JUNE 12, 2020
What is USD Coin (USDC)?
USD Coin (USDC) is the second-largest stablecoin pegged to the US dollar in terms of market capitalisation and usage. It was launched in September 2018 as a collaborative effort between Circle and Coinbase. Like Tether (USDT), USDC is a major participant in the stablecoin market facilitating all sorts of money flow and use-cases.
USDC is essentially a service that tokenizes the US dollar and facilitates its use over the internet and public blockchains. The stablecoin can be exchanged back to USD at any time, which is where the term ‘stablecoin’ comes from. Issuance of USDC tokens is ensured via an ERC-20 smart contract built on the Ethereum protocol.
Bringing US dollars on the blockchain allows for the smooth movement of money anywhere around the world within minutes, and also serves to provide stability in a market known for its relative volatility. In addition, USDC opens up new opportunities for trading, lending, risk-hedging and more, similar to other stablecoins like Tether.
Who built the USDC stablecoin?
Technically, USD Coin was developed by the Centre consortium, which is a partnership agreement between Circle and Coinbase teams. On the one hand, the tech and governing framework were built by Centre, while Coinbase takes the role of issuing USDC tokens commercially.
Founded in 2014 by Jeremy Allaire and Sean Neville, Circle is a recognised Money Transmitter, which makes the company and open financial book, similar to other authorities which issue money and take care of the monetary policy. Of course, Money Transmitters are US money businesses that are obliged to comply with US federal rules and regulations. In fact, before the issuance of USDC, the equivalent amount of USD is ascertained with one of Circle’s trusted associates. As such, all USDC tokens are regulated, transparent and verifiable on the blockchain.
How Does USD Coin function?
USD Coins are minted with a guarantee that every USDC token is backed with a single US dollar. Of course, the US dollar standard is backed by the US economy and the wide-spread belief in its value proposition. These relationships are where USD Coin derives its fundamental value.
As with other stablecoins, the process of turning US dollars into USDC tokens is called tokenization.
In essence, this is a three-step process:
- A user sends USD to a token issuer’s bank account.
- The issuer uses a USDC smart contract to create an equal amount of USDC.
- The freshly minted USDC are sent to the user, and the substituted US dollars are held in the issuer’s reserves.
Inversely, a USDC token can be redeemed for USD. Generally speaking, the process also has three steps to it:
- A user sends a request to the USDC issuer to redeem an equivalent amount of USD for USDC.
- The issuer transmits that request through the USDC smart contract to exchange tokens for USD while taking an equal number of tokens out of circulation.
- The issuer sends the USD from its reserves back to the user’s account. The user receives the net amount equivalent to the one in USDC tokens minus any fees that might be incurred.
Unlike Tether, which has had several run-ins with regulators in the past, the developers of USD Coin are obligated to provide full transparency while working within a range of financial institutions in order to maintain reserves on a 1:1 ratio with the fiat currency. In fact, all USDC issuers must report their USD holdings, which are in turn published by Grant Thornton LLP on a monthly basis.
How do you use USD Coin?
As previously mentioned, USDC is a 1:1 representation of one US dollar on the Ethereum blockchain. It’s an ERC-20 token that can be used with each application that supports this industry standard. In order to exchange fiat for USDC, one must first register an account with a USDC provider, verify his/her identity through a KYC process, and link a legitimate bank account. SwissBorg will be offering such service by the end of June 2020.
Once this is done, the Circle platform allows four main functions for redeemable tokens:
- Tokenizing USD
- Redeeming USDC
- Transferring USDC to ERC20-compatible ETH addresses
- Depositing USDC from compatible wallets
Circle USDC does not charge users fees for tokenizing and redeeming services. However, there is a $50 commission for vetoed bank transfers.
Broadly speaking, stablecoins like USDC are used for the following reasons:
- Leverage trading using up to 100x leveraged contracts
- Avoiding traditional financial institutions and red tape
- Working around hyperinflation in destroyed economies (Venezuela, Turkey, Lebanon)
- Sending money across borders without red tape
- Buying and selling assets on various exchanges, dApps and blockchain-based games.
Naturally, the centralised nature of stablecoins such as USDC by definition makes them different from Bitcoin which cannot be shut down by a governing authority, because none exists. That being said, stablecoins have an important role to play in the digital economy irrespective of political leanings, beliefs and inclinations, and fill a much-dreaded gap between traditional finance and cryptocurrencies.
USDC is available in the SwissBorg App
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