U.S. Dollar Coin (USDC) is one of the most popular stablecoins — a type of cryptocurrency that keeps its price pegged to the same price as another asset, in this case, the U.S. dollar.
Stablecoins have a variety of use cases and continue to grow in terms of trading volume and market cap. In 2021, the stablecoin market was worth about $130 billion, making USDC the second-largest stablecoin in circulation.
How Does USDC Work?
USD Coin runs on Ethereum, which is a programmable blockchain. The coin was created to be a form of digital money that wouldn’t be subject to wild price swings.
USDC is an ERC-20 token, which means it conforms to a certain set of programmatic standards that developers must follow to have their token issued on Ethereum. ERC-20 is the standard for utility tokens, which serve a specific function. In a sense, a stablecoin like USDC can be thought of as a type of utility token, in that it acts as a substitute for dollars within the digital asset space.
Dollar-denominated assets back the issuance of USDC tokens at a 1:1 ratio. For each coin in circulation, there is an equivalent amount of assets.
Who Created USDC?
USDC was created through a collaboration between Coinbase, the largest U.S.-based cryptocurrency exchange, and Circle, a financial services firm that is backed by some large financial institutions such as Goldman Sachs.
Based in Boston, Circle started in 2013 as a way to quickly and easily send money. The company quickly found its way into crypto and announced that they had acquired crypto exchange Poloniex in April 2020.
Price of USDC
The price of USDC remains pegged at $1. However, because the price of anything is determined by buyers and sellers, it can fluctuate slightly from time to time.
Sometimes investors try to eke out small gains by selling USDC on crypto exchanges for a few fractions of a penny higher than $1. Some traders might be willing to buy USDC at the slightly higher price if they want to exchange a different currency for one pegged to the dollar immediately.
Why Does USDC Have Value?
USDC is thought to have value because of the assets backing it. Circle backs each coin with cash and cash equivalents. For every new U.S. Dollar Coin created, there is supposed to be an equal amount of dollar assets held at Circle.
With the growing popularity of decentralized finance (DeFi) and centralized lending platforms, demand for USDC continues to rise, as the coin makes it easy for people to conduct financial transactions without leaving the crypto ecosystem.
People who don’t have access to the traditional finance system — who are sometimes referred to as the “unbanked” — may also benefit from USDC. Rather than needing a bank account, which can be difficult to get, USDC users only need an internet-connected device and a wallet that supports ERC-20 tokens.
Why Use USDC
There are several reasons someone might choose to use a cryptocurrency with a stable value:
• As a means of payment. If an individual wants to make a payment using crypto, they can rely on USDC to have a consistent value across time, without the sometimes-extreme price fluctuations that are common among cryptocurrencies.
• As a way to take profits. Traders like stablecoins because they can lock in gains while remaining within the crypto ecosystem. This may also potentially delay some of the taxable events associated with selling cryptocurrency for fiat currency (note: this is not tax advice).
• As a way to earn interest. Some platforms offer users interest payments in exchange for USDC deposits. Celsius and Vauld are among those that reward users for offering their USDC as collateral to be lent out to other users. It’s worth noting that there is risk involved with this activity.
• Making transparent donations to charity. People can use USDC to make charitable contributions that can be seen by everyone.
Advantages and Disadvantages of USDC
There are advantages and disadvantages to using USDC stablecoin. This chart outlines the biggest pros and cons.
| Pros | Cons |
|---|---|
| Price stability | No potential for price appreciation |
| Lots of liquidity | Depending on the current state of the Ethereum network, transaction fees can be high |
| Good reputation and is backed by Circle’s assets | Fees for withdrawing USDC from exchanges can also be high |
How Can I Buy USDC?
Investors can buy USDC on any crypto exchange that offers trading for the token. You will need some U.S. dollars or cryptocurrency that trades against USDC to get started.
To buy USDC, do the following:
1. Find an exchange that trades USDC. Many exchanges have trading pairs that include USDC against Bitcoin and other cryptocurrencies.
2. Create an account on the exchange.
3. Fund your account. Tip: depositing cryptos can be faster than depositing fiat currency like U.S. dollars.
4. Exchange the currency you used to fund your account for USDC.
The exact mechanics will look slightly different depending on the specific exchange, but these steps outline the general process.
How to Sell USDC
Selling USDC involves the same steps as buying. Once an exchange account has been set up, it’s simply a matter of placing a sell order instead of a buy order. USDC can often be sold for other cryptocurrencies or regular U.S. dollars. Note that depositing or withdrawing U.S. dollars typically requires additional user verification and linking a bank account.
Can You Stake USDC?
USDC is not a proof-of-stake token, so it can’t be staked. However, there are crypto lending services that allow investors to deposit their USDC and get paid interest in return. Like a bank, the platforms lend out the USDC at interest and pass on some of the profits to the depositor.
Unlike traditional savings accounts, some crypto lending platforms offer interest rates of anywhere from 8% to 12% or more. As with any investment, there are risks involved, and investors would be wise to do their own research first.
The Takeaway
USD Coin (USDC) can provide an easy way to transfer crypto into dollars without the friction typically associated with using real U.S. dollars. The coin can serve as a bridge between the traditional financial system and the blockchain-powered open financial system.
USDC can be exchanged back into crypto if desired. Some lending platforms also offer attractive interest rates on USDC deposits. One drawback, however, is that because USDC exists as an ERC-20 token on the Ethereum network, the token can be subject to high gas fees at times.
Photo credit: iStock/Prostock-Studio
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