What is USD Coin (USDC)?

TL;DR

USDC is a stablecoin pegged to the value of the US dollar. It is backed by actual dollar reserves and kept under scrutiny by US financial institutions. As one of the leading stablecoins in the market, USDC aims to guarantee that one USDC token will always be equivalent to one US dollar. 

Cryptocurrencies have a general reputation for price volatility, relative to more traditional assets such as stocks and securities. However, there are cryptocurrencies that are designed to be less susceptible to such volatility, appropriately named “stablecoins”.

USD Coin (USDC) is one such stablecoin that  was developed to be constantly pegged to the price of the US dollar. USDC can maintain this value peg by being backed by actual dollar reserves—their goal being to have one USDC always exchangeable for one US dollar and vice versa.

Stablecoins thus function more like actual currency, unlike Bitcoin (BTC) or Ethereum (ETH) whose fluctuating prices makes them somewhat unsuitable for payment purposes.

Stablecoins also play an important role in trading, allowing for exchanges to be conducted without having to cash out cryptocurrencies into fiat money. Since their prices fluctuate only minutely in negligible amounts, they are used as a reliable store of value.

Among stablecoins, USDC is currently the second-largest according to market capitalization next only to the pioneer stablecoin, Tether (USDT), a position it has kept almost since it was first issued in 2018 up to the present. 

USDC is an ERC-20 token, which means that it was primarily designed for use within the Ethereum network for the following purposes:

• USDC can be used for near-instant payments or money transfers which can be accessed by anyone with an internet connection and a wallet that can hold USDC, without the need for third-party intermediaries such as a bank. 
• Fiat dollars can be exchanged for USDC to trade on cryptocurrency exchanges, making it far more convenient to track, compute and record profit and loss margins. 
• Assets can be converted to USDC as a hedge during times of extreme market volatility. 
• Decentralized finance or “DeFi”, (which is the term used to refer to algorithm-based financial instruments that anyone can enter into without the need for middlemen) as well as their regulated counterparts called centralized finance (CeFi) are dependent on the use of trusted stablecoins such as USDC to be able to automatically execute their products’ smart contracts. 
• Businesses can also build on the USDC platform to integrate the ease and speed of using USDC onto their payments or payout processes. 

Different stablecoins maintain their value in different ways and are classified accordingly. Some stablecoins are backed by actual fiat reserves while some are backed by commodities such as gold or oil. Meanwhile, some “algorithmic” stablecoins can maintain their pegs through complex programming that manages their token supply to make them resistant to inflation. USDC belongs to the first type, with all of USDC coins in existence reportedly backed by the exact amount held in segregated accounts under US financial regulations. 

For USDC, the process is very straightforward. Every time a person purchases USDC, the corresponding amount is “minted” onto the blockchain and put into circulation while the fiat money used to purchase it is deposited in a bank. 

Conversely, every time USDC is sold and money is withdrawn from the bank, the corresponding USDC is then “burned” or removed from circulation, thus maintaining the 1:1 ratio at all times.

From an investor perspective, such a simple-to-understand system is the appeal of fiat-backed stablecoins like USDC over their more experimental algorithmic cousins due to the perceived security. Though algorithmic stablecoins argue that they provide more transparency since all records are kept public on a blockchain instead of in a bank, USDC can assure their holders by publishing monthly attestation reports conducted by the firm Grant Thornton LLP,  which can also be accessed publicly. 

USDC was established in 2018 by the Centre Consortium, a collaboration between Coinbase and the financial technology company, Circle, whose vision is to use blockchain technology to increase financial connectivity globally, and eliminate cross-currency and cross-demographic barriers. 

Within a year of its launch, USDC was able to exceed a one billion market cap, hailing it as the fastest-growing stablecoin during that time.

In July of 2021, the Grant Thornton report revealed that USDC had diversified its reserves to include securities and bonds, which led to some public criticism. In recognition of their commitment to transparency, the Centre Consortium has since then reverted to using only cash and short duration US treasuries as reserve assets. 

Only recently, in the aftermath of the TerraUSD (UST) meltdown, USDC caught up with its main rival, USDT, with a $3.4 billion market value gain. UST, an algorithmic stablecoin, allegedly pulled the entire crypto market down after failing to maintain its dollar peg, causing investors to channel their assets onto USDC.

Though natively an ERC-20 token, USDC also exists in versions supported by other blockchains. On PDAX, alternative network support is available for USDC (Algorand), USDC (Stellar), and USDC (Polygon), aside from USDC (Ethereum).

[Note: Please make sure you are using the correct network to prevent losing your assets.]

Stablecoins have seen massive growth in recent years, which points to a growing trend in cryptocurrency being used more and more as part of our everyday lives. Not surprisingly, stablecoins also seemed to have proven to be very useful during times of crisis with demand having increased with the outbreak of the pandemic as people looked for other alternatives for cash flows during the lockdowns. 

Even the launch of the Russian invasion into Ukraine earlier this year was also a point in the case for stablecoins as holders rushed to stabilize their assets by converting them to USDC while prices of BTC and ETH took a downturn. 

All in all, stablecoins seem to combine the best things about fiat currency: stability and immediate liquidity—with the best things about cryptocurrency: speed, ease of transactions, as well as security, and transparency. And with how things have been developing recently, investors and traders seem to agree that USDC epitomizes both sets of virtues the most. 

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DISCLAIMER: The statements in this article do not constitute financial advice. PDAX does not guarantee the technical and financial integrity of the digital asset and its ecosystem. Any and all trading involving the digital asset is subject to the user’s risk and discretion and must be done after adequate and in-depth research and analysis.