle announced the launch of Arc, a Layer 1 public chain specifically designed for payment stablecoins and their underlying ecosystem, aiming to provide enterprises with a high-performance, predictable, and compliant corporate-grade stablecoin gateway. The emergence of Arc also promises to transform Circle's native stablecoin, USDC, from a single-function payment token into a utility token of the public chain. Previously, Circle released the Arc Litepaper, detailing the operational logic of the blockchain at the product level. Web3Caff Research also provided a detailed interpretation:

As an L1 public chain, Arc primarily makes the following innovations for enterprise-level users:

• USDC as Native Gas Token: Arc first introduces USDC as the native Gas Token of the public chain to eliminate the impact of token price volatility, making the prediction of interaction costs directly related to the base fee per unit of Gas. To further reduce volatility, Arc dynamically adjusts the current base fee using an Exponentially Weighted Moving Average (EWMA) of historical block utilization, preventing sudden drastic increases in fees due to network congestion. Additionally, when users pay with other stablecoins, Arc automatically uses its native stablecoin via Circle Paymaster to front the interaction fees and deducts the equivalent value in other stablecoins from the user's account. This provides flexibility for multinational corporations and users in non-USD regions, potentially establishing Arc as a global, multi-currency financial settlement public chain.
• High-Performance Consensus Design: In the on-chain context, due to the time required for transaction finality, enterprises cannot immediately initiate order processing. There's always a possibility that subsequent automated processing in financial/business systems might need to be reversed, incurring additional processing costs per transaction, which is unacceptable in real-world business operations. To address this, Arc adopts the Malachite consensus mechanism (a Tendermint Byzantine Fault Tolerance mechanism). Under this mechanism, once a payment is confirmed and committed by two-thirds of the validators, it is immediately finalized and irreversible. Furthermore, Arc's validators are not anonymous staking nodes but a curated set of institutions with high reputations, capable of meeting compliance requirements across different global regulatory systems. In the future, Arc will also introduce Multi-proposer, allowing multiple validators to generate block proposals in parallel within the same time window, which are aggregated into a single block during the consensus phase. This further enhances the payment system's throughput and reduces latency in financial processing.
• Enterprise-Level Privacy: To prevent leakage of core business information, Arc provides optional privacy capabilities for enterprises, implemented in stages. As secure technologies like multi-party computation and homomorphic encryption mature, Arc will introduce more complex privacy settings on-chain, such as private order books and private financial strategies, operating automatically via confidential on-chain contracts.

For a deeper understanding of the Arc blockchain's operational logic, we recommend reading: "Market Pulse Analysis: Circle Enters the Public Chain Arena - Can Its L1 Network Arc Become the First Compliant Chain for Payment Stablecoins?".

Fast forward to May this year, half a year after the Arc testnet launch, Circle released the Arc blockchain whitepaper. It further elaborates on the design logic of the ARC Token as the native coordination asset of the Arc network and hints at the Arc mainnet launch expected this summer.

As mentioned earlier, the Arc network currently uses the PoA (Proof of Authority) mechanism, where a curated group of institutions with high reputations is responsible for network validation and block production. However, this model carries certain centralization risks and is more suitable for the project's early startup phase. As network adoption scales, the Arc network will likely transition to a PoS mechanism. However, USDC, being a stablecoin, is not suitable for staking. Therefore, Circle is considering introducing a new token system – the ARC Token – as the native coordination asset of the Arc network, responsible for coordinating the interests and behaviors of various network participants (validators, developers, users, institutions, etc.).

According to the whitepaper's design, ARC holders can participate in network governance votes based on their staked weight, collectively deciding parameters like network fee rates, inflation rates, and burn logic. They could also gain access to certain protocol privileges in the future. However, the whitepaper explicitly states that Arc's governance model is not purely a DAO model and will retain institutional coordination mechanisms. For highly sensitive matters such as security response, compliance, validator node admission, and protocol upgrades, Circle and designated institutions will primarily be responsible in the early stages of the network.

Meanwhile, transaction fees paid by users with stablecoins on the Arc network will be automatically converted into ARC Tokens. A portion of these will be distributed as rewards to validators and stakers, while another portion will be burned. Compared to traditional public chains requiring users to hold the native Gas Token directly, this design may be more aligned with the usage habits of institutions and enterprises.

For the Arc network, the application scope of the ARC Token could expand further in the future. For example, it could be used to build dedicated transaction channels; coordinate and manage asset flow and data interoperability between different blockchains; and underpin Circle Paymaster's multi-asset Gas scenarios, allowing users to pay network fees with various stablecoins.

Source: ARC: The Native Asset of the Economic OS

However, it's important to note that the ARC Token system is currently in the discussion and design phase and may undergo significant changes in the future. Moreover, Circle has repeatedly emphasized that ARC itself is neither a security nor an investment product, nor does it represent any equity or revenue rights.

For dedicated blockchains like Arc Network, centered on stablecoin payments, large-scale economic activities typically originate from banks, payment institutions, corporate users, and capital markets. With the establishment and improvement of laws and regulations related to stablecoins, on-chain assets, and on-chain financial activities globally, the path for these institutions to participate in building on-chain infrastructure is becoming clearer. This trend is also shifting the competitive dynamics of Web3 infrastructure. The pure competition of network performance and transaction fees among public chains is becoming a thing of the past. Instead, network liquidity, compliance, stability, sustainability, and ecosystem extensibility are becoming the new competitive focus.

Of course, this transformation won't happen overnight, and Arc Network's future development still faces several potential challenges.

For instance, the overall architecture of the Arc Network still carries a strong centralized flavor. Although Circle is attempting to establish a longer-term economic coordination and governance mechanism via the ARC Token and gradually push the network towards PoS, this system is still under discussion and not yet implemented. Its specific governance structure and economic model remain highly uncertain. Concurrently, the ARC Token mechanism itself introduces additional governance and security risks to the Arc network. For example, can the economic model's design effectively match real network demand? Could concentrated staking by large nodes lead to a re-centralization of governance power? These questions await further official discussion and optimization.

Furthermore, while regulatory frameworks for stablecoins are gradually improving, significant differences in specific regulatory frameworks exist across different countries and regions. This means Arc Network must continuously adapt to evolving compliance requirements in the future.

Currently, established public chains like Ethereum, Base, and Solana are actively expanding towards on-chain financial infrastructure, stablecoin payments, and institutional-grade applications. This can be interpreted as a signal of change from leading Web3 institutions, including Circle. But ultimately, who will truly build the next-generation global on-chain financial infrastructure remains to be seen.

Key Points Structure Diagram:

References:

[1] Introducing the ARC Whitepaper: Exploring Arc’s Native Coordination Asset

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