USD Coin (USDC)

In the crypto world, there has been this discomfort that comes when you know that the price of assets or the different digital currencies is not static. When a trader has satoshis and intends to exchange them for fiat currencies, sometimes the exchange rate can benefit them or not. There, however, are some stable coins that have emerged where the exchange rate is 1:1. An example is USD Coin. If you do not know what this coin is or what a stable coin is, you have no cause to worry about because we will elaborate on these in this article. 

What are stablecoins?

Stablecoins are actually cryptocurrencies that always have a stable price based on an external asset. It  can either be a fiat currency (dollar, euro), an exchange commodity (gold, oil), another cryptocurrency (Bitcoin, Ethereum), or a set of smart contract protocols. Stablecoin works in much the same way as fiat currency. It can act as an exchange means, settlement, or capital storage. Its value is tied to traditional assets at a 1:1 ratio. Stablecoins are divided into three main groups according to the way their value is stabilized. The first is when the exchange rate is regulated by the coin’s issuance but is not backed by anything. The second group is when the exchange rate is backed by a peg to fiat money or valuable assets. And the third group includes those stablecoins whose exchange rate is stabilized by a peg to other cryptocurrencies.What then is this stable coin USDC and how does it work?

History of USDC 

USDC was first announced in May 2018 by Circle and was launched in September 2018.  Visa announced in March 2021 that it would allow the use of USDC to fulfill transactions on its payment network. So, it will be possible to make transactions with this stablecoin using a bank card that supports this cryptocurrency. The statistics collected as of June 2021 show that there are 24.1 billion USDC in circulation. 

Understanding USDC

USDC operates on the Ethereum blockchain. It is primarily a cryptocurrency in the sense that it follows a decentralized exchange protocol. However, it is intended to be more transparent than most of its counterparts. USDC is the stablecoin of Coinbase and Circle, who have joined forces to create the Centre consortium, the basis of the project. The goal of the USDC is to become a reference in electronic payment, like PayPal, but without limitations. USDC is a digital currency that is pegged to the US dollar. It runs on the Ethereum, Stellar, Algorand, and Solana blockchains. According to Circle, USD Coin is not only backed by a dollar held in reserve, but also by fully reserved assets. 

USDCs are mostly issued by financial institutions, which are licensed by regulators. To issue 1 USDC, the institution must guarantee that it has 1 dollar in reserve. In addition, anyone with a bank account can issue this cryptocurrency provided they are identified. All that is required is to pay the dollar amount to an accredited issuer in exchange for the desired number of tokens, with no transaction fees (apart from the blockchain fees). 

Given that USD Coin operates on a 1:1 ratio with US dollars it can therefore be exchanged in any way without the fear of losing some dollars or coins. Tokenizing the US Dollar into USD Coins happens in three steps. First of all, a user sends US dollars to the coin issuer’s bank. The issuer uses the USD Coin smart contract to create the equivalent amount of USD Coin. and finally, the newly minted USD Coin is sent to the user and the substituted US dollar is held in a reserve. If the user intends to redeem the coins for US dollars, he will apply the reverse of the process explained above. 

To conclude, the strength of USD coins lies in their stability. They are issued by financial institutions that are licensed by regulators. Regular reports must be provided by these institutions to prove and guarantee that the dollar reserves correspond to the value of the tokens (where 1 dollar = 1 USDC). The stability of this asset means that it can be used as electronic money and as a means of payment in everyday life, without prohibitive fees.