The highly volatile nature of cryptocurrencies is a characteristic feature of the crypto market. Many investors who aim at investing in crypto assets think multiple times due to the high fluctuations integrated into it. Several kinds of stablecoins have been discovered in the crypto market as a solution to price volatility.
These coins have their values pegged with another fiat currency or asset and do not vary with the changing prices in the market.
The fiat-backed stablecoins are one of the most common types of stablecoins that are being utilized in the market. Moreover, USD Coin has also gained popularity among traders providing constant value trading options to them. This guide article explains the purpose and working of Fiat-backed stablecoins and how the USD coin is gaining hype in the crypto market.
What is a Fiat-Backed Stablecoin?
In order to increase the adoption of crypto assets among the people, stablecoins were discovered. The fiat-backed stablecoins can be understood as when any regulated institutions such as banks usually peg the stablecoins to any fiat currency or asset in the market.
These stablecoins are more profitable for traders as they are pegged with fiat currencies. Therefore, like any other online currency, investors can use these stablecoins to buy goods and services. The value of these stablecoins is directly delivered from the value of their underlying assets.
However, the market phenomenon of supply and demand is not followed by the fiat-backed stablecoins. This makes it a more trustworthy cryptocurrency among traders and investors.
Purpose of Using Stablecoins
The relevance of fiat-backed stablecoins in crypto can be clearly understood by knowing the purpose of using stablecoins. In order to bridge the highly volatile crypto assets and the stable assets existing in the real world, stablecoins were discovered. In addition to providing stability to the market prices, there are several other useful applications of stablecoins.
The investors reduce the transaction fee required for buying or selling any crypto asset by capitalizing on the price stability of stablecoins. This is because while carrying out transactions through stablecoins, most exchanges do not charge any transaction fee. Therefore, the users do not buy any crypto asset through fiat currency but rather utilize stablecoins.
Moreover, several cryptocurrencies can also be converted into stablecoins and then converted into cash to ensure lower transaction costs. All these reasons add up to the popularity of stablecoins in the highly volatile crypto market.
What is a USD Coin (USDC)?
USDC is a stablecoin created to keep an equivalence with the US dollar price in the market. It is a decentralized digital asset stored on the blockchain and derives its value from a fiat currency, the US Dollar in this case. This helps stabilize the currency’s value, providing a hedge against market volatility.
However, the USDC coin is not the only stablecoin available in the market. The Tether (USDT), backed by the US Dollar, is another stablecoin that Tether Limited launched in 2014. The USD currency (USDC) was created as a part of the Centre consortium by the Coinbase exchange and the Boston-based Circle in 2018.
The value of one USD Coin is equal to the value of a single US dollar in the market. Therefore, one US dollar is held in reserve for every USD coin circulated in the market. So the US dollar is tokenized by using the USD Coin service, making it feasible for the users to use them over public blockchains and Internet services.
However, it is impossible to mint USD Coins, unlike different cryptocurrencies. ERC-20 is the most commonly used standard for blockchain applications. It is integrated with the USD Coins helping the users to utilize it over all the decentralized applications based on the Ethereum network.
However, the USD Coin is not confined to the Ethereum network; it is also compatible with major blockchain networks such as Hedera, Flow, Stellar, Algorand, TRON, Avalanche, and Solana. The USD Coin has proved itself as an essential component of the stablecoin since its inception, providing enough liquidity to the market. Moreover, it also allows traders to carry out trade across all the decentralized and centralized markets worldwide.
Working of the USD Coin
A USD Coin is created by a smart contract every time a US Dollar is deposited that can be retrieved for one dollar later. The commercial issuers of the USD Coin must carry all licenses issued by the operating jurisdictions. Moreover, these issuers also need to fulfil all the compliance policies related to Financial Action Task Force (FATF) and ensure the Anti-Money Laundering process’s auditing process.
In addition, the users should support the redemption of the USD Coin and their fungible exchange from different reliable issuers and abide by the specifications set by the Centre. Moreover, the amount of the issued tokens should equal the reserve held by the USD Coin issuers. In addition, they are also required to provide proof of reserves that are publicized every month and carry auditor attestation of qualified auditors.
Therefore, every time a user deposits a dollar, the smart contract creates a USDC token. Thus, the user can retrieve one dollar for every USD Coin as it is backed up by a single dollar or an asset carrying an equivalent value kept in the institutions in the United States. However, the regulatory parties must be reliable and transparent to ensure that the USDC and stablecoins are operating properly.
For this purpose, a US-based accounting company Grant Thornton LLP is employed by Circle, which helps in the auditing of the accounts and provides all the relevant routine updates by attesting all the reserves supporting the USD Coins every month.
In addition, the coins are burnt or destroyed permanently whenever any consumer chooses to retrieve back the US dollars pegged to the coins. It helps maintain a continuous backing process, and the external bank of the customer receives back all his underlying funds.
What are the Distinctive Characteristics of a USD Coin?
The USD Coin is a transparent and audited stablecoin pegged with an equal number of US Dollars. Users can use the USD Coins for borrowing and lending services without external interference, buy goods and services at different platforms, and make immediate payments in any part of the world.
As the value of the USD Coins is similar to that of the US Dollar in the market, it eliminates the risk of price fluctuation related to owning digital currencies such as Ether (ETH) and Bitcoin (BTC). In addition, other distinct features of the USD Coin are mentioned below.
- Immediate Payments Across the World
Businesses and individuals can accept payments in USD Coins at any time of the year. This has made it possible for users to transfer payments in other parts of the world as immediately as sending a text message.
- Buying Goods and Services
Online traders have allowed their customers to use USD Coins to purchase different items on their websites. For example, by utilizing USD Coins, users can buy rare basketball moments compiled by the nonfungible tokens on reputable online marketplaces.
- Allows Borrowing and Lending Instantly
Without any interference from external parties, users can lend or borrow USD Coins easily. Similarly, USD Coins can also be borrowed immediately and used in different activities at the very moment. This process requires almost a few seconds or minutes, and the user does not have to wait for weeks to acquire a loan.
Pros of Using a USD Coin
Some key benefits of using USD Coins in daily life are discussed below.
- Speed of Transaction
One of the major advantages of using USD Coins is the faster transaction speed. Normally dealing with the US Dollar might require one to wait for a longer time to send or receive funds as the mediators, such as banks, have to follow their complex procedures, thus slowing down the transaction process. However, by using USD Coins, one can carry out immediate transactions and settle their payments instantly.
- Hedge Against Price Volatility
Another important benefit of USD Coins is that it provides a resistive force against the market fluctuations of prices and the volatile nature of crypto assets as the price of the US Dollar pegged with the coin remains constant. Moreover, the reserves kept at Circle are completely reserved by cash and treasuries of the US at all times.
- Audited By Regulatory Bodies
Reputable auditing companies regulate the USD Coins as the reserves are stored and managed by a few leading firms in the United States, such as BNY Mellon and Blackrock. In addition, several crypto exchanges also allow users to buy USD Coins and withdraw these coins at different blockchain networks.
- Payments Across Borders
One can carry out instant payments across borders using USD Coins. It helps overseas residents in the United States to send remittances to their respective countries.
- Passive Income Opportunities
In addition, users can also earn passive income using USD Coins. This is possible by lending them any decentralized financial platform such as Aave and earning capital instead of storing them in wallets.
Cons of Using a USD Coin
In addition to providing several advantages to users, some drawbacks related to using USD Coins are discussed below.
- Lesser Investment Opportunities
Investing the USD Coins might not be an ideal option for investors who aim to earn good capital through digital currencies. This is because USD Coins do not offer good price appreciation opportunities for the customers that would help them earn future profit.
- High Transaction Fees
If the user wants to withdraw his USD coins reserves, he might have to pay high charges demanded by certain exchange platforms. Moreover, compared to a usual bank transfer or PayPal services, these exchanges might also charge high transaction fees.
In addition, the users may be offered higher interest rates on lending USD Coins by different decentralized finance platforms but involve a higher risk potential, as evident from several crypto heists in the past.
Method to Buy a USD Coin
After the user has met the Know Your Customer (KYC) requirements, he can buy USD Coins on different exchanges. Users can access exchanges such as Gemini, Kraken, and Coinbase to buy USD Coins. There are a few steps that the user needs to follow to buy USD Coins on a centralized exchange such as Coinbase.
- Firstly, the user must sign up for the Coinbase account and verify his account to initiate the transaction process.
- The next step is the addition of a payment method that the user prefers to transfer funds, such as bank account transfer, wire transfer, or debit card, etc.
- Users can start the trade by clicking the “( )” option. If he is using the mobile application, the Buy option is to be selected, and in the case of Coinbase.com, select the Buy and Sell option.
- After that, in the search option of the Coinbase application, enter USD Coin, and a list of assets will appear on the screen. In that list, choose the option of USD Coin. On the other hand, on Coinbase.com, one can search and choose USD Coin by clicking on the Buy panel.
- The next step is to enter the amount to be exchanged into USD Coins.
- The last step is to click Buy Now and complete the process after confirmation.
Difference Between USDT and USDC
Both USDT and USDC are stablecoins backed up by the US Dollar. They are stablecoins introduced in the market to resolve the volatility issue of the crypto assets, and they derive their values from being pegged to the US Dollar. The USD Coins are offered by several crypto exchange platforms.
Moreover, the users can send and receive local USD Coins in the same way as USDT by using any wallet complaint with the ERC-20 or blockchains such as Solana, Algorand, Stellar, etc., or through any exchange platform.
In addition to these similarities between both stablecoins, some key differences are still discussed below.
- Launch Year
The USDT was launched in the crypto space in 2014, while the USD Coins were discovered in 2018.
Both the stablecoins were issued by different networks. The Tether network controls the USDT. On the other hand, a joint venture between Circle and Coinbase, known as Center, controls the management of the USD Coins.
- Compatible Blockchain Networks
Several blockchain networks are used to operate these stablecoins, including Avalanche, Algorand, Ethereum, Solana, Polygon, and Tron. However, USDT is compatible with a few more blockchain networks than USD Coins, such as Tezos, Liquid, EOS, etc.
The auditor behind the regulation of the USDT stablecoin is BDO Italia, whereas Grant Thornton LLP audits the USD Coins.
Several assets are used as the backup for these stablecoins, such as cash and equivalents to cash, the US treasuries, corporate bonds, commercial Paper, etc. In addition, the USD Coins are also backed up by municipal bonds and Yankee commercial deposits. In contrast, the USDT is backed up by crypto assets, fiduciary deposits, secured loans, etc.
Moreover, it is mandatory to learn about the compatibility between the Polygon network and the Bridged USD Coins operating on the layer-2 blockchain network. However, the Bridged USD Coins are not issued or retrieved by Circle. In addition, the reserves of the USD Coins stored by Circle and the US dollars in the market also do not support Bridged USD Coins.
Therefore, to unbridge the Bridged USD Coins, one can only utilize the local USD Coins based on the Ethereum network.
Can USD Coin Be Considered Safe?
Although the USD Coins are regulated and operate transparently, investors should study the benefits and drawbacks of investing in stablecoins before investing in any funds.
Compared to USDT, the USD Coins are regulated and audited regularly, ensuring the transparency of Circle. However, there are certain flaws integrated with the investment in crypto and even stablecoins. As the USD Coins are pegged to the price of the US dollar in the market, this makes its value constant that cannot appreciate further in the market.
However, at the same time, one can compensate for this deficiency by lending funds to someone through a decentralized exchange and thus earning passive income through it. In addition, it is also dependent on the number of funds one wants to allocate in trading and the ability to tackle the risks involved in crypto trading.
Lastly, while investing in crypto and stablecoin, even through a trusted exchange, it is important to be aware of the risks that could erupt if the exchange goes bankrupt.
Stablecoins have a massive scope in the crypto space due to their stability. They were designed to provide a barrier to price fluctuations in the crypto market and are urging the masses to transfer toward crypto trading. Moreover, regular audits and regulations also help build confidence among traders, thus adding to the transparency of fiat-backed crypto assets.
USD Coins were designed to maintain a constant value of a crypto asset by pegging them with the US Dollar. In a highly volatile crypto market, the stablecoin helped maintain stability. In addition, it has also provided an essential tool to investors in the fluctuating crypto market to earn multiple benefits from this stability.