What is USD Coin (USDC), fiat-backed stablecoin explained
What is a USD coin (USDC)?
A fully-reserved stablecoin, USDC, was created to ensure price parity with the US dollar.
USD Coin (USDC) is a fiat-collateralized stablecoin, a decentralized digital asset that lives on the blockchain and is pegged to a fiat currency — in this case, the United States dollar — to stabilize its value against market volatility. However, USDC is not the only stablecoin available in the market. Another asset-backed (U.S. dollar) stablecoin called Tether (USDT) was launched in 2014 by Tether Limited.
So who is behind the USD Coin? The Boston-based Circle and Coinbase exchange created the USD currency (USDC) in 2018 as part of the Center consortium. USD Coin claims to be equivalent in value to one U.S. dollar, meaning that for every USDC in circulation, one U.S. dollar is held in reserve. In essence, the USD Coin is a service that tokenizes the U.S. dollar and makes it easier to utilize over the internet and on public blockchains.
Unlike cryptocurrencies, the USD Coin cannot be minted. USDC is available as ERC-20, the most widely used standard for blockchain apps, making it interoperable with all other Ethereum-based decentralized applications (DApps). However, it is not solely restricted to the Ethereum network. Instead, the USD Coin is compatible with significant blockchain networks, including Solana, Stellar, Algorand, Flow and TRON.
Since its introduction, USDC has established itself as a critical component of the stablecoin market with ample liquidity and trading across centralized and decentralized exchanges worldwide.
How does a USD Coin work?
Each time a USD is deposited, a smart contract creates a USDC that may be redeemed for one dollar.
USDC commercial issuers must possess any or all licenses required by the operating jurisdictions. Moreover, they need to ensure audited Anti-Money Laundering and compliance processes that comply with the Financial Action Task Force requirements.
They should support the fungible exchange and redemption of USDC tokens from other reputable issuers and abide by further reporting and review specifications set forth by the Center. USDC issuers must also hold reserves at a 1:1 ratio to the amount of issued tokens and offer monthly publicized proof of reserves with qualified public auditors’ attestations.
Technically, a USDC token is created via a smart contract each time a dollar is deposited. Moreover, each USD Coin is redeemable for one dollar and is backed by either one dollar or an asset denominated in USD (fiat currency), which is kept in accounts at regulated institutions in the United States.
For stablecoins and USDC to function as intended, the parties in charge of overseeing them must be trustworthy and transparent. As a result, Circle employs Grant Thornton LLP, a U.S. accounting company, to audit those accounts and offer routine updates via monthly attestations on the reserves supporting USDC.
Then, to maintain consistent backing, the coins are permanently destroyed, or burned, when a consumer wants to redeem USDC back for dollars, and funds from the underlying reserves are returned to the client’s external bank.
What are the unique features of USD Coin
A USD Coin is a fully transparent and audited stablecoin, which is pegged to the U.S. dollar and can be used for instant global payments, purchasing goods and services and lending and borrowing without intervention of third parties.
The USD Coin maintains the same value as the U.S. dollar, making it a unique option for holding a digital currency without bearing the price risk of major cryptocurrencies such as Bitcoin (BTC) and Ether (ETH). Other notable features of the USD Coin are explained below:
- Instant global payments: USDC allows individuals and businesses to accept payments in digital assets 24/7. As a result, it is possible to transmit money across international borders as rapidly as sending a text message.
- Purchase goods and services: Online retailers allow customers to purchase various items using USDC. For instance, users can buy NFT compilations of rare basketball moments with USDC on well-known online marketplaces like NBA Top Shot.
- Instant lending and borrowing: USDC can be lent to those in need without the intervention of third parties. Similarly, it is feasible to borrow USDC instantaneously and start using funds in a matter of seconds rather than waiting several weeks to secure a loan.
What are the advantages and disadvantages of USD coin
USDC offers instant payments, saves users from the cryptocurrency market’s price volatility and is audited by a regulated auditing firm, making it a transparent stablecoin. However, it does not offer price appreciation opportunities, and investors may incur high transaction and withdrawal fees while dealing with USDC.
One of the key advantages of the USD Coin is the speed of the transaction. Usually, one must wait a long time to send and receive USD because institutions such as banks and their complex procedures slow down the processing of transactions. Nonetheless, USDC allows instant clearing and settlement of payments.
In addition, stablecoins like USDC saves users from the price volatility of cryptocurrencies, as leading American financial institutions ensure that Circle’s reserves are 100% backed by the U.S. dollar or short-term treasuries at all times. Moreover, there are numerous digital asset exchanges where one may buy USDC. Many exchanges also enable the withdrawal of USDC across various blockchains.
Furthermore, using a cryptocurrency wallet, one can quickly make cross-border payments or remittances. Similarly, one can earn passive income by lending USDC on decentralized finance (DeFi) platforms like Aave.
Regardless of the above advantages, the USD Coin may not be an ideal investment asset for those looking to earn money from digital assets because USDC may not offer potential price appreciation opportunities to yield profits.
Also, some exchanges charge a high fee for withdrawing USDC stablecoin, and transaction fees may be higher than a typical bank transfer or a PayPal transfer for smaller transactions. Moreover, even if DeFi platforms offer more interest for each USDC lent, they are riskier, as evidenced by various crypto heists.
How to buy a USD Coin?
USD Coin can be bought on cryptocurrency exchanges after meeting the Know Your Customer requirements.
One can buy USDC on exchanges like Coinbase, Kraken and Gemini. For example, buying USD Coin on a centralized exchange like Coinbase involves the following steps:
- Sign up on Coinbase and get your account verified to start transacting.
- Add a payment method such as a wire transfer, debit credit or bank account.
- Start trade by selecting “( )” Buy on the Coinbase mobile app or Buy & Sell on Coinbase.com.
- Enter “USD Coin” in the search field of the Coinbase mobile app to select USD Coin from the list of assets. Instead, click the Buy panel on Coinbase.com to search for and choose USD Coin.
- Enter the amount you wish to spend to change the value to the corresponding amount of USD Coin.
- Confirm your purchase by clicking “Buy now” to complete the purchase.
USDC vs. USDT
Although both USDC and USDT are USD-backed stablecoins, they have some differences in terms of the year they were launched, issuing organizations, compatibility with blockchain networks, assets-backing and auditors.
USDC and USDT are fiat-collateralized stablecoins pegged to the U.S. dollar, which were introduced to combat the highly volatile price swings of the cryptocurrency market. The majority of significant cryptocurrency exchanges offer USDC.
Similar to USDT, USD Coin can be sent and received by any ERC-20 compliant wallet or exchange and other blockchains like Stellar, Algorand, Solana and more. Along with these similarities, significant variations between these two stablecoins could influence a user’s choice.
Here are a few differences between USDC and USDT stablecoins:
Is USD Coin safe?
Despite the fact that the USD Coin is subject to regulatory oversight, investors must weigh the pros and cons of investing in stablecoins before committing any funds.
Comparing USDC with USDT, USDC is subject to regulations as it is audited from time to time, and Circle is fully transparent about its operations. However, investing in the cryptocurrency market, even in stablecoins, has its own cons. For instance, the price of the USD Coin will never appreciate as it is pegged to the U.S. dollar.
This disadvantage is offset by the provision that USDC can be lent and borrowed on decentralized platforms to earn passive income. Moreover, it depends upon one’s risk-return profile and how much funds one wants to allocate to a particular asset. Also, with trusted exchanges like FTX going bankrupt, one must be mindful of the risks of investing in stablecoins and cryptocurrencies.
Back to the list