Market Pulse Analysis: Circle Releases Arc Network White Paper, Can the new economic mechanism drive it to become the "clearing coordination layer" for institutional-level stablecoin payments?

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Author: ShirleyLi, Researcher at Web3Caff Research

Cover: Typography by Web3Caff Research

Word count: Total over 3,100 words

Compliance reminder: Stablecoins are virtual currencies (Tokens), and please be aware that issuing and participating in Token investments are subject to varying strict regulatory requirements and restrictions in different countries and regions, especially in Mainland China where issuing Tokens may be considered “illegal securities issuance,” and activities like Token trading matchmaking are also regarded as “illegal financial activities” (Mainland Chinese readers are strongly advised to read “Legal Regulations and Key Summaries on Blockchain and Virtual Currency in Mainland China”).
The following content is purely objective analysis of Arc Network’s development progress and market feasibility strategies, as well as an exploration and analysis of how blockchain-supported application scenarios can develop responsibly under the global regulatory environment.
Therefore, do not base any decisions on this information, and strictly comply with the laws and regulations of your country or region. Do not participate in any illegal financial activities.

For a long time, stablecoins have been an important component of on-chain financial ecosystems.
Recently, with the rapid development of RWA, cross-border payments, and other scenarios, their role is evolving from a simple on-chain transaction medium to an important value carrier connecting traditional finance and on-chain economy in some countries and regions worldwide.
Stablecoin payments have also become a new form of financial infrastructure.

Last May, Circle announced the launch of Arc, a Layer 1 public chain designed specifically for payment stablecoins and their underlying ecosystems, aiming to provide enterprises with high-performance, predictable, and compliant enterprise-level stablecoin access.
The emergence of Arc also aims to transform Circle’s native stablecoin USDC from a payment-focused token into a practical token for public chain use.
Previously, Circle released the Arc Whitepaper, detailing its operational logic at the product level, and Web3Caff Research provided a detailed interpretation:

As a Layer 1 public chain, Arc has made the following innovations focused on enterprise 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 interaction costs directly related to the base fee per unit of Gas.
To further reduce volatility, Arc dynamically adjusts the base fee using an exponentially weighted moving average (EWMA) of historical block utilization, avoiding sudden fee spikes caused by network congestion.
Additionally, when users pay with other stablecoins, Arc automatically uses Circle Paymaster to cover interaction fees with its native stablecoin and deducts an equivalent value of other stablecoins from the user’s account.
This provides flexibility for multinational enterprises and non-USD users, making Arc a potentially global multi-currency financial settlement public chain.

High-Performance Consensus Design:
In the on-chain context, finality of interactions takes time, and enterprises cannot immediately process an order because subsequent automatic processing in financial/business systems might need to be revoked.
Therefore, each transaction may require additional processing costs, which is unacceptable in real enterprise 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 submitted by two-thirds of validators, it is instantly finalized and cannot be reversed.
Meanwhile, Arc’s validators are not anonymous staking nodes but a curated group of reputable institutions capable of meeting global regulatory compliance.
In the future, Arc will introduce multi-proposer functionality, allowing multiple validators to generate block proposals in parallel within the same time window, which are then aggregated into a single block during consensus.
This can further improve transaction throughput and reduce delays in financial processing.

Enterprise Privacy:
To ensure that core business information remains confidential, Arc offers optional privacy features implemented in phases.
As security technologies like secure multi-party computation and homomorphic encryption mature, Arc will introduce more complex privacy settings, such as private order books and encrypted financial strategies, running automatically via private on-chain contracts.

If you want to learn more about Arc’s operational logic, we recommend reading:
“Market Pulse Analysis: Circle’s Push into the Public Chain Arena, Can Its L1 Network Arc Become the First Compliant Payment Stablecoin Chain?”

By May this year, half a year after the Arc testnet launched, Circle released the Arc Whitepaper again, further elaborating on the design logic of ARC Token as the native coordinating asset of the Arc network, and revealed that the mainnet is expected to go live this summer.

Previously mentioned, the Arc network currently uses a PoA (Proof of Authority) mechanism, with a set of vetted, reputable institutional nodes responsible for validation and block production.
However, this model carries some centralization risks and is more suitable for early-stage project deployment.
As the network scales, Arc is likely to transition to a PoS (Proof of Stake) mechanism, but USDC is not suitable for staking.
Therefore, Circle is considering introducing a new token system — ARC Token — as the network’s native coordinating asset, managing the interests and behaviors of network participants (validators, developers, users, institutions, etc.).

According to the whitepaper, ARC holders can participate in governance voting based on their staked weight, jointly deciding on fee rates, inflation, and token burn policies;
they will also gain future rights related to protocol access and interaction.
However, the whitepaper clarifies that Arc’s governance model is not purely DAO-based but will retain institutional coordination mechanisms.
High-sensitivity matters such as security responses, compliance, validator admission, and protocol upgrades will still be primarily handled by Circle and designated institutions in the early stages.

Meanwhile, transaction fees paid by users in stablecoins on Arc will be automatically converted into ARC Tokens, with part distributed as rewards to validators and stakers, and part burned.
Compared to traditional public chains requiring users to hold native Gas Tokens directly, this design may better suit institutional and enterprise usage habits.

In the future, the application scope of ARC Token on Arc could further expand, such as:
building dedicated transaction channels;
coordinating and managing asset flows and data interoperability across different blockchains;
supporting multi-asset Gas scenarios via Circle Paymaster, enabling users to pay network fees with different stablecoins, etc.

Image source: ARC: The Native Asset of the Economic OS

However, it should be noted that the ARC Token system is still in discussion and design stages, and significant changes may occur later.
Circle also emphasizes that ARC itself is neither a security nor an investment product, and does not represent any equity or profit rights.

On a dedicated blockchain like Arc, centered around stablecoin payments, large-scale economic activities mainly originate from banks, payment institutions, enterprise users, and capital markets.
As global legal frameworks for stablecoins, on-chain assets, and on-chain financial activities are established and improved, the pathways for these institutions to participate in on-chain infrastructure are becoming clearer.
This trend is also changing the competitive logic of Web3 infrastructure.
The past focus on network performance and transaction fees in public chains is giving way to competition over liquidity, compliance, stability, sustainability, and ecosystem scalability.

Of course, this transition will not happen overnight, and Arc’s future development still faces many potential challenges.

For example, Arc’s current architecture still exhibits strong centralization traits.
While Circle aims to establish a long-term economic coordination and governance mechanism through ARC Token and gradually shift toward PoS, this system is still under discussion and not yet implemented, with significant uncertainty around governance structure and economic model.
Additionally, the ARC Token mechanism introduces extra governance and security risks, such as:
Will the economic model match real network needs?
Could large node staking lead to governance power centralization?
These issues require further discussion and optimization by the team.

Furthermore, although stablecoin regulation is gradually improving, regulatory frameworks vary significantly across countries and regions, meaning Arc will need ongoing adaptation to evolving compliance requirements.

Currently, traditional public chains like Ethereum, Base, Solana, etc., are actively expanding into on-chain financial infrastructure, stablecoin payments, and enterprise-grade applications.
This signals that leading Web3 institutions, including Circle, are seeking change.
But who will ultimately establish the next-generation global on-chain financial infrastructure remains to be seen.

Key points diagram:

References:

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

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