What is USD Coin (USDC)? A Guide for Beginners
What is a Stablecoin?
Stablecoins are a type of digital currency that has a constant value at all times. These tokens are pegged to an underlying asset such as fiat currencies, cryptocurrencies, commodities, or an algorithm. Each stablecoin token is backed by a standardized unit of account at a specified ratio such as 1:1 with USD.
Stablecoin issuers are usually regulated entities who have to grant prove of their reserves to the financial regulators for confirmation. The owner of one stablecoin should be able to redeem their holding for fiat currencies at any time.
What is USD Coin?
USD Coin is also known as Circle and it is fully-backed by US dollar. It can be viewed as the tokenized version of US dollar. The value of USDC Coin is pegged to the value of one USD such that it is designed to remain stable.
The price of USDC stablecoin always remains as much as value of a unit USD. Coins such as Bitcoin and Ethereum are subjected to market volatility.
The reserves of USDC consist of dollar-denominated products such as treasury securities. The reserves are held in a separate account for regulated and audited US financial entities.
How does USDC Work?
When a new investor purchases a new unit of USDC coin, it is stored in the reserves as a unit of USD. The user can use one USD to buy one USDC token that is stored in the reserves and a new USDC coin is minted against it.
The same process takes place in reverse when the investor sells their USDC coin. In this scenario, the USDC coin burned and the user is able to get USD. In this manner, the USDC stablecoin managed to maintain its 1:1 peg with US dollar.
Issuance of USDC Stablecoin
The stablecoin is issued by a consortium called Centre. This consortium was co-founded by Circle and Coinbase. The mission and scope of Center is to extend financial autonomy to people, businesses, financial services providers, and other stakeholders on an international scale.
Center is audited by an independent accounting firm called Grant Thornton LLP that publishes monthly audit reports to declare the particulars of the reserves that are backing the USDC coin project.
Advantages of USDC Stablecoin
Here are some important advantages of USDC stablecoin mentioned as under:
Reduced Volatility
Stablecoins have none or little price volatility in comparison to other digital currencies. The cryptocurrency sector has several digital currency assets such as Bitcoin, Ethereum, and Litecoin whose prices are subject to constant change depending on various factors such as technical and fundamental indicators etc.
However, stablecoins retain a constant value at all times making them safer investment.
Fully Backed
USDC is fully backed and accounted for with reserves. It means that the issuer in this Center cannot add or subtract the total quantity of USD Coin outside of the reserves it holds.
It grants protection for the investors as the reserves that back USDC are regulated and audited by US agencies. It ensures transparency for its investors and ensures that the USDC coin maintains it 1:1 peg to dollar at all times.
Inflation Hedge
USD Coin is often used by investors as hedge against inflation. It means that investors can convert their cryptocurrency reserves into USDC coin to preserve their trading gains.
When the price of the cryptocurrency fells again in the market the investors can purchase the coin in a bigger quantity for to increase their profits.
DeFi
USDC has a practical utility for decentralized finance users. It is used for remittance and international payments. At the same time, it is used in various decentralized applications and protocols such as Aave, Dharma, and OpenSea among others.
Disadvantages of USDC
Some adverse features associated with USDC stablecoin are mentioned as under:
- The investors holding USDC stablecoin do not turn up a profit over time like other digital currencies that are trading on the spot market.
- The reserve assets that are backing USDC stablecoin are not fully accounted for and can pose an issue for the institutional investors.
- USDC stablecoin can absorb the negative impact from inflationary forces that can lead to devaluation.
Conclusion
USDC offers many benefits for digital currency investors such as maintaining liquidity, easier conversion, and preservation of profits. On the other hand, it also entails a few risks such as regulatory uncertainty and lack of profit earning potential.
