What Is USDC?
A Step-by-Step Guide to One of DeFi's Most Important Stablecoins
By: Rahul Nambiampurath • Loading...Beginners
USD Coin (USDC) is a stablecoin vying for market supremacy with Tether, the No. 1 such offering in terms of market capitalization.
Both stablecoins rely on centralized management and issuance to maintain their pegs to the U.S. dollar, so DeFi decentralized applications, or dApps, can function without being subject to volatility that regularly roils the crypt market.
These protocols deposits their reserves in traditional banks so one USDC on a blockchain network can be redeemed for $1. As a result, a centralized stablecoin like USDC is resistant to extreme market conditions. Can USDC eventually be the No. 1 stablecoin?
Why Do We Need Stablecoins?
There are two key drivers that determine the price of every asset:
- Supply and demand
- The scarcity of the asset — the fewer the units, the higher the price, generally speaking..
Since the popularization of dApps on Ethereum, in the summer of 2020, stablecoin usage exploded and spread to other networks. Source: The Block
Three out of the top 10 cryptocurrencies by market cap are stablecoins.
What Is USD Coin (USDC)?
USDC stablecoin was originally launched on the Ethereum blockchain as an ERC-20 token. This is a smart contract template for creating digital assets, whether they are stablecoins or cryptocurrencies.
In the case of USDC, the smart contract is in charge of maintaining its value to the dollar, on a one-to-one basis. This is called a peg. Therefore, one USDC is worth $1.
You can use Etherscan’s USD Coin tracker to view the USDC smart contract, and it tracks all USDC holders, transfers, and the total supply on Ethereum.
How Is USDC Used?
Since its initial launch on Ethereum, USDC has been integrated into eight other blockchain networks:
- Algorand (ALGO)
- Avalanche (AVAX)
- Flow (FLOW)
- Hedera (HBAR)
- Polygon (MATIC)[bridged]
- Solana (SOL)
- Stellar (XLM)
- TRON (TRX)
Because each blockchain network uses different smart contract formats, sending USDC needs to be carefully managed. For example, if one were to convert dollars into USDC on Binance, and send that with the minimal transfer fee possible, they would most likely pick the TRX network.
TRON has developed a frictionless, borderless, and instant global payment system. To receive the money, the recipient would need to give the sender a TRX network address, marked as TRC-20 asset instead of ERC-20.
Because of stablecoin efficiency and negligible fees, many users employ USDC or USDT to make international payments instead of traditional providers like PayPal or Stripe.
Although one would have to convert USDC back into USD on Binance/Coinbase, and then pull that money to a linked bank account, the associated fees are often lower than directly sending dollars.
Likewise, sending stablecoins through high-performing blockchains is near-instant, compared to a cumbersome and snail-like wire/SWIFT system. In addition to international payments, USDC is the mainstay of decentralized finance (DeFi). All lending and borrowing dApps take advantage of USDC price stability for collaterals.
Curve Finance’s 3pool is just one of stablecoin liquidity pools on blockchain networks. Source: Dune
In 2022, USDC’s total stablecoin market share climbed to 30%, and more than $50B in market cap. In January 2020, USDC had a 7% market share.
Who Issues USD Coin (USDC)?
Coinbase and Circle manage USDC in a consortium. While Coinbase is the largest cryptocurrency exchange in the U.S., Circle is a closely-held financial technology company.
Circle is licensed by regulators just like s PayPal, Apple Pay, or Stripe. It is subject to governmental scrutiny, audits, and oversight.
In addition to getting annually audited by the Securities and Exchange Commission (SEC), Circle hired auditing firm Grant Thornton to release monthly USDC reserve attestations. Based on these reports, USDC is fully backed by cash (U.S. dollars) and short-dated U.S. treasuries.
The reserves are designed to promote confidence that USDC stablecoins won’t de-peg in volatile market conditions.
Indeed, during the major market crash in May 2022, USDC’s peg didn’t wobble beyond $0.998 value. Because USDC is high in demand as a reliable digital asset, its peg often goes above the dollar, at $1.0002 per USDC.
USDC Price Changes. Source: TradingView
Can the Government Ban dApps by Controlling USDC?
While centralized stablecoins like USDC offer regulated transparency and investor’s peace of mind, they are also subject to government jurisdiction. When the U.S. Treasury blocked Tornado Cash by putting it on a sanction N list, it made the financial privacy dApp radioactive.
Circle CEO Jeremy Allaire explained that he had no choice but to comply unless he faced a 30-year prison sentence. This means that the U.S. government can block any open-source protocol, stopping stablecoin flows to it by banning associated wallet addresses and freezing funds.
Nevertheless, this applies to all centralized stablecoins that use banks as custodians of stablecoin reserves. Case in point, Tether has banned ten times more wallets and froze more funds than Circle’s USDC.
USDC vs. USDT when it comes to banning wallets. Source: Dune Analytics
This is why there is much research in developing algorithmic stablecoins that are completely decentralized. With such an asset, no institution would be in control of stablecoin custody or issuance. Unfortunately, algorithmic stablecoins, as they are pegged to volatile crypto assets, often collapse in extreme market conditions.
This not only happened to Terra’s UST in May 2022, but also to DEI (DEI) from Deus Finance, Fantom USD (fUSD), and Neutrino (USDN) algorithmic stablecoins. As a result, decentralized finance (DeFi) should be taken with a grain of salt, as it largely relies on centralized stablecoins.
This series article is intended for general guidance and information purposes only for beginners participating in cryptocurrencies and DeFi. The contents of this article are not to be construed as legal, business, investment, or tax advice. You should consult with your advisors for all legal, business, investment, and tax implications and advice. The Defiant is not responsible for any lost funds. Please use your best judgment and practice due diligence before interacting with smart contracts.
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