What is USD Coin (USDC), and How Does It Work?
Did you know stablecoins carry around 14% of the entire crypto economy? That’s right. The stablecoin market is currently worth approximately $190 billion.
Did you know stablecoins carry around 14% of the entire crypto economy? That’s right. The stablecoin market is currently worth approximately $190 billion. Given the short history of stablecoins in the crypto world, this is astounding. That shows people have seen their potential and really believe in them.
USD Coin (USDC) is among the biggest stablecoins on the market today. If you are here, you probably know a few things about stablecoins and have had your eye on USDC for a while now. So, you want to know how this stablecoin works and whether it’s a great asset to add to your crypto portfolio. If that describes your case, you have come to the right place. In today’s article, we will discuss what the USD coin is, how it works, and other crucial factors you need to know.
What Is a Stablecoin and How Does it Work?
Before going further, let us first discuss what a stablecoin is to ensure we are on the same page.
A stablecoin is a digital asset whose value is tied to another reserve asset, like a fiat currency. Pegging helps keep its price stable so that it doesn't go up and down like other digital assets, like Bitcoin. This also means that a stablecoin’s value is always constant, making it the best option if a crypto’s price stability matters to you.
If you want to learn more about stablecoins, check out this article explaining how stablecoins work.
What Is USD Coin (USDC), and What Type of Stablecoin Is It?
USD Coin (USDC) was launched in 2018 and is the second-largest stablecoin. There are different types of stablecoins in the crypto market today. The three major types you should be aware of are crypto-backed, fiat-backed, and algorithmically stablecoins.
USD Coin falls under the "fiat-backed" category. This means that its value is pegged to the US dollar. So, you can exchange one USDC token for one dollar at any time.
What Is the Difference Between USDC and USD?
As aforementioned, USD Coin is backed by the US dollar, thus the “USD” in the name. You may have noticed the same thing with other dollar-based assets like Tether (USDT), Binance USD (BUSD), and Gemini dollar (GUSD). So, the USD is just used to show that the coin is backed by the U.S. dollar. But, that does not make USDC and USD the same. USD is a fiat currency, while USDC is a digital asset.
Who Is Behind USDC?
USD Coin was created by two of the most popular cryptocurrency companies today: Coinbase and Circle. Coinbase is one of the biggest places to buy and sell cryptocurrencies, and Circle is a well-known financial services company backed by big names like Goldman Sachs. This strong collaboration explains USDC’s huge popularity.
How to Convert USD Coin to USD
Since USD Coin maintains the same value as USD, converting from one to the other is usually a walk in the park. Some crypto exchanges, like Coinbase, allow you to quickly convert your USDC assets to USD right on the platform. You could also withdraw USDC from your crypto platform to your bank account, which should reflect in USD in your bank account.
How Does USD Coin Work?
USD Coin was initially hosted on the Ethereum blockchain. However, it is now available even on other blockchains, such as Algorand and Stellar.
New USDC tokens are usually minted when someone buys them. However, when someone sells USDC tokens for USD, these tokens are removed from circulation. These steps explain how this usually works:
You plan on buying some USDC tokens, so you go to your favorite crypto exchange and deposit cash to facilitate the transaction.
The crypto exchange mints USDC coins worth the invested amount using smart contracts.
After completing the transaction, the crypto exchange usually adds your deposited dollars to USDC reserves to maintain the 1:1 stablecoin to dollar ratio in reserve.
Now, if you want to redeem USDC back to USD, then here is the process:
You leave a request on your platform to redeem your USDC for USD.
The stablecoin issuer then uses USDC smart contracts to exchange the requested USDC tokens for USD. The amount of exchanged USDC tokens is removed from circulation.
The issuer then pays out the requested dollars to your bank account or the specified payment method.
Is USD Coin Safe?
Since USD Coin is a stablecoin, it does the same job as other stablecoins and offers similar benefits. However, a few factors have enabled it to become the second-largest stablecoin on the market today.
One of these crucial factors is transparency. As you probably already know, stablecoins need enough reserves in the bank account of the token issuer to keep the price stable. Therefore, if a stablecoin issuer does not have enough reserves, the stablecoin’s price will likely fluctuate, which is not supposed to happen.
USD Coin is one of the stablecoins that has kept a good peg to the US dollar because its issuers keep cash reserves in the same amount of US dollars. Center, which was made by Circle and Coinbase to manage USDC, usually gives monthly attestations showing the value of the available reserves to show that this is true. The data also includes the number of USDC coins in circulation at that moment. Plus, the well-known accounting firm Grant Thornton LLP sends the Center monthly attestation reports. So, the data is legit.
Therefore, if you have been wondering if USD Coin is safe to buy, these factors should be enough to convince you. But it's still important to do your own research before putting money into USDC, especially if you want to buy a lot of it.
How to Use USD Coin (USDC)
Below are some of the best ways to use your USDC tokens:
Use Them to Access Crypto Services
If you often find yourself converting your digital assets to fiat and vice versa, you no longer have to do so. You can now exchange your Bitcoin for USDC since it holds the same value as the U.S. dollar. That way, you can easily complete transactions that demand stablecoins, such as buying something online, without needing to use the bank.
Also, USD Coin is supported by major exchanges, making it easily available. So, you can easily use your USDC savings to send or buy big amounts without having to worry about the bank's withdrawal limits.
Make Global Payments
If you have tried making payments to someone in a different continent or country, then you know how costly that can be. Plus, the money might even take a few days to reflect in the recipient’s account, which can be highly inconvenient.
With USDC, all you need is the recipient’s crypto wallet. The transfer is usually instant, and the money reflects pretty quickly. Additionally, the transaction fees are cheaper compared to traditional financial institutions.
Receive Money in USDC
If you work remotely and deal with international clients, then you should probably consider getting paid in crypto. This is because when you receive your money in USDC, you have the freedom to decide how much to save in your bank account. If you are also a crypto investor, using USDC would make funding your crypto investments easier.
Also, since USDC is a stablecoin, you don’t have to worry about your money losing value due to price volatility. So, your money will maintain the same value as when you received it.
This does not apply to remote workers only. You could also give this idea a shot if your company supports crypto payments.
Earn Passive Income Through Lending USDC
USDC is supported on many lending platforms. So, if you have some USDC tokens, you could put them in a lending platform and get some interest after the agreed-upon time. Some platforms, like Nexo, even offer weekly interest payments.
The interest rates are usually pretty enticing and could earn you more money than letting your funds sit in a low-interest bank account. However, keep in mind that interest rates differ between lending platforms. So, you might have to check out several platforms to find the one with the best lending terms and interest rates.
Protect Your Crypto Against Price Volatility
If you are a crypto hodler, you know how volatility can easily wipe out the value of your assets. This is especially true when the market enters a prolonged bear market. In this case, you can turn your volatile crypto into USDC to stop it from losing more value. You can then re-enter the market when everything cools down.
How to Get USD Coin
If USDC sounds like a great deal and you would like to buy it, then here is the simplest way to go about it:
The first step is to find a good crypto exchange that supports USD Coin (USDC). Coinbase, Binance, and Kucoin are the top exchanges we would recommend you use.
Once you find a good platform, now create your account and provide any needed details to verify your identity.
Next, deposit money in the account. Many exchanges support bank and card payments, so the process should be seamless. However, if you own other cryptocurrencies like Bitcoin, using them would be the faster and cheaper option.
Head to the exchange section of the platform and exchange your fiat or crypto for USD Coin.
The process will look like this on most cryptocurrency exchanges. However, it could still vary depending on the exchange you choose.
Pros and Cons of USD Coin
Here are the advantages and disadvantages of USDC that you need to know about before investing in it:
Pros
Its price is stable, so you don’t have to worry about your money losing value.
It makes it easier to perform day-to-day online transactions.
It helps you run from the volatility in the crypto market.
You could also use USDC to hedge against inflation, especially if you live in a country with unstable fiat currency.
Cons
The price does not appreciate. Unlike volatile cryptos like Bitcoin, USDC’s price remains the same over time. Therefore, holding it for extended periods will not earn you any extra money.
Transaction fees vary, meaning they can sometimes be high.
Since USDC tokens are dollar-denominated assets, they could also be affected by dollar’s inflation.
Conclusion
USD Coin (USDC) is a great digital asset to own, even if you are a newbie in the crypto space. As you have seen, it has many use cases, and you can even earn passive income with it. However, like other crypto assets, it also has some risks. Therefore, understand them properly before buying your first USD coins.