USDC

To really understand USD Coin, you need to know how it works and maintains its value. Luckily, we’re going to cover that and more in today’s article. You’ll never need to ask yourself “what is USDC?” again. Here’s everything you need to know.

What is USDC? USD CoinDefinition and Stablecoin Fundamentals

Understanding USDC

First off, let’s answer that question of “What is USDC?”

Created back in September 2018 by a consortium called Centre (which itself was backed by Circle and Coinbase), the idea behind USD Coin (USDC) is to create a cryptocurrency that’s pegged to the US dollar at a 1:1 ratio. In other words, 1 USD Coin should always equal $1.

It does this because each USDC is backed by $1 or the equivalent in reserves, which helps to keep the market stable. That’s why it’s called a stablecoin, and it’s the second largest by market cap thanks to its valuation of about $77 billion. 

Today, USDC is available on over fifteen different blockchains, including Ethereum, Solana and Polygon. It’s mostly issued as an ERC-20 token, which makes it broadly compatible with a large number of wallets and exchanges.

How Reserves Play into the Dollar Peg Backing

Now, you might be wondering how USDC is able to maintain its parity with the US dollar. That’s because Circle has huge cash reserves to back it, with $1 in cash or cash equivalents for every USDC that’s issued. 

These reserves are in a range of places, including in segregated accounts at US-regulated financial institutions, short-term US Treasury bonds, and BlackRock’s USDC Circle Reserve Fund at the Bank of New York Mellon.

Whenever a user purchases USDC, dollars are deposited and new tokens are minted. When users sell their USDC, the tokens are burned and the dollars are returned. All of this includes backing and attestation by Deloitte, which verifies that the reserves match the supply and helps to inspire confidence.

How the USDC Price Maintains Value and Stability

The Arbitrage Behind the Dollar Peg

The peg does a lot to maintain stability, but there are still slight variations in the USDC price as the market changes. In normal conditions, you can expect it to fluctuate between $0.99 and $1.01, but if the fluctuations go much further than that then arbitrage kicks in.

The idea behind USDCarbitrage is that if there’s too much of a fluctuation then the market corrects itself. If it trades above a dollar, traders can deposit USD and mint USDC for profit. If it trades below a dollar, they can redeem USDC for USD and make a profit. That ensures that the laws of supply and demand keep it at around a dollar.

On top of that, those reserves ensure that unlike Bitcoin and Ethereum, it can always be redeemed. 

USDC Stability vs. Bitcoin Volatility

Comparing USD Coin to Bitcoin and Ethereum is difficult, because they take different approaches to how they operate at a fundamental level. With traditional cryptocurrencies, the prices fluctuate wildly, while USDC offers stability regardless of what’s going on in the crypto market.

This stability ensures that stablecoins like USDC are able to act as a safe haven when the market is volatile. It’s like trying to carry out a comparison between a rollercoaster and a cable car; one is filled with ups and downs, while the other stays steady. You might want a rollercoaster if you’re chasing thrills, but the cable car provides a more comfortable ride.

Traders love USDC because they can store profits there without using traditional fiat currency, and it’s often used as a medium of exchange for trading and making payments. It’s a more functional cryptocurrency that’s suited to daily purchases, not a speculative investment.

Where to Buy USDC: Key Exchanges and Platforms

Coinbase, Binance and Other Exchanges

By now, you might be wondering where to buy USDC. The good news is that there are plenty of exchanges and platforms out there for you to choose from.

Let’s start with Coinbase. That’s not surprising, given its backing of USDC from its inception. Then there’s Binance, which offers high liquidity, and Kraken, which is known for its strong regulatory compliance. Other popular choices include Gemini (which is US-regulated), Crypto.com and eToro. 

Centralised exchanges are usually the easiest place to buy USDC, but be aware that you’ll typically need to verify your email address and provide KYC (Know Your Customer) documents such as a passport and/or proof of address. Expect to pay fees of up to 0.5% on your purchases (the exact costs will vary from one platform to another). 

The Decentralised Exchange (DEX) Guide

When deciding where to buy USDC, don’t discount the option of using a decentralized exchange (DEX). These are platforms which allow cryptocurrency traders to swap assets between each other without the need for a middleman or a centralised platform.

Some of the most popular DEXs include Uniswap, SushiSwap and PancakeSwap, with the swap being the key word here. They’re all about allowing users to connect wallets like MetaMask or Trust Wallet to swap Ethereum and other tokens directly for USDC, removing the need for KYC checks. However, you can expect to pay higher network gas fees than you would with a centralised exchange and it can be a little trickier for beginners to wrap their heads around.

How to Buy USDC: Your Guide to the Process of BuyingUSD Coin

Steps to Buy on Coinbase and Binance

Learning how to buy USDC on Coinbase, Binance and other similar sites is easy. For most sites, you’ll have to follow these steps to start buying:

1. Create an account
2. Complete the KYC verification by submitting ID and/or proof of address
3. Deposit fiat currency via bank transfer or a debit/credit card
4. Wait for funds to arrive
5. Navigate to the USDC trading pair (e.g. USDC/USD)
6. Enter the amount that you want to purchase
7. Place the market order and confirm the purchase

That’s it! The USDC will appear in your exchange wallet instantly, and you’ll also have the option to withdraw from there to an external wallet. In terms of depositing funds, bank transfers are the cheapest but can take a day to complete, while card transfers are instant but come with higher fees (typically 2-4%).

How to Mint USDC Direct from Circle

If you want to directly mint USD Coin as a business or institution then you’ll need to have a Circle account and commit to a minimum issuance amount of $100,000. The good news is that it doesn’t have to be super complicated or difficult to do.

To start minting, institutions need to wire USD to Circle, which will mint USDC at a 1:1 ratio with no trading fee. Circle can also handle large amounts, making it ideal for big institutions. The redemption process works the same way for large clients as it does for smaller ones, allowing them to burn USDC and receive USD in return via a bank transfer. But for retail users, it’s all about exchanges.

Usage and Applications of USDC

Trading and Finding a Safe Haven

There are plenty of different reasons why people use USDC. The primary use is that it allows people to park their crypto trading profits during market volatility without having to convert to fiat currency. In other words, if the values of Bitcoin and Ethereum are erratic, it’s easier to switch to USDC than to the US dollar.

Part of that is because you can move from one exchange to another quickly and easily without having to wait for the banks to catch up, and part is because it can help you to save on conversion fees. You can also earn a yield on DeFi platforms like Compound, Aave and Curve by lending or depositing USDC for interest, typically earning 5-10% APY. Liquidity provision on DEXs allows users to earn while still maintaining their assets. 

Payments and Remittances

Like most cryptocurrencies, USD Coin can be used to make cross-border and international payments without breaking the bank on conversion fees. It can be sent and received in minutes, has lower fees than wire transfers, and requires no currency conversion. That makes cross-border remittances both cheaper and faster than traditional methods.

Because of that, USDC’s acceptance amongst merchants is growing, with plenty of payment processors and fintech platforms integrating USDC. Visa has even piloted a program in which it uses USDC settlements on the Solana blockchain to process payments between different institutions. It’s also a popular choice for crypto debit cards because of its low fees and stability.

Protocols for Lending

All of the advantages we’ve covered have ensured that USDC is often used in the decentralised finance (DeFi) ecosystem as a way to provide collateral for lending on platforms like Aave and Compound. It’s also used to provide liquidity on Curve and DEXs like Uniswap. Users swear by it as a way to earn yield through stablecoin pairs like USDC/USDT and USDC/DAI.

Meanwhile, USDC is powered by smart contracts, which in turn allow it to function as a kind of programmable money. That’s a vital feature given the speed at which the global finance markets tend to move. USDC can also be used to power decentralised apps (dApps), most of which rely on stable values to function. It’s no surprise that so many financial institutions are turning to it.

USDCAlternatives: Comparison of USD Coin vs Other Stablecoins

USDC vs. USDT

USDC is often compared with USDT, another cryptocurrency and stablecoin called Tether that has a similar reputation for stability but features one main drawback. USDC publishes monthly reserve attestations from Deloitte, while Tether has faced criticism throughout the years because of its lack of transparency.

There’s also the fact that Circle and USDC willingly submit to regulation within the US, while Tether relies on offshore structures. Meanwhile, USDC is backed by cash reserves and US Treasuries, while USDT has a more mixed portfolio. 

USDT has the largest market cap ($190 billion vs. USDC’s $77 billion), but USDC is often the preferred choice. Its transparency and regulatory compliance make it the safer bet. 

DAI, UST and Algorithmic Options

Something else to bear in mind is that USD Coin is fully reserved and fiat-backed thanks to its commitment to maintaining cash reserves. Decentralised alternatives like DAI are crypto-collateralised, which can leave them more exposed to market volatility. 

Ultimately, USDC has a proven track record of success. By comparison, algorithmic risk is seen by most as a real threat, especially after the collapse of TerraUSD (UST) in May 2022, which showed that just because something is called a stablecoin, that doesn’t necessarily mean that it is.

With that said, it’s important to remember that USDC is centralised, while DAI and other options rely on decentralised governance. You’ll want to weigh up the options and determine whether you’re willing to pay for stability by placing additional trust in the issuer.

USDCRisks and Concerns

Circle and its Ability to Blacklist

One of the main features of USD Coin is its centralisation, with Circle maintaining control over the issuance and management of the stablecoin. That’s both a selling point and a risk, depending upon how you look at it.

For example, Circle can freeze and/or blacklist USDC addresses, so if you plan to use the currency, you need to trust its solvency and management. There’s also the regulatory risk, because government pressure on Circle could affect operations. It’s not decentralised like Bitcoin and other alternatives, where government pressure can’t really apply because there’s no single entity for them to apply that pressure to.

There’s also the potential risk of bank failure, although Circle tries to protect itself by holding its reserves in segregated accounts and short-term Treasuries. If Circle goes bankrupt then there are systems in place to ensure that the reserves are untouched, but delays could still apply before the funds are returned to users.

Regulation and the Potential for a Depeg

For USDC, there’s the ongoing potential for regulatory changes as stablecoin regulation continues to evolve. Even though it seems like crypto and stablecoins have been around for a while, they are still in their infancy when it comes to laws and legislation. Don’t be too surprised if there are regulatory changes that place restrictions on issuance and/or redemption.

There’s also the potential for a depeg, such as the one we saw in March 2023 during the Silicon Valley Bank (SVB) crisis. For a couple of days, USDC lost its peg to the dollar and was traded at $0.87, with Circle disclosing $3.3 billion of exposure, although it was short-lived and the currency quickly recovered.

Meanwhile, there can be risks when using smart contracts on DeFi platforms, because bugs and exploits can lead to problems. USDC isn’t protected by FDIC insurance in the same way that bank deposits are, while there’s a risk of inflation due to the slow erosion of the purchasing power of the US dollar over time. That’s an inherent risk for anything that’s tied to a real-world currency.

Summary and Key Points

Let’s recap what we’ve learned and take a look at a quick summary of our guide to USDC.

First off, we established that USD Coin is a stablecoin that’s issued by Circle and pegged to the US dollar, with a market cap of about $77 billion. It’s backed by cash and US Treasuries and is available on over fifteen blockchains. Thanks to arbitrage and its reserve backing, USDC maintains a steady valuation, fluctuating slightly between $0.99 and $1.01. Every month, Deloitte provides attestations to verify the reserves. 

Wondering how to buy USDC? Your best bet is to use an exchange like Coinbase, Binance or Kraken, although you’ll need to pass KYC checks. Alternatively, use a DEX like Uniswap, or if you’re a large institution, you can mint USDC directly through Circle. 

To buy USDC, you’ll usually create an exchange account, verify your identity, deposit fiat currency, purchase USDC, then either withdraw it to your wallet or keep it on the exchange. It’s a popular choice as a safe haven during market volatility, for making cross-border payments, for yield generation and for providing collateral for loans, mostly because of its stability, regulatory compliance, transparency and liquidity. However, risks include that it’s centralised and Circle can blacklist addresses, alongside the external risk of the currency de-pegging during market crises. 

Choosing between USDC and USDT means considering whether you’re willing to trade increased transparency and regulation for a smaller market cap. We’d recommend it for storing cash when you need stability, but it’s not an investment. Before you decide to do anything, research Circle’s reserves, check those Deloitte reports and consider using a hardware wallet. And that’s everything you need to know!