Today we start to see another crypto. As probably have you already read from the title, we will talk about a stablecoin: USDC!
OVERVIEW
In the last review, I talked about DAI, If you missed my last review, you can recover it here
USD Coin (USDC) is a stablecoin, which is a digital "currency" pegged to a stable reserve asset. Its value is tied to that of the U.S. dollar and therefore does not experience the fluctuations that other cryptocurrencies do.
Stablecoins are nothing new in the cryptocurrency world. The arrival of Tether (USDT) marked a before and after in this regard, enabling fast transactions between those using cryptocurrencies such as Bitcoin or Ethereum who want to make quick changes to a "Least Volatile" currency on exchanges. However, Tether had serious problems behind it. In addition, USDT has transparency policies that many people find unacceptable, particularly regarding audits verifying that Tether has in its possession the 1: 1 support expected for each USDT token issued. The issuance of Tether tokens, on the other hand, is granted only to companies or individuals that meet the acquisition requirements, and only for amounts over $100 USD. These weaknesses led various giants in the industry to look for ways to address it and take over the nascent mercado that came next.
That is how Coinbase and Circle joined forces and created Center, a company that would be tasked with managing USDC. USDC has been in circulation since September 26, 2018. It can be seen as a viable alternative to other stablecoins pegged to the dollar, such as Dai (DAI), Tether (USDT), and Binance USD (BUSD). USD Coin tokens can be converted back into dollars at any time, making their use quite convenient.
How does USD Coin work?
For every $1 held in a bank account by Centre, 1 USDC is issued. To maximize transparency and accountability, regular audits are conducted to prove that Centre holds the USD equivalent that it should hold. The results are then published on its official website. As a result, although USD Coin is a cryptocurrency, it is not as decentralized as Bitcoin because a small group of companies control its issuance.
Image source: CoinMarketCap
A currency with no issuance limit
Because USDC is a currency pegged 1: 1 to the dollar and, this fiat currency has no issue limit (nor will it ever have one), the USDC smart contract is special in that the issuance of USDC is infinite.
The issuance of new currencies responds only to dollar deposits in the Center's protected accounts, which then allow the smart contract to create the same amount of USDC within the smart contract and release it to an ETH address where the buyer's USDC will be stored. Yes, this is the same model followed by, for example, Tether, where the dollar bank deposit is transformed into USDT for the buyer.
This form of issuance can certainly generate all kinds of suspicions for those who support the transparency and security of cryptocurrencies, but many institutional players trust this system, and this is what has led USDC to become one of the world's great stablecoins. For its part, the ultimate withdrawal of USDC funds from this token's smart contract leads to the burning of USDC tokens. That is, if a user withdraws 1,000 USDC and withdraws it from the blockchain to a bank, that 1,000 USDC is withdrawn from the Center accounts for cash withdrawal, thus burning the 1,000 USDC token, balancing what exists on the blockchain with what exists in the bank accounts. This ensures that there is always 1:1 support for each coin within USDC.
After the usual introductory part, we move on to the in-depth discussion and analysis of some technical aspects of the project.
DEEPENING
In the previuos section (OVERVIEW) I introduced you USD Coin (USDC) and I said that is a stablecoin, which is a digital "currency" pegged to a stable reserve asset. Its value is tied to that of the U.S. dollar and therefore does not experience the fluctuations that other cryptocurrencies do. USDC is a currency pegged 1:1 to the dollar and, this fiat currency has no issue limit), the USDC smart contract is special in that the issuance of USDC is infinite.
What are the main features of the project?
USDC might seem like just another stable token. There are several today, especially when pegged directly to the value of the dollar. However, there are some specificities to consider. Specificities that could make it, in the medium and long term, one of the best alternatives we have available in the sphere of stables pegged to the U.S. national currency.
Anchored by Coinbase: The fact that it has one of the world's largest exchanges behind it is certainly a very good sign for USD Coin. Indeed, we are looking at the largest exchange in the world, which is also representative of several institutional investors within the cryptocurrency world. One can hardly be wary of Coinbase: a solid project, which now moves more money than many international banking groups and is constantly monitored by tax and financial authorities around the world.
The official website is hosted by Coinbase is another important source of information. Mainly because it constantly keeps updated the number of tokens in circulation and the trading volume for the past 24 hours.
Pros and Cons of USDC
The advantages of using a stablecoin appear obvious: since it is not tied to any algorithm (which makes it impossible to mine), USD Coin is released immediately as soon as it is requested, keeps its value tied to the dollar unchanged over time, and can be used to "crystallize" gains generated from investments.
USDC is based on the Ethereum network, to be precise it is identified as an ERC-20 token. This makes it possible to replicate the many advantages seen on the Ethereum network on this stablecoin as well: Ethereum manages smart contracts based on the Ether virtual currency and, in the case of the stablecoin we are analyzing, they allow for certifying the issuance of U.S. bonds to cover the required amount of crypto, with very rapid issuance times. Unfortunately, however, USDC also has shortcomings: since the exchange rate with the U.S. dollar is always 1:1, USD Coin does not lend itself to investment or trading, never generating a real profit or return from its price fluctuations (which are always very small and rare).
Pros
- Is pegged to the value of the dollar.
- Based on the Ethereum network.
- Not mineable through mining processes.
- Rapid issuance times.
- Useful for "freezing" investment gains.
- Managed by a consortium co-founded by Coinbase
Cons
- Due to its 1:1 ratio to the dollar, it is not suitable for trading activity.
- Does not generate real profit.
- As with all stablecoins, you risk having more crypto than dollar reserves.
- High competition: actually, the competition is very high. Tether is capitalized much more and although it is perhaps less transparent in its management than USD Coin, it is more popular. Binance also operates its token pegged to the dollar, and so will most likely begin to do all the major exchanges worldwide.
Image source: https://koinsquare.com/stablecoins-a-confronto/
If you want to research more, you can DYOR from the whitepaper: https://f.hubspotusercontent30.net/hubfs/9304636/PDF/centre-whitepaper.pdf
Have you already used USDC for trading or hedging?
Next Sunday I’ll introduce to you a new cryptocurrency.
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