What is USD Coin and how does it work? Explained by Digimagg

USD Coin (USDC) is a cryptocurrency linked to the U.S. dollar, ensuring its value remains stable. Classified as a stablecoin, each USDC is intended to retain a value equivalent to one dollar.

USDC is presently the second-largest stablecoin, boasting a market capitalization of $73 billion. Together with Tether (USDT), USDC constitutes 80% of the global stablecoin market capitalization.

What is USD Coin?

Introduced in 2018 by Centre, a consortium established by Circle and Coinbase, USD Coin (USDC) was designed as a regulated stablecoin leveraging blockchain technology.

Stablecoins, like USDC, are a category of cryptocurrency tethered to another asset, be it a fiat currency, commodity, or another cryptocurrency. USDC's objective is to maintain a fixed ratio with the U.S. dollar, ensuring a one-to-one peg.

Unlike cryptocurrencies such as Bitcoin (BTC) or Ethereum (ETH), which exhibit price volatility, stablecoins like USDC serve a distinct purpose. Rather than aiming for asset appreciation over time, they primarily function as a stable store of value.

For instance, while Bitcoin has experienced a year-to-date return of -35% at the time of writing, the value of USDC has remained relatively steady throughout the year. Within the last 52 weeks, USDC's trading price dipped slightly below its dollar peg to $0.995.

How does USD Coin work?

USD Coin (USDC) is supported by tangible assets, often referred to as a fiat-collateralized stablecoin. This means that it's backed by a sovereign currency like the U.S. dollar or the British pound.

To maintain the stable value of USDC at $1, it's collateralized by cash and short-term U.S. government bonds. Essentially, for every USDC token in circulation, $1 is held in collateral.

Investors in the crypto market acquire USD Coin with the expectation that its value will consistently match that of the dollar. The primary use case for USDC involves purchasing it, storing it on an exchange or crypto wallet, and subsequently using it to buy other cryptocurrencies.

Transparency offered by USDC

Steve Bumbera, Many Worlds Token's Chief Operating Officer, emphasizes that USDC is widely regarded as a secure stablecoin due to its transparent collateral reserves.

He notes that Centre collaborates with auditors and regulatory bodies, ensuring clear disclosure of reserves supporting the USDC's peg to the U.S. dollar. Monthly reserve balance reports are accessible, detailing USDC circulation and its dollar equivalence.

Grant Thornton audits USDC, with Circle announcing weekly attestation reports since May 2022, enhancing trust by revealing the exact funds backing the stablecoin.

When acquiring 1 USDC, a new token is minted, while selling 1 USDC for fiat currency "burns" the coin.

USDC mirrors the divisibility of the U.S. dollar, allowing fractions down to 0.000001 USDC, although Coinbase imposes a 0.001 USDC withdrawal limit. Maximum withdrawal caps at 15,000,000 USDC.

Marco Manoppo, Digital Asset Research's Research Director, explains that digital asset participants trade USDC pairs on exchanges or interact directly with its issuer.

USDC injects liquidity into crypto markets and operates across prominent blockchain networks like Ethereum, Algorand, Solana, and TRON. Additionally, it serves as an ERC-20 utility token, standard for Ethereum smart contract creation.

Pros and cons of USD Coin

USD Coin offers a significant advantage by facilitating the purchase and sale of other cryptocurrencies without the need to convert fiat currency in and out of exchanges.

USDC transactions are available 24/7 and are faster than traditional currency transfers, with settlements completed in seconds. Moreover, transaction costs are minimal, ensuring cost-effectiveness and efficiency.

According to Jeremy Allaire, Circle's founder and CEO, USDC's appeal lies in its seamless integration with the global banking system, making it effortless to create and redeem. This integration enables swift capital transfers across different geographical locations, outpacing traditional wire transfers.

However, there are drawbacks to using USDC. Firstly, it does not offer price appreciation like some other cryptocurrencies. Additionally, users must be mindful of the regulatory environment surrounding digital currencies and stablecoins. Crypto experts warn that government regulations targeting these digital assets could potentially hinder their future.

USD Coin vs. Bitcoin

USD Coin differs from cryptocurrencies like Bitcoin in that it is fully collateralized.

According to Manoppo, "Unlike USDC, Bitcoin is not backed by other assets. BTC’s value narrative revolves around its scarcity, similar to gold."

While the value of USDC is linked to the U.S. dollar, Bitcoin's value is determined by its limited supply. There will only ever be 21 million bitcoins in circulation, with approximately 19 million currently in the market. Supporters of cryptocurrencies argue that this scarcity will drive up its value over time.

However, relying solely on people's perceptions to define an asset's value, as seen with Bitcoin's volatility, poses challenges.

In contrast, USDC has maintained a relatively stable value over its existence, although it may experience some short-term fluctuations during extreme market conditions, Manoppo notes.

On the other hand, pegging a digital asset to a fiat currency like the U.S. dollar does not offer significant potential for appreciation as an investment.

Should one invest in USD Coin?

Buying USD Coin doesn't yield profits for investors since it's designed as a stablecoin. Therefore, its primary benefit lies in its utility rather than expected price appreciation. Acquiring USDC is akin to holding U.S. dollars, where the investment's value matches the cash equivalent.

Nonetheless, there are avenues for earning from USDC. You can earn passive income by lending USDC to other crypto investors, with some lending platforms offering interest. However, this involves risk, as with any investment.

Overall, USD Coin aims to facilitate faster and more cost-effective currency transfers, bypassing traditional intermediaries like banks, while providing stability in the crypto space.