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USD Coin: a stablecoin between CeFi and DeFi

April 17, 2024

7 min

USD Coin: a stablecoin between CeFi and DeFi

USD Coin is the second stablecoin by market capitalisation, i.e. a cryptocurrency that follows the trend of the US dollar.

Just three months after its launch in 2018, it was in fifth place in the cryptocurrency market, and it currently occupies seventh place in January 2024.In direct competition with Tether (USDT), this crypto focuses on transparency and reliability, here is what it is and how USD Coin (USDC) works in detail.

What’s USD Coin?

To understand USDC, we have to start with its origins. This stablecoin is a collaboration between Circle and Coinbase, a peer-to-peer payments company and the only listed cryptocurrency exchange. 

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

USD Coin is pegged in a 1:1 ratio with 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 company Grant Thornton LLP

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

The most widespread stablecoins are mostly based on fiat reserves or traditional instruments, such as Tether and Pax Dollar.  However, there are also stablecoins backed by other cryptocurrencies and thus considered highly decentralised. The most famous 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 cryptocurrency but without the volatility typical of these.

Regulation and reserves

USDC’s functioning is similar to that of many other stablecoins based on fiat currencies. They are somewhere between the traditional centralised world—consisting of corporations and banks—and the world of cryptocurrencies and decentralised finance.

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

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

USDC has, in the past few years, given a greater sense of confidence when compared to Tether, as Coinbase and Circle are companies known to everyone for other services, with an official and compliant location. In the last period, however, the situation has changed. Not because Circle, and thus USDC, has become less trustworthy, but because Tether, through the publication of its proof of reserve, has reassured users and regulators.

However, Circle also experienced a period of questionable transparency after it declared that each USDC token was backed by a real dollar in a bank account. Monthly reports attesting to this from October 2018 to April 2021, bearing both Circle’s and Grant Thornton’s logos, supported this statement. 

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

The remaining 40% is made up 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 key collateral.

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

These changes have already been rapidly implemented and will be reflected in future certificates published 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 said, for those looking for an alternative to the stablecoin issued by Tether, USDC is an excellent solution. In fact, it is available on many exchanges, although USDT remains the most popular.

USDC is also available on many 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:

  • Refuge asset instead of the dollar
  • Value reserve on blockchain
  • Payments and transfers on blockchain without price fluctuation
  • For centralised or decentralised crypto loans
  • Currency on decentralised applications

USD Coin in DeFi

USD Coin in DeFi

From a technical point of view, USDC is an ERC-20, Ethereum‘s standard token. Thanks to this, it can exploit all the advantages of its blockchain.

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

USD Coin is also compatible with all the major blockchains, 70 in total, and consequently with the functionality and dapp in their ecosystem.

What is the advantage of a stablecoin over the DeFi protocols?

For example, if you deposit ETH in the Aave protocol to earn periodic rewards, a drop in the price of ETH could cancel out all the return earned. If, on the other hand, 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 who seek more return than traditional fixed-interest investments – such as savings accounts, money market funds or bonds – can convert their funds into USDC to earn above-average returns in the DeFi market. This of course also implies a higher rate of risk, since DeFi has a very recent origin and requires technical expertise.

Since 2020, stablecoins have become increasingly important in DeFi’s loan and yield farming sector, and are now an indispensable asset type for every crypto enthusiast.Currently, the total capitalisation of crypto pegged to the dollar is about $157 billion with UDC holding 20 per cent of the market share.