Borrowing
What is USDC? A Detailed Guide
December 06, 2023
Borrowing
December 06, 2023
USDC is one of the most popular stablecoins in the crypto world, find out what this means and how you can use USDC in this article.
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The cryptocurrency market is volatile, and stability is a key factor that affects how investors and users interact with digital currencies. Circle's USD coin, commonly known as "USDC," is an important cornerstone in the world of stable digital assets.
USDC is a digital currency that is designed to maintain a stable value relative to the US dollar. It is one of the most popular stablecoins in the crypto market, with a market capitalization of over $20 B.
The USDC stablecoin offers many advantages to crypto enthusiasts by facilitating trading, saving, and participating in decentralized finance (DeFi) applications. Each USDC token is backed 1:1 by US-dollar equivalents in reserves, which are regularly audited to ensure compliance. Thanks to these reserves, the token maintains a 1:1 "peg" with the US dollar, trading for $1 at all times.
In this article, we will explore what USDC is, how it works, what it can be used for, and how to convert it to USD. But before we get started, we should get familiar with the concept of stablecoins as a whole.
A stablecoin is a type of cryptocurrency that aims to maintain a stable value relative to a fiat curency or a basket of commodities. The purpose of stablecoins is to serve as a kind of highly liquid "digital dollar."
Stablecoins are designed to reduce the volatility and risk typically associated with cryptocurrencies while offering the speed, security, and transparency of blockchain technology. The most reliable stablecoins are fiat-backed. Fiat-backed stablecoins are pegged to the value of a traditional fiat currency and maintain reserves that back the stablecoin at a 1:1 ratio.
The three most popular stablecoins are USDC, USDT, and DAI. All three are dollar-denominated assets, as they are pegged to the US dollar.
Let's take a brief look at each of these:
One of the most popular fiat-backed stablecoins is the USD Coin (USDC), which mirrors the value of the US dollar.
USDC is issued by Circle, a blockchain company responsible for minting the stablecoin and maintaining the USDC reserves. Every USDC token in circulation is backed by an equivalent value of US dollars, or dollar-denominated assets held in reserve. This reserve-backed system guarantees the value of the token and ensure that the USDC price does not dip below one dollar. This design provides users with a sense of trust and security, making fiat-collateralized stablecoins an attractive choice for those seeking a reliable store of value in the crypto space.
USDT is another stablecoin that is pegged to the U.S. dollar at a 1:1 rate. However, unlike USDC, USDT does not disclose the exact composition of its reserve assets, which may include cash, cash equivalents, and other securities.
USDT was launched in 2014 and is managed by Tether. USDT is compatible with multiple blockchains, including Ethereum, Tron, and EOS and it offers fast, low-cost transactions.
DAI is a stablecoin that is minted by MakerDAO, a decentralized organization that relies on collateralized crypto assets to maintain the DAI stablecoin's backing.
As with other stablecoins, DAI is designed to keep a 1:1 peg with the U.S. dollar.
DAI was launched in 2017 as part of the MakerDAO protocol on the Ethereum blockchain. MakerDAO allows users to mint and manage DAI through a system of loans, smart contracts, and governance votes.
Now that we're familiar with stablecoins, let's take a deeper look at USDC in particular.
Launched in 2018, USDC represents a tokenized "digital dollar," where the value of one USDC coin is pegged as close as possible to the value of one U.S. dollar.
This means that one USDC is always worth one USD, regardless of the fluctuations in the rest of the crypto market.
USDC is issued and managed by Circle, a blockchain fintech company, and Coinbase, a leading crypto exchange, in collaboration with the Centre Consortium. Circle and Coinbase co-founded the Centre Consortium in 2018 to establish an open standard for fiat currencies on the internet and provide a governance framework for the global adoption of stablecoins.
The process of creating a new USDC coin is called minting. Minting is a three-step process:
A business sends USD to the token issuer’s bank account.
The issuer uses a USDC smart contract to create an equivalent amount of USDC.
The newly minted USDC tokens are delivered to the business, while the substituted USD is held in reserve.
The process of converting USDC back to USD is called redeeming. Redeeming is also a three-step process:
A business sends USDC to the token issuer’s address.
The issuer burns the USDC tokens and releases the corresponding USD from the reserve.
The business receives the USD in their bank account.
The reserve assets that back USDC are held in segregated accounts with regulated financial institutions such as BlackRock and BNY Mellon. The reserve assets are composed of ~80% short-dated U.S. Treasuries and ~20% cash deposits within the U.S. banking system.
These reserves are regularly audited to ensure that each USDC token is indeed backed 1:1 by US-dollar equivalents. This ensures the stability of the token.
USDC offers several benefits to users:
Fast and reliable transactions: USDC transactions are processed on blockchain networks, which are faster and more reliable than traditional payment rails. USDC transactions can be completed in seconds and the blockchain guarantees that all payments will be processed with no interruption.
Global accessibility: The USDC stablecoin can be used by anyone, anywhere, anytime, as long as they have access to the internet and a compatible wallet. USDC can be sent and received across borders, without intermediaries or restrictions.
Interoperability: USDC can be easily exchanged with other cryptocurrencies such as Bitcoin or Ethereum, or used in various decentralized applications for trading, lending, and making purchases. Many crypto holders and on-chain organizations also use a combination of USDC and other stablecoins as a store of value.
Transparency and trust: Unlike some other stablecoins, USDCS is backed by U.S. dollar assets that are audited and verified by independent third parties. Users can trust that their USDC tokens are always represented by an equivalent amount in reserves.
Similar to other cryptocurrencies, USDC boasts versatility in its applications, offering users a stable and reliable medium of exchange. This stability, coupled with its pegged value to the US dollar, positions USDC as an attractive asset for various transactions and investments in both the crypto and traditional markets. Here are some of the use cases of USDC:
For Crypto Transactions
Trading: USDC can be used to buy and sell other cryptocurrencies on both centralized and decentralized exchanges. USDC can also be used to hedge against volatility and to reduce exposure to price fluctuations in the crypto market.
Savings: Many crypto holders hold on to stablecoins like USDC as spending capital, knowing that they won’t fall in value. USDC is also a good long-term store of value that is independent of general crypto volatility.
DeFi Applications: USDC can be used to participate in decentralized finance (DeFi) platforms for lending, borrowing, yield farming, and more. DeFi is a movement that aims to create open, permissionless, and transparent financial services that operate without intermediaries. USDC can be used within various DeFi protocols including Aave, Compound, MakerDAO, and others. By using USDC in DeFi, users can earn rewards or interest on their USDC holdings.
For Non-Crypto Transactions
Digital Payments and E-Commerce: Many online goods and services retailers accept USDC as it is faster and more secure than traditional payment methods. The stablecoin also comes in useful for payments across in-game items, NFTs, digital subscriptions, and more.
Freelance and Contract Payments: As the gig economy grows, freelance and contract workers, especially in the web3 economy, turn to stablecoins like USDC for payment. Crypto payment methods offer benefits such as fast settlement, global reach, and transparency for both employers and employees.
Physical Goods & Services: In some places, USDC can be used for physical goods and services. For example, USDC holders can buy movie tickets, popcorn, and more from AMC Theaters or buy gold, silver, and other precious metals from APMEX using their USDC.
As USDC gains popularity in the crypto world, many wonder how to convert it back to a fiat currency such as USD. The main method is through a centralized crypto exchange platform.
Centralized Platforms: You can use platforms like Coinbase, Crypto.com, Binance, and Gemini, which support both USDC and USD. Here's how the process works:
Create an account and complete identity verification (KYC).
Deposit or buy USDC with another cryptocurrency.
Sell your USDC for USD at the current market rate or set a limit order.
Withdraw your USD to your bank account or card.
KYC Process: Before using these platforms, you'll need to undergo a KYC (know your customer) process, a necessary practice in traditional financial services that's used to verify your identity. The KYC process includes:
Providing basic information like your name, email, phone, and address.
Verifying your identity with documents like a government ID or a proof of address.
Additional checks, such as source of funds, occupation, or tax ID, may be required. KYC processes can vary around the world depending on the platform, jurisdiction, and risk level. Some offer instant verification, while others take longer. KYC may sacrifice privacy for security, but centralized platforms require it for compliance purposes.
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