The article primarily introduces Circle's Arc Network whitepaper and its new economic mechanism, analyzing whether it can serve as a clearing and coordination layer for institutional-grade stablecoin payments.
Author: Shirley Li, Researcher at Web3Caff Research
Source: Web3Caff Research
Word count: The entire text is over 3,100 words.
Compliance Notice: Stablecoins are virtual tokens (Token). Please be aware that regulations and restrictions regarding the issuance of and participation in token investments vary significantly across countries and regions. In particular, issuing tokens within Mainland China may constitute “illegal securities issuance,” and activities such as facilitating token trading or other cryptocurrency-related services are classified as “illegal financial activities” (Mainland China readers are strongly advised to review Compilation and Key Highlights of Laws and Regulations Related to Blockchain and Virtual Currency in Mainland China). The following content provides an objective analysis of Arc Network’s progress and market feasibility strategies, aiming to explore how application scenarios supported by blockchain technology are developing responsibly within the global regulatory environment. Therefore, please do not make any decisions based on this information, and strictly comply with the laws and regulations of your country or region—do not engage in any illegal financial activities.
Stablecoins have long beenan essential component ofon-chain financial ecosystems. Recently, with the rapid development of use cases such asRWAand cross-border payments, their role is evolving from a simple on-chain transaction medium to a vital value carrier connecting traditional finance with on-chain economies in parts of the world, making stablecoin payments a new form of financial infrastructure.
In May last year, Circle announced the launch of Arc, a Layer1 blockchain built specifically forpayment stablecoinsand the ecosystem surrounding them,Layer1blockchain, aiming to provide enterprises with a high-performance, predictable, and compliant enterprise-grade entry point for stablecoins. The emergence of Arc is also expected to transform Circle’s native stablecoin, USDC, from a standalone payment token into a utility token on the blockchain. Previously, Circle released the Arc Literpaper, outlining the product-level operational logic of this blockchain; Web3Caff Research has also provided a detailed analysis:
As a Layer 1 blockchain, Arc has made the following innovations primarily focused on enterprise-level users:
- USDC as the Native Gas Token: Arc introduces USDC as the native gas token on its public blockchain to eliminate the impact of token price volatility, ensuring that interaction costs are directly tied 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 spikes in gas fees due to abrupt network congestion. Additionally, when users pay with other stablecoins, Arc automatically uses its native stablecoin via Circle Paymaster to cover the interaction fees and deducts an equivalent value of the user’s chosen stablecoin from their account. This provides flexibility for multinational corporations and users in non-US dollar regions, positioning Arc as a potential global, multi-currency financial settlement blockchain.
- High-performance consensus design: In a blockchain context, because the finality of interactions requires time, enterprises cannot immediately initiate the processing of an order, as there is always a possibility that subsequent automated financial or business system processes may need to be reversed. This means each transaction carries a potential additional processing cost, which is unacceptable in real-world business operations. To address this, Arc employs the Malachite consensus mechanism (a Tendermint-based Byzantine Fault Tolerant protocol), under which a payment is instantly finalized and irreversible once confirmed and committed by two-thirds of the validators. Meanwhile, Arc’s validators are not anonymous staking nodes, but a curated group of reputable institutions capable of meeting compliance requirements across global regulatory frameworks. In the future, Arc will introduce multi-proposers, allowing multiple validators to generate block proposals in parallel within the same time window, which are then aggregated into a single block during the consensus phase—further increasing the payment system’s throughput and reducing latency in financial processing.
- Enterprise-grade privacy: To ensure the protection of core business information, Arc offers optional privacy features for enterprises, implemented in phases. As advanced security technologies such as secure multi-party computation and homomorphic encryption mature, Arc will introduce more sophisticated on-chain privacy settings, such as private order books and privacy-enabled financial strategies, automatically executed via private on-chain contracts.
If you'd like to learn more about how the Arc blockchain works, we recommend reading:“Market Pulse Analysis: Circle Enters the Public Blockchain Arena—Can Its L1 Network Arc Become the First Compliant Chain for Payment Stablecoins?”.
As we move into May this year, six months after the Arc testnetlaunch, Circle has once again released the Arc blockchain whitepaper, further explaining the design rationale behind the ARC Token as the native coordinating asset of the Arc network, and revealing that Arc mainnetis expected to launch this summer.
As mentioned earlier, the Arc network currently employs a PoA (Proof of Authority) mechanism, where a curated set of reputable institutional nodes are responsible for network validation and block production. However, this model carries certain centralization risks and is better suited for the early launch phase of the project. As network adoption grows, the Arc network is likely to transition in the future to a PoS mechanism. However, USDC, as a stablecoin, is not suitable for staking. Therefore, Circle is considering introducing a new token system—ARC Token—as the native coordinating asset of the Arc network, designed to align and coordinate the interests and behaviors of all participants (validators, developers, users, institutions, etc.).
According tothe whitepaper, ARC holders can participate in network governance voting based on their staking weight, collectively deciding on network fee rates, inflation rates, and burn mechanisms; they may also gain certain protocol access and interaction rights in the future. However, the whitepaper explicitly states that Arc Network’s governance model is not fully DAO-based and will retain institutional coordination mechanisms. For high-sensitivity matters such as security responses, compliance, validator node onboarding, and protocol upgrades, Circle and designated institutions will primarily be responsible during the network’s early stages.
Meanwhile, transaction fees paid in stablecoins on the Arc network are automatically converted into ARC Tokens, with a portion distributed as rewards to validators and stakers, and another portion burned. This design is more aligned with the usage habits of institutions and enterprises compared to traditional blockchains that require users to hold native gas tokens directly.
For the Arc network, the use cases for ARC Token may expand further in the future—for example, by enabling the creation of dedicated transaction channels; coordinating and managing asset flows and data interoperability across different blockchains; supporting Circle Paymaster’s multi-asset gas scenarios, allowing users to pay network fees with various stablecoins, and more.
Image source: ARC: The Native Asset of the Economic OS
However, please note that the ARC Token system is currently in the discussion and design phase and may undergo significant changes in the future. Additionally, Circle has repeatedly emphasized that ARC itself is neither a security nor an investment product and does not represent any equity or right to returns.
On specialized blockchains like Arc Network, which center on stablecoin payments, large-scale economic activity typically originates from banks, payment institutions, enterprise users, and capital markets. As global regulations surrounding stablecoins, on-chain assets, and on-chain financial activities are established and refined, the pathways for these institutions to participate in building on-chain infrastructure are becoming increasingly clear. This trend is also reshaping the competitive logic of Web3 infrastructure. The era of purely competing on network performance and transaction fees is fading; instead, liquidity,liquiditycompliance, stability, sustainability, and ecosystem scalability are emerging as the new battlegrounds.
Of course, this transition will not happen overnight, and the Arc network still faces several potential challenges in its future development.
For example, the current overall architecture of the Arc network still retains a strong centralized character. Although Circle is attempting to establish a longer-term economic coordination and governance mechanism for the network by introducing the ARC Token, and gradually moving the network toward a PoS model, this system remains in the discussion phase and has not yet been formally implemented; its specific governance structure and economic model still involve considerable uncertainty. Meanwhile, the ARC Token mechanism itself introduces additional governance and security risks to the Arc network—for instance, can the economic design align with the network’s actual needs? Will centralized staking by large nodes lead to a re-concentration of governance power? These issues remain to be further discussed and refined by the official team.
In addition, although the regulatory framework for stablecoins is gradually being refined, significant differences still exist across countries and regions, meaning that Arc Network will need to continuously adapt to evolving compliance requirements.
Currently,Ethereum, Base,Solana and other traditional blockchains are actively expanding into on-chain financial infrastructure, stablecoin payments, and institutional-grade applications. This is a clear signal that leading Web3 institutions, including Circle, are seeking transformation—but it remains to be seen which will ultimately build the next generation of global on-chain financial infrastructure.
Key structure diagram:
References:
[1] Introducing the ARC Whitepaper: Exploring Arc’s Native Coordination Asset
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