USDC is the second most common stablecoin in the cryptocurrency ecosystem, behind only Tether. This article will clarify how USDC functions, why it is superior to Tether, and how USDC can be integrated into various blockchains.
How USDC works
USDC is a stablecoin managed by Circle and Coinbase in collaboration. These two businesses are in charge of developing, handling, and redeeming USDC. The stablecoin functions as follows.
Investors deposit USD (US Dollars) with Circle after completing a KYC scan.
With the dollars deposited, Circle mints USDC at a 1:1 ratio. When an investor makes a $100 USD deposit, they will receive 100 USDC tokens.
The USDC tokens are given to the investor, who can then use them as they see fit.
An investor can exchange USDC for US dollars at any time by contacting Circle.
In conclusion, USDC has value since it can be exchanged for dollars in a bank account 1:1. This dollar peg is also responsible for keeping USDC trading at $1.
The peg is too high if 1 USDC is selling for $1.03. Investors will deposit USD with Circle and receive USDC, which is worth more than $1, when this occurs. The increased production of USDC lowers the coin's value to $1.00.
The peg is too poor if 1 USDC is selling for $0.97. Investors will be able to purchase USDC and exchange the tokens for US dollars until this occurs. As a result of the increased demand for USDC, its value has returned to $1.00.
This arbitrage trade is responsible for keeping the value of USDC at or near $1.
How USDC trades
The vast majority of USDC is traded as an ERC20 token on the Ethereum blockchain. Inside Ethereum's DeFi ecosystem, all ERC20 USDC are completely interoperable. USDC is used in Uniswap, Compound, Aave, and many other DeFi protocols, for example.
While most USDC is built on Ethereum, it can also be found on other blockchains. USDC can also be found on the Algorand, Stellar, and Solana exchanges.
The principle is the same regardless of which blockchain USDC is traded on. One USDC token can always be redeemed for a dollar kept in a Coinbase bank account.
USDC’s downside
USDC is a centralized stablecoin that is controlled by a single entity. Coinbase, like legacy banking products, has the ability to block USDC transactions and freeze USDC accounts.
This occurs very rarely, and 99.99% of USDC users should never be concerned about their account being frozen. It is, however, a possibility. This differs from a decentralized stablecoin like DAI, where neither an account balance nor a transaction can be frozen.
Why is USDC superior to Tether?
Tether is the world's most common stablecoin by market capitalization, but it has serious flaws. Most notably, Tether has never shown that they have sufficient funds to meet all of their USDT obligations.
To put it another way, if all USDT holders decided to exchange their tokens for dollars at the same time, there would not be enough dollars to go around. This had led many to believe that Tether might implode, putting the cryptocurrency ecosystem at risk. Tether was also chastised for allegedly having a conflict of interest with the Bitfinex exchange, to which it had made a significant loan. However, the loan was recently repaid, and Bitfinex states that it has no more lines of credit with Tether.
Unlike Tether, USDC is developed and run by Coinbase and Circle, two of the cryptocurrency ecosystem's most dependable businesses. Most notably, the two firms publish routine reports to demonstrate that they have sufficient funds to cover all remaining USDC liabilities.
USDC holders should never have to think about a bank run unless there is a big disaster. If they want to convert their USDC to USD, there will still be enough dollars to make them whole.
Is the USDC going to be regulated?
USDC is following all current American regulations and is not violating any rules. Using USDC isn't illegal, and it doesn't fall into any legal limbo.
However, as the cryptocurrency environment matures, additional regulations affecting USDC are likely to emerge. In reality, we've recently seen two examples of regulations that could have an effect on USDC and stablecoin issuers in general.
The Stable Act would require any stablecoin issuer, such as Coinbase and Circle, to obtain a banking license in the United States. This specific piece of legislation was rushed through, and it is unlikely to pass. And if the Stable Act is repealed, another piece of legislation of a similar nature could be proposed in the future.
Even more positively, the OCC (Office of the Comptroller of the Currency) recently issued a ruling allowing banks to use stablecoins as a payment tool, similar to how they use ACH wire transfers and the SWIFT scheme.
The Stable Act would make issuing stablecoins even more difficult. If the legislation passes, Coinbase and Circle will be required to obtain banking licenses in order to continue to fund USDC.
The OCC ruling allowing banks to use stablecoins, on the other hand, is extremely positive for the industry. It also incorporates USDC into the current financial structure, which is beneficial to Coinbase, Circle, and all USDC users.
Why is USDC Important?
The cryptocurrency ecosystem relies heavily on USDC. USDC is the second most common stablecoin, and its market cap is steadily increasing. To put it another way, investors are depositing and generating new USDC at a faster rate than they are redeeming old USDC for dollars.
This is extremely beneficial to everyone in the crypto world. The growth of USDC indicates that more capital is pouring into a dependable stablecoin, giving crypto users more options on where to invest their funds.
Before investors can mint new USDC directly from Circle, they must go through a rigorous KYC process; however, anyone can buy USDC on the secondary market. USDC is available for purchase on hundreds of exchanges and on four separate blockchains, offering investors a wide range of choices for how to use the stablecoin.
