What Is USD Coin? How Does It Work?

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USD Coin (USDC), as its name suggests, is a cryptocurrency whose value is based on the U.S. dollar. Since USD Coin is a stablecoin, one USDC should always be worth one dollar.

With a $73 billion market cap right now, USD Coin is now the second-largest stablecoin. 80 percent of the market capitalisation for stablecoins worldwide is made up of USD Coin and Tether (USDT).

Understanding USD Coin

USD Coin was introduced in 2018 by Centre, a partnership established by Circle and Coinbase, as a regulated stablecoin that uses blockchain technology.

A subset of cryptocurrencies known as stablecoins have their value linked to another asset, such as a fiat money, a commodity, or even another cryptocurrency. The goal of USD Coin is to keep its peg to the dollar at exactly one to one.

Unlike volatile cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH), stablecoins like USDC have various uses. This cryptocurrency’s main function is to act as a reliable store of value rather than as a potential asset that increases in value over time.

As of the time of writing, the return on Bitcoin for the year is -35 percent. The value of USDC has mostly remained unchanged so far this year. The lowest trading price USDC has experienced in the previous 52 weeks is $0.995, which is a small decline below its dollar peg.

How Does USD Coin Work?

It is frequently referred to as a fiat-collateralized stablecoin and is backed by physical assets. Fiat-collateralized currencies, as the name implies, are backed by a state-issued currency, such as the US dollar or the British pound.

USDC is collateralized by cash and short-term US government bonds to maintain its constant value of $1. $1 is maintained as collateral for each USDC token that is currently in use.

Investors who purchase USD Coin do so with the expectation that one USDC would always be worth one dollar. So why would you own USDC? Buying USDC, storing it on an exchange or in a cryptocurrency wallet, and then using it to pay for additional cryptocurrency purchases is the most typical use scenario.

USDC Offers Transparency

Due to the degree of transparency around its collateral reserves, USDC is often seen as a safer stablecoin, according to Steve Bumbera, chief operating officer of Many Worlds Token.

According to Bumbera, the Center “works with auditors and government regulation with a transparent and explicit statement of the reserves available to back the peg to the U.S. dollar.”

Even monthly reports of these reserve balances, which include the amount of USDC in circulation and its corresponding value in US dollars, are available for viewing.

Grant Thornton, an auditing company, releases USDC’s attestations. Circle stated that it would start releasing weekly attestation reports in May 2022. They contribute to the credibility of USDC by making public the specific amount of real money supporting the stablecoin.

An additional USDC is created when you purchase one. Additionally, when you decide to exchange 1 USDC for fiat money, the coin gets “burned” during the exchange.

USDC has the same divisions as the US dollar. Although Coinbase has a 0.001 USDC withdrawal cap, you can hold down to that amount. Additionally, a single withdrawal cannot exceed 15,000,000 USDC.

According to Marco Manoppo, research director at Digital Asset Research, “participants in the digital asset market can interact with or acquire USDC through trading USDC denominated pairings on an exchange, or by directly communicating with USDC’s issuer.”

As an asset on multiple important blockchain networks, including Ethereum, Algorand (ALGO), Solana (SOL), and TRON (TRX), to mention a few, USDC provides liquidity to the cryptocurrency market. In addition, USDC is an ERC-20 utility token, which is a need for building smart contracts on the Ethereum network.

Pros and Cons of USD Coin

The key benefit of USD Coin is that it makes it possible to purchase and sell other cryptocurrencies without requiring users to transfer fiat money in and out of exchanges.

Sending USDC is quicker than sending traditional currencies because payments happen instantly and it is possible to do so around-the-clock. Its minimal transaction costs make it both time and money efficient to use.

“What makes USDC such a remarkable product is that it’s easy to produce and redeem, with seamless connection with the existing global financial system,” said Jeremy Allaire, founder and CEO of Circle. Customers can thus use it as a very effective conduit between traditional electronic money and dollars from digital currencies.

According to Manoppo, “it also permits the transfer of capital across different geographical jurisdictions at a far faster rate than traditional wire transfers.”

The use of USDC is still not without drawbacks. One is that there is no price growth. Users should be aware of the regulatory environment that surrounds stablecoins and digital currencies. Government restrictions on these digital currencies, according to crypto specialists, may have a debilitating impact on their future.