A USDC (US Dollar Coin) is a cryptocurrency that is backed by fiat money, making it a stablecoin. It is a tokenized US dollar, with the value of one USDC coin pegged 1:1 to the value of one US dollar. It is important to note that, despite its name, it is not issued by the US government. Its reserve assets are held in segregated accounts with US regulated financial institutions.
It was created in a joint venture by fintech company Circle and crypto exchange platform Coinbase. Initially an ERC-20 token, it has expanded beyond Ethereum to other blockchains.
What is a stablecoin?
A stablecoin is a type of cryptocurrency that offers price stability and whose values are tied to real-world assets. Some are actually backed by a reserve of the asset that they represent while others use algorithms or other methods to keep their values from fluctuating too much. Stablecoins have gained traction as they attempt to offer the best of both worlds; the instant processing and security or privacy of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies.
Stablecoins have become a key component of developing decentralized finance (DeFi) in which transactions can be carried out without a middleman such as a bank or a broker. If you are thinking about using cryptocurrency for something other than trading or investing (think: lending, borrowing or financing), you are bound to encounter stablecoins. Stablecoins such as USD Coin or Tether are among those with the highest market capitalizations on the cryptocurrency market.
Fun Fact:
Although, one USD Coin represents one US Dollar, you can buy less than $1 of USDC. Just like you can divide the US Dollars into cents, you can buy as little as 0.000001 worth of USD Coin.
Understanding stablecoins:
Though Bitcoin (BTCUSD) remains the most popular cryptocurrency, it tends to suffer from high volatility in its valuations. For example, its price increased from around $5000 at the height of the coronavirus pandemic sell-off in March 2020 to almost $65000 in April 2021. It then plunged again by over 50% to around $30000 in June 2021. It is not uncommon to see 10% fluctuation in either direction within a few hours.
This kind of short-term volatility makes Bitcoin and other popular cryptocurrencies unsuitable for everyday use by the public. A currency should act as a medium of monetary exchange and a mode of storage of monetary value. Its value should remain stable over longer time horizons. But if it is not, people will refrain from adopting it.
Similarly, cryptocurrencies, should maintain their market value and have as low inflation as possible’ sufficient enough to encourage spending the tokens instead of saving them. Stablecoins provide a solution for achieving this ideal behaviour.
How does USD Coin work?
As we know, USDC is pegged to the US dollar. Its reserve assets are held in segregated accounts with regulated US financial institutions. Such accounts are attested to (i.e., verified publicly) by an independent accounting firm Grant Thornton.
The US Dollar Coin isn’t mined like a lot of other cryptocurrencies. It is available as Ethereum ERC-20, Algorand ASA, and Solana SPL tokens that can be purchased using US Dollars on several major exchanges. As per Circle, there is a supply of four billion tokens in circulation right now.
Once a customer meets the Know Your Customer (KYC) identity requirements, they can link their bank account and make a wire transfer in US dollars. If you initiate a transaction to buy one USD Coin using fiat currency, then that fiat currency is deposited and stored as one US dollar and the new USDC is minted. If you sell a USD Coin exchange for fiat currency, then the USDC is “burned” when the fiat money is transferred back to your bank account. This is also how the USD Coin maintains the 1:1 peg with the US dollar.
What is so special about USDC?
USDC is often referred to as a programmable dollar. Unlike regular US dollars, USD Coin doesn’t require a bank account or particular geography. USD Coin allows unbanked and under-banked individuals in any country to hold a US dollar-backed asset with nothing more than a mobile phone. And you can send USD Coins around the world at an extremely low cost in just a few minutes. This opens a lot of possibilities. Additionally, being programmable, developers can create accounts to store money with one line of code. Lending is faster, cheaper, and more transparent. It also opens up faster and cheaper payments, including payroll, global crowdfunding, transparent and stable donations to charity.
While USD Coins may not be totally unique compared to other stablecoins, there are a few reasons why it stands out among other cryptocurrencies.
- Regulation: The parent company of USD Coins is a registered Money Service Business in the United States. This means that it is regulated by the government’s Financial Crimes Enforcement Network (FinCEN), which combats money laundering.
- Audit: USD Coin is suited by Grant Thornton, one of the top 10 accounting firms in the world.
- Fast: It can take a long time to send US Dollars to people and institutions when banks are involved; especially cross-country transactions. USDC offers the stability and desirability of the US Dollar with the speed of cryptocurrency transactions.
- DeFi: You can also use USD Coins in a variety of decentralized finance protocols. For instance, you can deposit it in BlockFi, a loans company that offers you interest for depositing USD Coins (among other coins).
- Stable asset: USD Coin is usually held as a stable asset by crypto traders, just like other stablecoins such as Tether and DAI. It is useful for traders who want to have an easy way to trade cryptocurrencies for US dollars. Since USD Coin represents a US dollar, it’s a neat way to trade more volatile currencies, such as bitcoins (BTC).
Cons of USDC:
The only cons of USDC are that, as stablecoins, while they have less price volatility than other cryptocurrencies, it is not immune to the US dollar price inflation. It also may be subject to increased scrutiny by regulatory agencies like the US Securities and Exchange Commission.
The Future:
Traditional investors are wary of cryptocurrency for two key reasons: lack of regulation and volatility. But this new wave of stablecoins seeks to change all of that for better. By becoming a more attractive way for institutional investors to get involved in, stablecoins like USDC could help make cryptocurrencies more mainstream.
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