Ah, stablecoins. They’re the odd ducks of the crypto world. They’re not edgy, there’s no hard-core privacy focus or libertarian streak, no talk of USDC’s innovative proof-of-stake consensus mechanism, or of Tether as the new gold.
And yet, stablecoins account for a significant percentage of crypto’s total market cap. A quick list of tokens by market cap shows two stablecoins – USDC and Tether – in the top five, but even that’s a bit deceiving. If you remove the two-headed crypto monster of BTC and Ethereum, there are two stablecoins in the top three positions.
So let’s take a closer look at stablecoins – in particular, USDC. How does it work, why does it even exist, and most importantly – what’s it for?
Jump on in.
What is USDC?
USDC (USD Coin, if you will) is a product of Circle, a “global financial technology firm.” Jargon aside, Circle provides a number of financial services, all of which rely on USDC. Those services include payments, institutional investing, and more. USDC is the basic building block of Circle’s suite of products. It’s a stablecoin built on the Ethereum blockchain and backed 1:1 with the US dollar – hence the name.
Stablecoins are exactly what they sound like – digital currencies whose prices are stable. Of course, that raises a couple of questions: stable to what, exactly? and of course my favorite, why? ISN’T BTC’s PRICE JUMP ENOUGH FOR YOU?!?!?
Ok, sorry, I’ll calm down. But I’m not exactly wrong – stablecoins are an attempt to remove some of crypto’s inherent volatility, creating something that’s more stable and therefore a more predictable financial instrument. And what’s one way to create a stable crypto coin? Tie it to a real-world asset that’s also fairly stable. That’s where the USD comes in. USDC is backed with the dollar. One USDC = one USD.
We should note – backing one currency with another is absolutely nothing new. In fact, most fiat currencies started out this way. The gold standard in the American banking system meant that, in theory, every paper dollar circulating in the US was at one point backed by a dollar’s worth of gold. The gold standard went the way of the dodo decades ago, but the idea remained.
Here’s where USDC (and other USD-backed digital currencies) are really cool; they’re basically private, tokenized digital dollars.
Private: USDC is a Circle product; the USDC project received backing from Coinbase, among others. At the same time, it’s still on a blockchain, with transactions viewable on your friendly neighborhood blockchain explorer. Don’t expect the Treasury Department or your bank to show you the books for USD, but you can actually see both the code and transactions for USDC.
Tokenized: It’s Ethereum-based; store USDC in any Ethereum-compatible wallet (which is to say, the vast majority of them). Beyond Ethereum, USDC is available on a host of other chains such as Solana, Algorand, and Avalanche. And of course, tokenization provides all the usual blockchain benefits. View transactions, trade USDC for other tokens on centralised exchanges (CEX), jump into DeFi with a decentralised exchange (DEX), etc.
Advantages of USDC and Why use USDC
USDC, and other stablecoins, arose partly to solve a critical problem: the relative volatility of crypto. However as the term “stablecoin” implies, the price is stable – no guessing how much it’s jumped overnight. Stability is relative, of course – as the dollar goes, so does USDC. That relative stability allows investors to use USDC as collateral in smart contracts without fear of major price swings.
Let’s take a look at 4 main uses cases for USDC.
1. Fiat On / Off Ramp
On-ramping, i.e. converting fiat currency to crypto, is fairly straightforward. Any number of CEXes will let you pay for crypto with a credit or debit card. Just like that, you’ve converted USD to BTC, or SOL, or ETH, or any other token offered by that exchange.
But off-ramping is a bit trickier. Sure, a lot of exchanges will let you do it, but you’ll face some hefty fees. It’s still a handy system if you’re withdrawing on an infrequent basis, but if you’re an investor with a lot of funds at stake, you’re paying steep fees every time you switch between a fiat-based and crypto-based financial system.
USDC is the most glorious of things – a fiat/crypto cheat code. As a tokenized dollar, USDC lets investors keep their assets in the crypto ecosystem while holding a token that is equivalent to the dollar. Let’s say crypto is down, across the board. There’s some appeal in shifting funds out of crypto and into fiat, to leverage USD’s stability. But if there are hefty fees on both sides, any advantage is wiped out. USDC provides an answer. Shift funds from more volatile assets into USDC’s relative stability. Take advantage of lower transaction fees (gas fees excepted, of course), ride out the market dip, and be positioned to jump back in when things recover.
Getting paid in crypto is increasingly common. But crypto’s volatility poses a challenge when you’re paying or getting paid in crypto. Say $300 in Cardano is 300 ADA, but if a crash happens overnight and you want to pay someone the next day, you’ll need to purchase more ADA to meet your obligations. Again, USDC provides an answer, allowing holders to pay in crypto just as if they were paying in dollars.
Circle has made crypto USDC payments a major pillar of their product, with a Circle account for anyone wanting to access APIs for payments, payouts, and accounts. If this feels aimed at institutions, that’s intentional. Circle wants USDC to be to the crypto world what USD is to fiat – the go-to currency for everyday transactions.
3. Multi-chain functionality
If you’re familiar with Ethereum at all, something in the earlier paragraphs probably set you back a bit. Yeah, moving funds via Ethereum from one token to another might not cost you any exchange fees, but those gas fees can be painful.
There’s good news because USDC is multichain. As of this writing, it’s on Ethereum, Algorand, Solana, Stellar, Tron, Hedera, Avalanche, and Flow. Being on multiple chains makes USDC that much more flexible, able to be traded on chains with lower transaction fees. Multichain functionality increases USDC’s appeal as a payments system also; users can accept payments in one digital currency across several chains. It also positions USDC well; whoever comes out on top in the blockchain L1 wars, USDC will be there.
The basics of staking are simple. Users lock up tokens to ensure liquidity in a given network and are rewarded with more tokens. Originally, that process was associated with Proof-of-Stake networks. But staking has evolved with the crypto ecosystem. Yield farming and liquidity mining rely on some of the same principles, but leverage increasingly sophisticated smart contracts to generate a return. How does USDC factor in?
Providing liquidity in the form of crypto tokens to a given protocol comes with some risk. What if the value of that token drops rapidly? In many cases, a collateralized DeFi loan can suddenly become under-collateralized and liquidated; there’s not enough value to cover the terms of the loan. USDC lessens the chance of such a scenario by being a bit more stable.
What are the Drawbacks of Using USDC?
What’s backing the USDC?
Beyond basic security and network hacks, USDC’s biggest threat comes from the nature of the USDC’s backing itself. The question is simple; what assets guarantee that USDC maintains its 1:1 value with USD?
Circle itself clarifies that USDC is backed 1-to-1 with “fully reserved dollar assets.” The exact composition of those assets isn’t fully known outside of Circle’s, uh, inner circle. But whatever the exact makeup, USDC is more accurately considered an asset-backed stablecoin rather than a fiat-backed one.
How big a risk does that pose? That’s largely in the eyes of the investor. For its part, Circle has been careful to work within the current bounds of the financial industry, meaning all assets are held in regulated financial institutions. That provides a level of reassurance, especially to institutional investors.
The Specter of Centralization
USDC isn’t the only game in town; Tether exceeds USDC by market cap, and BUSD, UST, and Dai are no slouches either.
One of USDC’s selling points is that it’s regulation-ready; Circle, Coinbase, and other investors have built USDC to work within the current financial system. That means holding reserve assets in approved financial institutions and complying with US rules and regulations. That strategy has made USDC appealing to investors from institutions on down who are ok with a more centralized stablecoin. But for crypto users looking for a truly decentralized approach, USDC falls short.
Long-term, it’s worth wondering what effect CBDC’s might have on stablecoins. There’s a chance that a pure fiat digital currency might replace many of the functions of a private stablecoin that’s backed by fiat currency.
If that was the case, then USDC might see some of its biggest use cases diminish. Right now, one of USDC’s primary uses is in collateral and liquidity for smart contracts – data shows that roughly 40% of USDC’s supply was locked up in smart contracts. A CBDC, such as a hypothetical FedCoin digital dollar, might eat into USDC’s utility. That said, there are plenty of stablecoins already out there, and competition hasn’t hurt them so far.
U and USDC
Alright, so what about you?
Use USDC as a refuge against more volatile cryptocurrencies.
Building a Web 3 shop or business? Integrate USDC payments on a number of L1 chains.
And if you’re deep into DeFi, USDC will be integral to collateralizing DeFi protocols and providing valuable stability.
It’s all in the name.