After the unfortunate event of an algorithmic stablecoin UST and the blockchain Terra (LUNA), the stablecoin category is emerging and getting traction from the community. Among the maze of stablecoins in the crypto market, USDC is a notable candidate.
In this article, we will find out what USD Coin (USDC) is and why it is a competitive stablecoin.
What is USD Coin (USDC)?
USD Coin (USDC) is a fiat-backed stablecoin that is pegged to the U.S. dollar. It was first issued in September 2018 by a company named Circle and some members of the crypto exchange Coinbase. At the moment, USDC is the second-largest stablecoin in the crypto market, only behind Tether (USDT) in terms of market capitalization.
Akin to USDT, USDC is backed by reserves containing assets such as dollars to maintain the $1 peg for 1 USDC. It is built with an open-source code and every developer can contribute to the code.
The USDC supply had a steady growth in 2019-2020. Turning into 2021, it skyrocketed from $4B to over $50B market supply. In addition, the stablecoin got adopted by centralized exchanges and top DeFi protocols.
USDC is strongly supported by the largest crypto exchange in the U.S., Coinbase. As stated on its website, it only supports USDT on the Ethereum blockchain (ERC-20) and USDT/USDC conversion. On the other hand, the exchange supports USDC/BTC and USDC/ETH trading pairs, increasing the utilization of the stablecoin USDC.
What is USDC used for?
Like other fiat-backed stablecoins, USDC is issued as a medium of exchange in the crypto space. It is redeemable and has low volatility. As a result, investors can choose USDC to hedge their portfolio in market selloffs.
Let’s explore some of its major use cases:
- Borderless transfer and multichain storage: USDC is a blockchain-based token that can be transferred among crypto addresses permissionlessly. It is nơw available on many top blockchain platforms such as Ethereum, Solana, Algorand, Tron, Avalanche, etc. This means investors can keep USDC in many types of crypto wallets or multichain wallets.
- In the crypto space: USDC has further utilities in the crypto land. Many DeFi protocols have adopted USDC as a token in liquidity pools, collateral in lending/borrowing and derivatives, etc.
- Fundraising activities: Startups seeking funds can raise capital in USDC on fundraising platforms (centralized and decentralized) from global investors.
- Hedging against high-volatility markets: Converting crypto assets to stablecoins such as USDC helps protect your portfolios. However, holding USDC does not mean your money is inflation-proof. Since USDC is pegged to the U.S. dollar, it gets affected by the price inflation.
- Fast deployment: Stablecoins like USDC on the blockchain are easy to be converted into other crypto assets on exchanges. You just need to do a few clicks to lay investments instead of depositing cash to buy cryptos.
What chain is USDC on?
USDC is available as many token standards on blockchain platforms. Going multichain is a strategic plan of USDC to increase its dominance in the stablecoin market. At the time of writing, USDC is available on 35+ chains (blockchains and layer 2s).
Some blockchains that support USDC, including Ethereum, Algorand, Solana, Stellar, Tron, Hedera, Avalanche, Flow, etc. Besides that, USDC comes via cross-chain bridges onto other Layer 2s such as Arbitrum, Optimism, Aurora, Ronin, etc.
As shown in the table, USDC is on Ethereum, Solana, Avalanche, Tron, BNB Chain, and Polygon where its supply is greater than one billion. They are all top blockchains in the crypto space.
USDC vs. USDT
If the supply of USDC flips that of USDT, it will be the biggest stablecoin in the crypto space. If you’ve been following USDT for a while, you’ll know that it has been involved in many controversies surrounding its transparency.
USDC and USDT are going on a competitive stablecoin race. They are going multichain fast via bridges. According to DeFiLlama, USDC is available on 40 chains while USDT is on 44 chains. As a result, there is more room for USDC to expand its impact.
As shown in the chart, USDT went into the crypto market sooner than USDC did. However, the supply of USDT has been slowing down since Q2 2021 while USDC has been keeping the growth pace. At the time of writing, the market cap of USDT is approximately $19B bigger than that of USDC.
The stablecoin race includes many other competitive players such as BUSD, DAI, FRAX, etc. It is harsh that the algorithmic stablecoin UST was depegged and left the game. UST was a strong competitor against centralized stablecoins like USDT or USDC, but now it seems hard for UST to regain its status.
The current stage of stablecoins in the crypto market is affected by the regulations, especially regulatory policies from the U.S. government. Since every top stablecoin is pegged to the U.S. dollar, the U.S. government is paying close attention to protecting its influence.
How does USDC work?
USDC is issued with the mint-burn mechanism. This means that an issuer acts as an intermediary where users can come to mint USDC with their dollars or redeem USDC for dollars. Here is how it goes:
- Mint USDC: A user sends the U.S. dollars to the issuers (Centre’s bank accounts)
- Circle, owned by Centre, will mint new USD Coins and send them to the user’s crypto wallet.
- To redeem USDC for dollars: The user sends USDC back to the Centre’s crypto wallet and receives the equivalent amount of dollars in return.
This mechanism raises a concern about the centralization of the stablecoin USDC. Let’s dive deeper into Circle’s reserves which back USDC.
The process includes a third party (Circle) as the intermediary where its users can mint new USDC and redeem it back into cash. This raises a concern about whether Circle has enough assets stored in the reserves to handle the massive withdrawal demand or not. Let’s break down the reserves of Circle.
In the weekly report of USDC reserves on May 20th, 2022, the total USDC in circulation is worth $52.9B, a $2.3B increase from the last week. The USDC reserves are worth $53B, $0.1B bigger than the total circulating USDC. Therefore, Circle can make USDC redeemable as it claims.
What is USDC Wallet?
As stated on the Circle website, if you are a business, you can create a Circle Account to store USDC. Furthermore, USDC holders can store their crypto assets on centralized exchanges such as Binance, Coinbase, etc.
Besides the two mentioned centralized methods, there are other ways to keep your USDC in blockchain-enabled wallets:
- Hot Wallet: USDC will be stored on the blockchain and users can access it with a passphrase (seed phrase) via non-custodial wallets such as MetaMask (Ethereum), Coin98 Super App (Multichain), Phantom (Solana), etc.
- Cold Wallet (Hardware Wallet): Your private key will be stored in a physical device (it might look like a USB drive). To use the crypto wallet, you will need to connect the device to the internet via computer or mobile device. This method keeps your crypto wallet safe from online attackers.
How to buy USDC
USDC is widely used across the crypto space since its supply is over $50B. Therefore, the purchase of USDC is accessible. At the writing time, the trading volume of USDC is around $6B.
If you want to buy USDC, you can do it on most centralized and decentralized exchanges such as Binance, Coinbase, Kraken, Uniswap, etc. Furthermore, investors can buy USDC via on-ramps or OTC (Over-The-Counter) transactions.
How to earn interest on USDC
USDC is a centralized and fiat-backed stablecoin. It does not use the hyper yield incentive strategy like other algorithmic stablecoins, which contain risks of losing peg. But how can we generate more yield from our USDC? Let’s pan the gold from rivers of information.
Staking/ Liquidity Provision/ Lending
Crypto degens can deposit their USDC into staking pools, liquidity pools, or lending protocols to earn passive income in the form of token rewards. Single-exposure pools or lending protocols without Impermanent Loss, which irritates many DeFi players, can be a great choice for the time being.
Disclaimer: Staking and Lending contain risks of losing your funds. You should do your own research and be responsible for your investments.
Circle, the company behind USDC, released the Circle Yield program that offers 4.25% - 4.75% APR depending on the terms. 4.75% yield with the 12-month term is a competitive rate compared to that on other DeFi protocols (for example, 1.29% APY on Aave). However, investors need to become Circle customers to get this max. 4.75% rate.
Is USDC safe?
USDC has a clear regulatory framework that allows USDC to be licensed across the U.S. (46 states, Washington, D.C), and Puerto Rico. In addition, USDC is redeemable for U.S. dollars on a one-to-one basis. Circle also releases the monthly attestation report on the reserves that back USDC.
Is USDC an ERC-20 Token?
USD Coin (USDC) is supported by many top-tier blockchains. Therefore, it exists in many token standards like ERC-20, SPL, BEP-20, TRC-10, etc. On Ethereum, the largest smart contract platform, the supply of ERC-20 USDC is close to 40B USDC (approx. 75% of total supply across chains), updated on May 27th, 2022.
How stable is USDC?
USDC was first issued in late 2018 and it had many spikes in price, far from the $1 peg. The USDC supply has been growing strong from 2020 to 2021, making the USDC price more stable, at around $1 without long-tail spikes.