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

Original Author: ShirleyLi, Researcher at Web3Caff Research

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Compliance Reminder: Stablecoins are virtual currencies (Tokens). Please be aware that issuing and participating in investing in Tokens is subject to varying degrees of stringent regulatory requirements and restrictions in different countries and regions. In particular, issuing Tokens in Mainland China constitutes an act of "illegal issuance of securities," and providing services related to cryptocurrency transactions, such as matching orders for Token trading, also constitutes "illegal financial activities" (Readers in Mainland China are strongly advised to read the "Compilation 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 Arc Network's progress and market feasibility strategies, and is intended to explore and analyze how blockchain-based application scenarios are developing responsibly within the global regulatory environment. Therefore, please do not use this information for related decisions, 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 gradually evolving from a simple on-chain transaction medium into an important value carrier connecting traditional finance and the on-chain economy in some countries and regions worldwide. Stablecoin payments have thus become a new form of financial infrastructure.

In May of 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 enterprise-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 for the public chain. Previously, Circle released the Arc Litepaper, detailing the operational logic of this blockchain at the product level, and Web3Caff Research also provided a detailed analysis:

As an L1 public chain, Arc primarily focuses on the following innovations for enterprise-grade users:

• USDC as Native Gas Token: Arc first introduces USDC as the native Gas Token for the public chain to eliminate the impact of token price volatility, making the prediction of transaction 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, through Circle Paymaster, automatically pre-pays the transaction fees using its native stablecoin 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, positioning Arc as a potential global, multi-currency financial settlement public chain;
• High-Performance Consensus Design: In the on-chain context, because transaction finality requires time, enterprises cannot immediately initiate order processing. There's a possibility that subsequent automatic processing in financial/business systems might need to be reversed, leading to potential extra processing costs for each transaction. This is unacceptable for real-world enterprise operations. To address this, Arc uses the Malachite consensus mechanism (a Tendermint Byzantine Fault Tolerance mechanism). Under this mechanism, once a payment is confirmed and submitted by two-thirds of the validators, it is instantly finalized and irreversible. Furthermore, Arc's validators are not anonymous staking nodes but a curated set of reputable institutions capable of meeting compliance requirements across different global regulatory systems. In the future, Arc will also introduce a Multi-proposer system, allowing multiple validators to generate block proposals in parallel within the same time window, aggregating them into a single block during the consensus phase, further enhancing payment system throughput and reducing latency in financial processing.
• Enterprise-Grade Privacy: To ensure the confidentiality of core business information, Arc provides optional privacy capabilities for enterprises, implemented in phases. As secure technologies like Multi-Party Computation (MPC) and Homomorphic Encryption mature in the future, Arc will introduce more complex on-chain privacy settings, such as private order books and private financial strategies, operating automatically via confidential on-chain contracts.

If you want to learn more about the operational logic of the Arc blockchain, we recommend reading: "Market Pulse Analysis: Circle Enters the Public Chain Arena. Can Its L1 Network Arc Become the First Compliance Chain for Payment Stablecoins?"

Fast forward to May of this year, six months after the launch of the Arc testnet, Circle released the Arc blockchain whitepaper, further elaborating on the design logic of the ARC Token as the native coordination asset for the Arc network, and hinting that the Arc mainnet is expected to go live this summer.

As mentioned earlier, Arc currently uses a Proof-of-Authority (PoA) mechanism, where a curated set of reputable institutional nodes is responsible for network validation and block production. However, this model carries a certain degree of centralization risk and is more suitable for the project's early launch phase. As network adoption grows, Arc will likely transition to a Proof-of-Stake (PoS) mechanism. However, USDC, being a stablecoin, is not suitable for staking. Therefore, Circle is considering introducing a new token system – the ARC Token – which will serve as the native coordination asset for the Arc network, responsible for aligning the interests and behaviors of various participants (validators, developers, users, institutions, etc.).

According to the whitepaper design, ARC holders can participate in network governance voting based on their staked weight, collectively deciding on parameters such as network fee rates, inflation rates, and burning logic. They may also gain certain access and interaction rights within the protocol in the future. However, the whitepaper also clearly states that Arc's governance model will not be a fully-fledged DAO model, retaining institutional coordination mechanisms. For highly sensitive matters involving security responses, compliance, validator onboarding, and protocol upgrades, Circle and designated institutions will primarily be responsible, especially in the network's early stages.

Meanwhile, transaction fees paid by users using 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 may 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 support the multi-asset Gas scenarios of Circle Paymaster, allowing users to pay network fees with different stablecoins.

Source: ARC: The Native Asset of the Economic OS

However, it is 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 and does not represent any equity or profit rights.

On specialized blockchains like Arc Network, centered around stablecoin payments, large-scale economic activity often originates from banks, payment institutions, corporate users, and capital markets. As laws and regulations related to stablecoins, on-chain assets, and on-chain financial activities are established and refined globally, the path for these institutions to participate in on-chain infrastructure is becoming clearer. This trend is also reshaping the competitive logic of Web3 infrastructure. The era of simply comparing network performance and transaction fees is becoming a thing of the past. Network liquidity, compliance, stability, sustainability, and ecosystem scalability are becoming the new competitive battlegrounds.

Of course, this shift will not happen overnight, and the future development of the Arc network still faces several potential challenges.

For instance, Arc's current overall architecture still carries a strong element of centralization. Although Circle is attempting to establish a longer-term economic coordination and governance mechanism for the network by introducing the ARC Token and gradually promoting its evolution towards PoS, this system is still in the discussion phase and has not been formally implemented. Its specific governance structure and economic model remain subject to significant uncertainty. At the same time, the ARC Token mechanism itself may introduce additional governance and security risks to the Arc network. For example, can the economic model design truly match real network demand? Could concentrated staking by large nodes lead to a recentralization of network governance power? These questions await further official discussion and optimization.

Furthermore, although stablecoin regulatory frameworks are gradually improving, significant differences remain across countries and regions. This means Arc Network will need to continuously adapt to evolving compliance requirements in the future.

Currently, traditional public chains like Ethereum, Base, and Solana are actively expanding towards on-chain financial infrastructure, stablecoin payments, and institutional-grade applications. This can be seen as a signal of change among top Web3 institutions, including Circle. However, which entity will ultimately succeed in building the next generation of 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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