USD Coin (USDC)
USD Coin: Transparency and stability are fundamental
Among the biggest cryptocurrencies in the industry, one finds several currencies with a stable value of $1. Their prices don’t rise or fall and are therefore called ‘stablecoins.’ One of the biggest of these stablecoins is USD Coin (USDC). This article will teach you what USD Coin is and what sets it apart from the rest!
A cryptocurrency with a stable value; why?
Firstly, what is a stablecoin? Let’s begin with a short introduction to that concept first. A stablecoin is a cryptocurrency whose value is linked to a fiat currency. In the case of USD Coin the fiat currency that the stablecoin is pegged to is the United States dollar.
There are several use cases for having a crypto version of the dollar. For example, traders can easily switch between a cryptocurrency like bitcoin (BTC) and a more stable asset like the dollar. Stablecoins are, therefore, an essential part of the arsenal of the crypto trader, offering them a quick way out of volatile crypto assets.
Another important use case is that stablecoins can be integrated into Decentralized Finance (DeFi) applications. Investors can deposit their stablecoins into these applications and earn yield. In some cases, this yield is higher than the interest rates that bank accounts offer, though there are risks involved with earning yield through DeFi.
USD Coin is fully backed by fiat
Now, let’s look at USD Coin. This stablecoin was launched by Centre, a consortium founded by the popular American crypto exchange Coinbase and fintech company Circle. Its goal is to connect every merchant, person, financial service, and currency worldwide. Adding to the above-mentioned use cases, sending money cheaply over the blockchain is another obvious advantage of stablecoins.
Every time a person buys UDSC, the dollars this person deposits are added to segregated bank accounts managed by regulated parties. The dollars here are managed to constantly offer enough backing for the USDC that are in circulation. In other words, for every 1 USDC on the market, Centre makes sure that there is 1 dollar on their side to cover for it. Once a person decides to sell their USDC, the USDC is destroyed, and the person receives 1 dollar in return.
An important factor that determines the security of a stablecoin is the transparency of the underlying reserves. On their website, Circle states that USDC is fully backed by cash and US government obligations. Therefore, even in the case of a bank run of investors wanting to redeem their USDC for USD, the value of the stablecoin will remain stable, or so claims Circle.
Furthermore, Circle is a licensed money transmitter in most American states, adding extra credibility to its ability to manage the reserves of the stablecoin effectively. Every month, the stablecoin publishes an attestation report as well in which the reserve balances are reported to the public.
What sets USD Coin apart from other stablecoins?
Stablecoins may not look very different; they all have a value of, in this case, 1 dollar. However, it is in the backend where stablecoins distinguish themselves. USDC tries to distinguish itself by having a 1:1 backing cash reserve and obligations. In other words, the project won’t invest its reserves in risky investments to generate a profit.
Furthermore, Circle tries to offer complete transparency with its monthly reporting. With the collapse of UST, the stablecoin of the Terra ecosystem, this full transparency is likely why USDC has grown significantly in popularity. As a result, the market capitalization of the stablecoin has grown substantially. This way, USDC has secured a place in the top of most valuable cryptocurrencies in the industry.
Another significant development for USDC is the collaboration with major payment network Visa. The payment giant is currently testing USD Coin to settle global transactions and could eventually integrate the stablecoin into its global payment network.