# Circle's New Arc: Is ETH Just an Asset for Institutions?

Source: https://research.auditless.com/p/circles-new-arc-compatible-or-not?isFreemail=false&post_id=171384528&publication_id=357894&r=4qnp&triedRedirect=true
Kiwi News: https://news.kiwistand.com/stories/Circles-New-Arc-Is-ETH-Just-an-Asset-for-Institutions?index=0x68adcd8ae0adfd535f264751dad497a538435385f2d9f198b321d8e03509d2d22288541d
Submitted by auditless.eth on 2025-08-26 UTC, 1 upvote, 0 comments

## Summary

Circle's Litepaper for its new L1, Arc, is presented by the author as a compliance-focused bet on institutional finance rather than a decentralized network like Ethereum. The author notes that Arc would launch with 20 validators, argues that decentralization matters less for institutions that already trust one another, and says Circle is not claiming support for use cases beyond stablecoins. Arc would use USDC as its gas token and a modified EIP-1599 fee mechanism, which Circle claims makes USDC fees more stable. The author says Circle's EVM-compatibility claim does not hold up in full, citing precompiles that affect application portability.

## Article

Circle dropped a Litepaper for their new L1 called “Arc”.

I'm excited to dive in because every new L1 indicates a vote for a different trajectory than Ethereum is currently on. Stripe’s L1 announcement didn't offer much clues but we have a lot more detail here from Circle.

Of course the party line is “vertical integration”, quoting from Blockworks:

Circle’s Q2 2025 Earnings Call also reaffirms this with multiple mentions of “transaction revenue streams” as a focus area.

But the Litepaper takes a much more aggressive stance in defending some of its features so we need to look beyond internalizing fee revenue.

The Litepaper tends to flip from consensus math to a compliance statement. In several excerpts, it aims to present a case why Arc would be more compliant than Ethereum for institutional finance:

Is this the first litepaper that is aimed at regulators over developers/users?

The regulatory arbitrage here is compelling.

While Arc would be limited to 20 validators at launch, the decentralization argument really doesn't apply to institutions as they already trust other institutions.

Circle is pretty explicit in the Litepaper about building the minimum set of infrastructure for compliant, invoiced, tracked, private, institutional transfers.

While they are open to DeFi development onchain, they are not claiming to support use cases beyond stablecoins.

Of course Arc will use USDC as the gas token. The network will also use a modified version of EIP-1599 that uses an exponentially weighted moving averages for target utilization to minimize block-to-block volatility.

Circle claim that the gas denominator interplays with EIP-1599 in a way that makes USDC fees more stable.

I don't fully understand this point.

I would claim that demand for block space is largely independent of the block fee numeraire (when it is sufficiently liquid as ETH/USDC is). Directionally, fees should arrive at the same place in absolute value terms.

It is true that short-term ETH price movements will provide additional volatility between blocks. It’s probably not a significant effect to require dedicated hedging if block times are under 1 second.

For this reason, I'm also not convinced that institutions need to hold a lot of ETH to “hedge” being able to pay gas fees.

Either way it’s not surprising that Circle would default to USDC for fees and it represents a UX improvement, I just don't get why banks would struggle to pay gas in ETH.

Circle claims that the network is EVM-compatible but unfortunately the details don't bear this out.

While it is true that existing Ethereum contracts could run fine on Arc, the opposite is not true:

Using a precompile to build cryptographic primitives for privacy seems reasonable (and may result in some of the earliest productive use cases of privacy in the space) but has annoying implications for application portability.

I hope precompiles don't become a competitive differentiator for different “EVM”-based L1s. It’s already bad enough with the different zk-EVMs.

It’s a little sad that we won't all use the world computer but Arc presents compelling features. Things I haven't mentioned include transaction amount privacy, audit backdoors, a FX engine which will provide native oracles, adoption of relevant ERCs, etc.

The ironic thing is that financial institutions seem to be piling into BTC and ETH while building away from the assets’ native networks. Few institutions have been building Ethereum L2s and they are certainly not expressing interest in Bitcoin L2s.

Is ETH just becoming ultrasound money that happened to subsidize some public goods (the EVM ecosystem)?