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USD Coin: a stablecoin between CeFi and DeFi

September 3, 2021
7 min
USD Coin: a stablecoin between CeFi and DeFi
Intermediate
You will learn

    USD Coin is the second stablecoin by market capitalisation and is pegged to the price of the US dollar.

    After only 3 months since its launch in 2018, it has ranked 5th in the cryptocurrency market.

    In direct competition with Tether USDT, USD Coin focuses on transparency and reliability, controversial topics for its rival.

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    Stablecoin

    Cryptocurrencies that allow to use the advantages given by the blockchain, avoiding high price volatility. Their price is pegged to a fiat currency (such as the dollar) or to the price of commodities such as gold. Some stablecoins are backed by fiat currency reserves, others by cryptocurrency reserves or an algorithm.

    What’s USD Coin?

    USD Coin is the result of a collaboration between Circle and Coinbase. While we are familiar with Coinbase as the only publicly traded cryptocurrency exchange, Circle is a peer-to-peer payments company.

    These two companies have founded a consortium called Centre, which governs the stablecoin.

    USD Coin is pegged at a 1:1 ratio to the US dollar, thanks to bank reserves.
    USD Coin is fully compliant with US law, and each month USDC in circulation and reserves are certified by the independent firm Grant Thornton LLP.

    For all the characteristics listed so far, USDC is considered a highly centralised stablecoin.

    Most popular stablecoins are based on fiat reserves or traditional assets, such as Tether, Pax Dollar and True USD. However, there are also stablecoins that are backed by other cryptocurrencies and therefore considered highly decentralised. The best example at present is DAI.

    Like other similar stablecoins, USD Coin’s mission is to guarantee fast, global and convenient transactions and to provide an asset in the form of a cryptocurrency but without the volatility typical of cryptocurrencies.

    Regulation and reserves

    Fiat-backed stablecoins lie somewhere between the traditional centralised world – corporations and banks – and the world of cryptocurrencies and decentralised finance.

    Their role is ideally to increasingly integrate cryptocurrencies into the ‘old world’. In order to gain the trust of the existing system, communication cannot be dispensed with, and a transparent approach must be adopted.

    The technical understanding of cryptocurrencies and the blockchain is already a major obstacle. If this is combined with omissions or ambiguities about information that is easier to understand and necessary for the traditional financial system, the crypto market becomes more vulnerable.

    USDC, in general, has always given a greater sense of trust, when compared to Tether, as Coinbase and Circle are companies that are known to everyone for other services, with a official and compliant headquarters.

    Circle also initially stated that each USDC token was backed by one real dollar in a bank account. The statement was supported by monthly reports attesting to this from October 2018 to April 2021, and bearing both Circle’s and Grant Thornton’s logos.

    The report referring to May 2021, and published in July, specified for the first time that in fact cash dollars were just over 60% of total USD Coin reserves.

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    The remaining 40% consists of various types of debt securities and bonds. The reserves of a stablecoin are what make it redeemable, stable, and give it value, so they are a fundamental guarantee.

    As a result of this news, Circle announced its decision to change the composition of its reserves to only cash and short-term US Treasury bonds.

    These changes have already been implemented quickly and will be reflected in future statements issued by Grant Thornton.

    Despite the inconsistency of the statements, it is a positive sign that Circle has finally chosen the path of transparency and improvement.

    What is USD Coin used for?

    That being said, for those looking for a more transparent alternative to Tether, USDC is a great solution. In fact, it is available on many exchanges, although Tether remains the most popular.

    USDC is also available on all the best Centralised Finance (CeFi) platforms, i.e. services that allow centralised lending or staking of cryptocurrencies, such as Nexo or BlockFi.

    USD Coin can also be used as:

    • Safe-haven asset instead of the dollar
    • Store of value on blockchain
    • Payments and transfers means on blockchain without price fluctuation
    • Collateral for centralised or decentralised crypto loans
    • Coin on decentralised applications

    USD Coin in DeFi

    From a technical point of view, USDC is an ERC-20, Ethereum’s main token standard. Thanks to this, USDC can exploit all the advantages of its blockchain, which is the most popular among decentralised applications and in decentralised finance in general.

    Unlike Tether, USD Coin is an open-source protocol, just like all DeFi protocols.

    USD Coin is also compatible with the blockchains of Algorand, Solana and Tron and consequently with the functionality and dapp in their ecosystem. It doesn’t end there: Centre is looking for other blockchains that can support USDC.

    What is the advantage of a stablecoin on DeFi protocols?

    If you put ETH in the Aave protocol to earn periodic rewards, for example, a drop in the price of ETH could wipe out all of the return earned. However, if you use a stablecoin, such as USDC, the value deposited would remain stable, so the return would not be affected by the volatility of the cryptocurrency market.

    Those seeking more return than traditional fixed-interest investments – such as savings accounts, money market funds or bonds – can convert their funds into USDCs to earn above-average returns in the DeFi market. This, of course, also implies a higher risk rate, given that DeFi is very recent and requires technical expertise.

    As of 2020, stablecoins are increasingly important in the lending and yield farming sector of DeFi.

    USDC in Q1 2021 has established itself as one of the most popular lending assets on platforms such as Compound, dYdX and Aave with loan rates ranging from 0.15% to 11.82% APY.

    APY

    Annualised Percentage Yield is the actual rate of return on an investment in one year. APY is used not only in the field of investments, but also in DeFi and in particular in yield farming and incentive programmes linked to the provision of liquidity.

    In the second quarter, however, it is DeFi’s favourite stablecoin, according to a report by Messari. It is therefore starting to be a real cause for concern for Tether.

    Over 50% of USDC’s circulating supply is now locked on smart contracts worth ~$12.5 billion. While this percentage is not as high as DAI’s, USDC is leading by a wide margin in dollar terms.

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