The USD Coin (USDC), the Dollar Stablecoin of Circle and Coinbase

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The USD Coin (USDC), the Dollar Stablecoin of Circle and Coinbase
The USD Coin (USDC), the Dollar Stablecoin of Circle and Coinbase

The USD Coin (USDC) has become one of the most widely used and loved stablecoins in the crypto-asset ecosystem. We take stock of the operation of this stable cryptocurrency, its links with Coinbase and Circle and its advantages over other competitors such as Tether (USDT).

What is USD Coin (USDC)?

USD Coin was created in 2018 by Circle, a company that is part of the CENTER consortium. The Coinbase exchange platform is at the origin of this consortium, so it is significantly linked to the stablecoin. USDC is an ERC-20 type token, which primarily runs on the Ethereum (ETH) blockchain.

The USDC has, however, also launched on the blockchain of Tron (TRX), Solana (SOL), Algorand (ALGO) and Stellar (XLM). It plans to integrate 9 new networks. We should therefore see it land on Tezos (XTZ) or Polkadot (DOT) in the future.

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USDC Logo

A “stable currency” backed by the dollar

USDC is a stablecoin: this means that each USDC token issued is as close to the value of a dollar (USD) as possible. Just like its biggest competitor, Tether (USDT), the USD Coin is “backed”, i.e. guaranteed, by an equivalent dollar amount.

Concretely, this means that the current number of USDC (nearly 60 billion in June 2022) corresponds to reserves of nearly 60 billion dollars held by the Circle company.

USDC is not legal tender, despite the fact that it is issued by regulated institutions: it is indeed a cryptocurrency, just like Bitcoin (BTC). This gives it certain advantages, as we shall see.

What is the USD Coin (USDC) Used for?

USDC, like other major stablecoins, allows you to take advantage of the relative stability of a fiat currency like the dollar while still taking advantage of the flexibility of cryptocurrencies. The USD Coin aims to bring together the best of both worlds in order to offer a flexible and fast payment system. This allows it to be adapted to a few major areas:

Volatility protection

USDC is widely used to “hedge” one’s holdings against significant volatility in the cryptocurrency markets. Typically, investors will store part of their funds in USD Coin on exchanges in order to stabilize the price while waiting to exchange them against other cryptocurrencies.

The majority of major exchanges now integrate USDC. As with Tether, an analysis of USDC funds stored on centralized exchanges can give indications of market trends and the amount of risk investors are willing to assume.

Decentralized finance (DeFi)

USDC is also widely used in decentralized finance (DeFi). Over 50% of the USD Coin supply is now locked in smart contracts. They provide liquidity and power the operation of loans on the various DeFi protocols. The USDC is used as “collateral” thanks to its stability, which makes it possible to bring solidity to a particularly volatile sector.

In March 2021, a study by Flipside Crypto revealed that USDC is now the dominant stablecoin in decentralized finance in terms of total value locked (TVL):

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Source: Flipside Crypto via Circle

Coinbase savings plan

We also note that the Coinbase exchange platform has been offering a savings plan in USDC since June 2021. Holders can thus generate a 4% annual return on their USDC loans. Coinbase wants to stand out from the competition by offering secured loans, which are not made to “unidentified third parties”.

International capital transfers

Just like other stablecoins, one of the biggest advantages of the USD Coin is, of course, its ability to move funds almost instantly, anywhere in the world. Unlike the “classic” dollar, it does not require verification by a centralized entity such as a bank, and there is no limit on the amount.

The USDC makes it possible to get rid of the limitations in terms of cost, time and authorization that still surround transfers of fiat currencies such as the dollar.

USDC – How Does it Work?

Now that we have seen how the USD Coin is used, we can look at how the stablecoin works. CENTER prides itself on launching the first truly dollar-pegged stablecoin. For this, the consortium communicated from the start on the way its cryptocurrency is backed: each USDC is exchangeable at any time against a USD.

Circle and Coinbase are also distinguished by their very regulatory-oriented approach. Unlike a Tether, which deliberately evolved in an artistic blur at the beginning of its operation, the USD Coin very quickly put figures on its reserves.

The company publishes through the firm Grant Thornton LLP monthly reports on the latter. In July 2021, it also began detailing the shares of dollar-denominated assets it holds.

Issuance of USDC tokens

To mint a USDC coin, the CENTER consortium uses a series of smart contracts. Each time USDC is issued, the issuer thus automatically verifies with CENTER that the token corresponds to the value of the funds deposited. Note that CENTER does not itself manage USDC reserves; it is indeed Circle that has this role.

The “state channels”

To increase transaction processing speed, the USDC makes use of side channels called “state channels”. The latter reduces transaction costs and times by posting only the first and last transaction on the blockchain that underpins USDC (e.g. Ethereum).

All so-called ”  intermediary  ” transactions are only recorded locally for the participants. They are signed and encrypted to ensure their security.

The meteoric rise of the USDC

The success of a stablecoin can be seen directly in the supply: the more tokens are issued, the more it reflects demand from investors and traders. In 2022, USDC enjoyed a breakthrough, having previously lived in the shadow of Tether. Its supply has thus increased sharply since the end of 2020:

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Source: CoinGecko

As a result, on Ethereum, USDC will overtake Tether. This progress is accompanied by the success of the Circle company, which managed to raise $440 million in May 2021. It was also preparing for its future IPO under the ticker CRCL. Circle and Coinbase are also considering the creation of other stablecoins, backed in particular by the euro and the yen.

How to Buy USDC?

The easiest way to get USDC is, of course, using Coinbase, the exchange behind the stablecoin. The exchange allows direct exchange of USD Coin for US Dollars. USDC is also available on other exchange platforms, such as Binance or Bitpanda, for example.

USD Coin (USDC) Reviews

Backed by two industry giants, Coinbase and Circle, the stablecoin USD Coin is arguably the biggest competitor to Tether, whose USDT has often been the subject of controversy. The very “pro-regulatory” positioning of the USDC should thus allow it to avoid certain pitfalls at a time when regulators of all stripes have begun to look into the subject of cryptocurrencies.

Today, USDC represents the highest total value locked in the DeFi sector, and it is expected to overtake USDT on Ethereum soon. This, therefore, shows the solidity of the stablecoin project, which should continue to be part of the cryptocurrency landscape in the future.

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