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What Is USD Coin? How Does USDC Work?

Image of a black cube with the USD Coin logo on it.

USD Coin (USDC) is a stablecoin. If you don’t have vast crypto knowledge, you wonder what is USD Coin? It’s a cryptocurrency which price isn’t volatile like popular assets, say Bitcoin or Ethereum, but instead it’s stable. Why? Because it’s pegged to the US dollar, meaning it may fluctuate but always be around the dollar’s value. There are other stablecoins on the market and what is USD Coin’s goal is to be one of the most used ones, meaning it has to dethrone the first stablecoin Tether (USDT) to do it. So far though, USDC has given USDT a good run for its money, being backed by more reliable organizations and you’ll learn here why this is essential for stablecoins.

In this article you’ll learn what is USD Coin (USDC) and interesting things you should know about this project to help you decide if you want to own some USDC tokens, or not.

What Is USD Coin?

If you’re wondering exactly what is USD coin, you can simply explain it as a cryptocurrency whose value is linked to the value of the US dollar. The organizations behind USDC are the blockchain Circle as well as one of the most popular crypto exchanges in the world – Coinbase. Here we’ll go into the specifics to what is USD coin.

What Is USD Coin Price Algorithm?

As mentioned, USD coin is pegged to the US dollar, but what does that mean exactly? It means that the value of a USDC token will always be more or less equal to the value of one dollar. We will always be able to convert a token of this type into dollars.

As we can see then on the main markets that change it, the price can fluctuate very slightly with respect to that of the dollar, generally in the order of thousandths of a percentage. These are very small variations that are mostly dependent on the small inefficiencies that can be created on the market.

That being said, you can recognize the difference between other cryptocurrencies and stablecoins because the general concern with digital assets is always their price volatility. While the USD coin price may vary, it’s always around the price of the dollar. If you compare it to the Bitcoin price, for example, that can rise and fall significantly in minutes, investors who seek more stability, definitely can rely on USD coin and other similar assets.

Screenshot of the USD Coin website

What Is USD Coin’s Institutional Backing?

By nature, cryptocurrencies are decentralized, meaning no bank or government controls them. However, for the issuing of stablecoins, there has to be an organization behind the coin that makes new stablecoins out of the deposited fiat money of people in it. It’s crucial for a stablecoin to be backed by a reputable organization, otherwise it may bring concerns to how much is the stablecoin really stable, meaning how real is the ratio stablecoin to pegged fiat currency. The issue has already occured with Tether (USDT), whose organization is suspected of not managing their assets very transparently.

Perhaps one of the best qualities of USDC is that it is controlled by a consortium, in which several players in the cryptocurrency industry participate. It was in fact founded by Circle , and today also hosts the popular platforms for crypto trading – Coinbase, as well as the mining company Bitmain, which is one of the largest investors in Circle.

What Is USD Coin Main Purpose?

Like all stablecoins, USD Coin also has as its main use to act as a countervalue on high-frequency exchanges, obviously being tokenized, which cannot be said of the traditional dollar.

Therefore, its first use is to act as a counterparty in the negotiations that take place within the main exchanges. However, the uses, especially those of Coinbase, are much broader. It aims to use it as a means of payment, offering free wallets and above all the possibility for everyone to exchange a crypto with a stable value expressed in dollars without the delays and costs that are instead connected to traditional banking.

What Is USD Coin Compatibility With Ethereum?

USD coin is an ERC-20 token, meaning it’s compatible with the Ethereum blockchain, one of the most popular and used programmable blockchains. A choice of this type has proved to be a winning one over time. Because the Ethereum network today offers reliability and allows this stable token, USDC, to be used in many decentralized finance projects.

How Does USDC Work?

Learning the basics of what is USD coin, you may be wondering how does this cryptocurrency really work – is the USD coin price really pegged to the dollar, what collateral is given for that, how is the coin managed, and how can it be traded. We’ll try to briefly cover the emerging questions you may have after you find out what is USD coin.

Circle Coinbase Act as Guarantors to the Stablecoins

Circle and Coinbase, which are the majority shareholders of the consortium that controls USDC, act as guarantors of the value of USD coin, along with the redemption to third party institutions.

Obviously there must be a credible counterpart for each token that is placed on the market and this can be managed using collateral in dollars, which are properly registered and also controlled by the user.

How Is USD Coin Issued

You can’t mine USDC tokens, the way you can mine Bitcoin, and you can’t also stake them, how you can stake Cardano or Avalanche. Instead, this cryptocurrency is issued on request. Anyone who buys USDC from Coinbase will have new ones delivered and never released. The doubt in this case is that Coinbase, as well as the other agents involved in the project, can issue more coins than they will actually be able to convert one day. This problem can be overcome, as long as the exchange actually has US dollars or equivalent in hand.

US Treasury Bonds Act as Collateral

The operation chosen by USDC provides, for each token sold, the purchase of US treasury bonds, short, medium or long term. These are particularly solid assets that cannot default. Or rather, if they were to default, the dollar itself would end up being worth little or nothing.

The procedure used is the following: customers buy USDC directly from the consortium, the consortium buys government bonds and immobilizes the money thus raised as collateral. It is a safe procedure which, at least for the moment, guarantees the counterpart in dollars which supports the value of the USDC and which allows it to be effectively pegged to that of the dollar.

What Is USD Coin’s Risk Level?

As every financial asset, there are risks that the stablecoin holds. However, if we’re considering the organizations behind it, USD coin has a reputable backing that also positively affects its own popularity. In addition, the assets that are fixed to guarantee the value of USDC are periodically checked by third-party companies, which confirm their consistency. That’s why at least for the present, the USD Coin looks like a solid project.

Background of market chart. In front of it, in the middle of the image, is the blue circle logo of USD Coin

What Is USD Coin Going to Be Used for in the Future?

The USDC future is linked to several technological projects that intersect in its functioning. On the one hand, there are the exchanges and the companies that push and sell it, the same companies that today are concerned with ensuring that behind every USDC issued there actually is a US dollar.

Secondly, the future of this token will also be linked to Ethereum. In the sense that today the most important trading volumes on USDC are due to decentralized finance projects that are based on the Ethereum blockchain. If this drops in intensity, meaning it is no longer central to the majority of DeFi projects, the USDC could also lose relevance. However, in this regard, it must also be said that for USDC could find a way to save itself from this crash, if it’s adopted for more uses.

If you’re wondering what is USD Coin price going to be in the future – there’s no use of price predictions really. In general you can’t base your investment decision in digital assets on price predictions since past performance isn’t a guarantee for future gains. But in the case with USDC, there’s not much really to predict. In the last year, the lowest and highest prices of this stablecoin were $0.9874 and $2.35. As you can notice, it’s varying around the dollar but it can’t go much further than this high, you can’t never expect USDC or any stablecoin to reach $100, for example. That’s why its use is not as a long term investment for gaining returns but luckily it has other uses.

What is USD Coin main current issues is that the asset doesn’t yet have many practical uses, besides the popular exchanges it’s on. But if it’s more widely adopted in the future, it may became a real competitor for Tether’s place. The popularity of Ethereum is likely to continue, despite the competitors aiming for its place, so this stablecoin may benefit from that as well. The future of USDC depends on how widely its adoption will grow and if the organizations behind it will keep their good reputation.

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