Formerly known as USD Coin, USDC has successfully established itself as one of the go-to stablecoins in the crypto space. Despite launching four years later than its biggest stablecoin competitor, USDT and USDC are often compared to this day. While Tether's stablecoin (USDT) has the largest market cap, Circle's USDC offers a compelling alternative given its reputation for being always-on and offering 1-to-1 redemption for US dollars.
Curious about how USDC compares to the competition and how it stands among the best stablecoins? From USDC's origins to its current place in the stablecoin space, here's everything you need to know about USDC.
What's USDC?
USDC is a digital stablecoin that's pegged to the US dollar and fiat-backed. Launched in 2018, USDC is designed to maintain a 1-to-1 ratio with the US dollar. The USDC stablecoin aims to provide its users with a digital representation of a traditional fiat currency while taking advantage of the benefits of blockchain technology.
Who's behind Circle?
Many crypto enthusiasts know Circle Internet Financial Limited as the company managing the USDC stablecoin. However, the company's roots go beyond its USDC fame. Founded in 2013 by Jeremy Allaire and Sean Neville, Circle began as a P2P payments technology company. Back then, Circle had a guiding vision of dramatically changing the way we use money around the world with the help of digital dollars.
After multiple rounds of venture capital funding from prominent financial institutions like Goldman Sachs and securing its BitLicense from regulators, Circle worked to solidify its reputation as a go-to cryptocurrency company for any financial firm looking to deal with Bitcoin and blockchain technology. Up until 2019, Circle's mobile payment platform Circle Pay operated as a way for users to hold, send, and receive traditional fiat currencies.
After discontinuing Circle Pay and selling its digital asset trading platform, Circle set its sights on revolutionizing digital payments by creating the USDC we're all familiar with today. In September 2018, Circle formed a consortium with Coinbase Global and named it Center.
How does USDC work?
While the 1-to-1 peg with the US dollar has been marketed as USDC's strongest selling point, it's key to understand more broadly how the token works. Thanks to the US dollar peg, anyone can redeem a digital dollar of USDC for US dollars at any point in time.
Understanding USDC's peg to 1 USD
In short, the peg implies that for every USDC in circulation, there's an equivalent amount of US dollars held in reserve. This collateralization offers a sense of security, as the value of USDC is directly tied to a widely circulated and accepted fiat currency like the US dollar.
According to Circle, USDC's reserves are audited annually and these audits are filed publicly with the Securities and Exchange Commission (SEC). The public audits are all part of Circle's plans to eventually become a publicly listed company on the New York Stock Exchange.
As of November 9, 2023, the following represents USDC's reserves composition:
$24.1 billion of USDC is currently in circulation, while $24.2 billion is currently kept in Circle's reserves.
Of the $24.2 billion in reserves, the Circle Reserve Fund makes up $22.9 billion. The remaining $1.3 billion represents cash at reserve banks. The Circle Reserve Fund is an SEC-registered government money market fund. It consists of a portfolio of short-dated US Treasuries, overnight US Treasury repurchase agreements, and cash.
Due to this overcollateralization of USDC, Circle can claim that USDC is backed by an equivalent value of US dollar-denominated assets held as reserves for the benefit of USDC holders. The cash part of USDC's reserves is held at regulated financial institutions, while the portfolio of the Circle Reserve Fund is custodied at The Bank of New York Mellon, which is a regulated financial institution and is managed overall by BlackRock.
What are the use cases of stablecoins like USDC?
Now that we understand the background of Circle and the inner workings of USDC's peg, here are some everyday use cases of USDC.
On-ramping and off-ramping
Keen to enter and exit the world of crypto at will? That's where stablecoins come in. Stablecoins essentially act as the bridge between traditional finance and decentralized finance. They allow crypto enthusiasts to exchange fiat currencies for digital assets and vice versa. Thanks to stablecoins like USDC, crypto traders can easily convert their traditional fiat currencies into digital currencies at will.
Liquidity for active trading
If you're a crypto trader that's actively scalping gains and doubling down on existing positions, you'll likely need the liquidity that major stablecoins provide. With 24-hour trading volume numbers of about $11 billion on OKX, USDC provides more than enough trading liquidity to serve crypto traders when they need access to the asset while trading.
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What determines a good stablecoin?
Before diving into how USDC stands out from the competition, we must first understand what makes a good stablecoin. On a fundamental level, the best stablecoins must offer transparency to their reserve of assets. In a post-FTX crash crypto era, clarity over what's backing these digital stablecoins will be especially helpful in winning over cautious crypto traders who may be skeptical of what's holding up a stablecoin's value.
Additionally, a good stablecoin has a high trading volume. This gives crypto traders the liquidity they need when entering and exiting trades as they use the stablecoin as a liquid exchange medium.
The last factor for what makes a stablecoin strong is availability. The last thing you want is to be limited when trading with a stablecoin because a certain spot trading pair isn't available on the exchange you're actively trading on.
How USDC differentiates from competing stablecoins
Putting traders' trust in the US dollar peg
Compared to non-collateralized stablecoins or those backed by cryptocurrencies, the fiat-backed stability of USDC provides users with a more reliable store of value. This stability becomes particularly crucial during periods of high volatility in the crypto market. Here, issues like trust in the stablecoin can be the difference between potential bank runs due to mass withdrawals and being a bastion of strength for traders during volatility.
Regulatory compliance and frameworks in place
The regulatory environment plays a pivotal role in the stablecoin market, and USDC has positioned itself as a compliant player. USDC adheres to stringent regulatory standards, aligning itself with financial regulation to guarantee legality and trustworthiness. This compliance adds an extra layer of security for users and businesses involved with USDC transactions. By actively engaging with regulators like the SEC, Circle is better positioned to navigate legal challenges more effectively, helping build long-term trust among its users.
Transparency through regular audits
According to Circle, transparency is a cornerstone of the USDC ecosystem. Thanks to regular public audits by reputable third-party firms, anyone can refer to these audits and verify the existence of USDC's reserve holdings. Doing so will confirm that the 1-to-1 US dollar peg is being maintained. With the information displayed on Circle's website, users can essentially trace every USDC token back to its issuance and verify the corresponding US dollar reserves. This transparency ultimately builds further trust and makes sure the USDC stablecoin operates with integrity.
Widespread partnerships and acceptance
The widespread acceptance of USDC by the end of 2023 is a testament to its reliability. According to Circle's USDC ecosystem, numerous online platforms and financial institutions have integrated USDC into their ecosystems, providing users with a range of avenues to explore USDC usage. Overall, the broader acceptance of USDC contributes to its liquidity and utility. Users can seamlessly transact with USDC across various industries, from e-commerce to decentralized finance, enhancing the stablecoin's overall value proposition.
Final words and next steps
Thanks to the rapidly developing crypto scene, an ever-growing pool of crypto traders is joining the fray and seeking the best stablecoins to convert their traditional fiat currencies into. With USDC's focus on transparency, widespread adoption, and a fiat-backed dollar peg, many consider it a top contender among all stablecoins in the crypto space.
From highlighting Circle's background to explaining the 1-to-1 US dollar peg, we hope our guide to USDC has been useful.
Keen to exchange some of your USDT for USDC? Trade our USDC/USDT spot pair and make the switch today.
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