What is USDC coin?DownloadSubscribe
What is USDC coin?

What is USDC coin?

Beaten only by Tether, USDC is the second most popular stablecoin in the cryptocurrency ecosystem.

The Ethereum-based stable coin has received increased attention recently, following announcements that the Visa payment network will allow settlement in USDC, thus bridging the blockchain world and traditional finance.

This article will explain how USDC works, why USDC is better than Tether, and how USDC can be used with different blockchains.  

How USDC Works

USDC is a stablecoin run by a joint partnership between Circle and Coinbase. Together these two companies are responsible for creating, managing and redeeming USDC. Here’s how the stablecoin works.

  • After completing a KYC check, investors deposit USD (US Dollars) with Circle
  • Circle mints USDC at a 1:1 rate with the dollars deposited. If an investor deposits $100 USD, they will be given 100 USDC tokens
  • The investor receives the USDC tokens and can use them as they see fit
  • At any time an investor can redeem USDC for US dollars from Circle

In summary; USDC has value because it’s 1:1 redeemable for dollars held in a bank account. This dollar peg is also what keeps USDC trading steady at $1.

If 1 USDC is trading for $1.03 the peg is too high. When this happens, investors can deposit USD with Circle and mint USDC which is worth more than $1. This increased supply of USDC drives down the value of the coin to $1.00

If 1 USDC is trading for $0.97 the peg is too low. When this happens, investors can buy USDC and redeem the tokens for USD dollars. This buying pressure increases the demand for USDC, returning its value to $1.00.

This arbitrage trade is what keeps the value of USDC at or very near to $1.

How USDC Trades

A vast majority of USDC trades as an ERC20 token, existing on top of the Ethereum blockchain. All ERC20 USDC is fully interoperable within Ethereum’s DeFi ecosystem. For example, USDC is commonly used in Uniswap, Compound, Aave and many other DeFi protocols.

USDC DeFi coin
Image showing lending/borrowing protocols that support USDC

Although most USDC runs on top of Ethereum, other blockchains host USDC as well. USDC also trades on top of Algorand, Stellar and Solana.

Regardless of which blockchain USDC is trading on, the concept is always the same. One USDC token can always be redeemed for a $1 held in a bank account by Coinbase.

The Downside of USDC

USDC is a centralized stablecoin which is controlled by a single organization. Like financial products in the legacy banking system, Coinbase can block USDC transactions and freeze USDC accounts.

This happens very infrequently and 99.99% of all USDC users should never worry about their account being frozen. However, it is a possibility. This is different from a decentralized stablecoin like DAI, where an account balance can never be frozen, nor can a transaction be blocked.

Why USDC is Better Than Tether

Although Tether is the world’s most popular stablecoin by market cap, the project has glaring flaws. Most importantly, Tether has never credibly proven that they actually have enough dollars to cover all of their USDT liabilities.

In other words, if all USDT holders wanted to redeem their tokens for dollars at the same time, there may not be enough dollars to meet that demand. This had led many to believe that Tether could blow up, much to the detriment of the cryptocurrency ecosystem. Tether had also come under fire for having a conflict of interest with the Bitfinex exchange, to which it had made a large loan, but this loan has been recently paid back, and Bitfinex reports that it has no further lines of credit with Tether.

Unlike Tether, USDC is created and managed by Coinbase and Circle, two of the most reliable companies in the cryptocurrency ecosystem. Most importantly, the two companies release regular audits to prove that they have enough dollars to back up all of their outstanding USDC liabilities.

Barring some major cataclysm, USDC holders shouldn’t ever have to worry about a bank run. There will always be enough dollars to make them whole if they want to convert their USDC to USD.

Will USDC Be Regulated?

USDC is not breaking any laws and is conforming to all existing American regulations. Using USDC is not illegal, nor does it fall into a legal grey area.

That being said, it’s likely that as the cryptocurrency ecosystem grows there will be additional regulations which affect USDC. In fact, just recently we’ve seen two examples of regulations which can affect USDC, and stablecoin issuers in general.

  • The Stable Act would force any stablecoin issuer, like Coinbase and Circle, to get a United States banking license. This particular piece of legislation has been rolled out too quickly and is not expected to pass. However, even if the Stable Act is discarded, a similar piece of regulation may be put forward in the future.
  • Much more positively, we’ve just seen the OCC (Office of the Comptroller of the Currency) release a ruling that gives banks the ability to use stablecoins as a payment method, the same way that banks use ACH wire transfers and the SWIFT system.

The Stable Act would make it much more difficult to issue stablecoins. If the regulation passed, Coinbase and Circle would have to get banking licenses to continue supporting USDC.

On the other hand, the OCC ruling that allows banks to use stablecoins is incredibly bullish for the industry. It further integrates USDC into the existing financial system, which is great for Coinbase, Circle and everyone who uses USDC.

Why USDC Matters

USDC is an important part of the cryptocurrency ecosystem. It’s the second most popular stablecoin and USDC is continually growing in market cap. In other words, investors are depositing and creating new USDC, faster than old USDC are being redeemed for dollars.

This is really good for everyone in crypto. USDC’s growth means more money is flowing into a reliable stablecoin, and that crypto users now have more choice as to where they put their savings.  

Investors must complete a rigorous KYC process before they can mint new USDC straight from Circle, however, anyone can buy USDC on the secondary market. USDC trades on dozens of exchanges and on four different blockchains, giving investors lots of options in how they use the stablecoin.

Support for USDC on the visa network also marks an important step in the road for cryptocurrencies becoming the globally accepted payment solutions of the future.

This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

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