WHAT’S USDC? How does it work? Complete Guides 2024

USD Coin, or USDC, is a cryptocurrency created by Centre, a nonprofit consortium founded by Coinbase and Circle with a mission to “provide governance and standards for the future digital financial ecosystem.” 

aims to mirror the value of the U.S. dollar and act as the “U.S. dollar of the crypto ecosystem.” Because of this, it maintains a relatively consistent value even if other cryptocurrencies fluctuate. But before we dive into the details, let’s first understand what’s a stablecoin.

What are stablecoins?

Stablecoins are cryptocurrencies that usually have a value attached to real-world assets like the U.S. dollar or gold. The purpose of stablecoins is to have a cryptocurrency whose value remains stable.

Any given “traditional” cryptocurrency might experience fluctuations in value that make it unreliable as an everyday medium of exchange. For example, today’s price of one bitcoin (BTC) may not remain consistent in a month.

Stablecoins are a type of cryptocurrency designed to have a stable price, unlike regular cryptocurrencies known for their high volatility. Here’s how they work:

• Pegged Value: Stablecoins are pegged to an external asset, such as:
  • Fiat Currency: Most popular stablecoins are pegged to fiat currencies like the US dollar (USD) or Euro (EUR). This means their value should stay close to $1 or €1, respectively.
  • Commodities: Some stablecoins are pegged to commodities like gold or oil. Their value fluctuates with the underlying commodity price.
  • Other Cryptocurrencies: A less common peg uses another cryptocurrency, but this can introduce some volatility.
• Maintaining Stability: There are different mechanisms to maintain the peg, depending on the type of stablecoin:
  • Fiat-backed: These hold reserves of the pegged asset (e.g., USD) in a custodian bank account. If the stablecoin price goes above $1, more coins are minted and sold to bring the price down. Conversely, if it falls below $1, some coins are bought back and burned to reduce supply and increase the price.
  • Algorithmic: These use smart contracts to manage supply and demand. If the price rises, more coins are created, and if it falls, some coins are burned.
• Benefits of Stablecoins:
  • Reduced Volatility: They offer a way to hold crypto assets without the wild price swings of Bitcoin or other volatile cryptocurrencies.
  • Faster Transactions: Compared to traditional money transfers, crypto transactions are generally faster and cheaper. Stablecoins can leverage this benefit for payments.
  • Bridge between Crypto and TradFi: Stablecoins can act as a bridge between the cryptocurrency world and traditional finance (TradFi), enabling easier movement of funds between the two systems.
• Things to Consider:
  • Peg Stability: Not all stablecoins are equally stable. Some mechanisms might be more reliable than others.
  • Regulation: Stablecoins are a relatively new invention, and regulations are still evolving.

What’s USDC?

USDC is a stablecoin. As its name suggests, value ties to the U.S. dollar, where each stablecoin attempts to maintain a value roughly equal to $1.

initially operated on Ethereum’s (ETH) blockchain. However, it currently functions on the Algorand and Solana networks, with it supporting more networks over time. allows users to tokenize the U.S. dollar, making it usable across blockchains, crypto exchanges, and other transactions. Additionally, tokens are convertible to USD. It’s a vital component of the crypto world and significantly impacts DeFi (decentralized finance) and other financial instruments.

How does USDC maintain its peg?

Circle and Centre’s open-source fiat stablecoin infrastructure created serves as the basis for USDC’s design.

is completely backed by reserves and is redeemable for USD on a 1:1 ratio, which you can find on crypto trading platforms. It maintains its peg by employing a straightforward collateralization method. For every $1 of USDC in circulation, there is $1 backing it in a bank account. can only be created via bank deposit

, a popular stablecoin, maintains its peg to the US dollar through a combination of factors:

1. Reserve Backing: is an asset-backed stablecoin, meaning it’s fully backed by reserves of US dollar-denominated assets held by Circle, the company behind . These assets are typically held in cash and short-term U.S. Treasuries at reputable financial institutions.
2. Maintaining Reserves: Circle aims to maintain an amount in reserves equal to the total number of tokens in circulation. This means if there are 1 billion tokens outstanding, there should be $1 billion in reserves to back them.
3. Redemption and Creation: Circle facilitates mechanisms for authorized institutions to redeem USDC for US dollars at a 1:1 rate. This helps maintain stability because if the market price of rises above $1, institutions can profit by redeeming large amounts, increasing supply and driving the price down. Conversely, if the price falls below $1, institutions can buy USDC at a discount and redeem it for $1 from Circle, decreasing supply and pushing the price up.
4. Transparency and Audits: Circle publishes regular attestations from independent accounting firms verifying the amount of reserves held. This transparency helps build trust in the peg between and the US dollar.

In summary, peg is maintained by a combination of reserve backing, mechanisms for redemption and creation, and transparency through audits.

Highlighted  characteristics

1. is audited monthly by one of the world’s leading accounting firms. Since inception, Circle has released monthly audits via Grant Thornton, one of the world’s leading accounting firms. The audits prove that users can access the equivalent amount of fiat-backed reserves as the total circulatory USDC supply.
2. is registered with the Financial Crimes Enforcement Network in the U.S. As a provider of financial products and services, Circle is a legally recognized business in the U.S. As a result, it’s registered with the Financial Crimes Enforcement Network (FinCEN), which aims to combat financial fraud.
3. It’s quicker to send USD through USDC than through a bank. The key benefit of is that it makes it possible to exchange crypto without requiring users to transfer fiat currency in and out of cryptocurrency exchanges. Sending USDC is quicker than sending fiat currency since payments happen near-instantly, and it’s possible to do so around the clock. Also, depending on the network where resides, it may be more cost-effective.
4. It’s NOT decentralized. Unlike cryptocurrencies such as Bitcoin and Ether, is issued by a centralized authority that must adhere to regulations. If a regulatory body decides action is required against a holder, all their crypto may be frozen. For example, somes users that interacted with the crypto mix Tornado Cash saw their assets frozen.

How to use USDC

USDC can be used via two methods. If you want to buy , you’ll have to convert your fiat currency into crypto. You can also convert your USDC into fiat currency.

There are several ways you can use USDC, depending on your goals:

As a Stable Investment:

• Hedge Against Volatility: If you hold other cryptocurrencies, owning USDC can help balance your portfolio and reduce volatility. Its peg to the US dollar provides a more stable element compared to fluctuating crypto prices.

For Transactions and Payments:

• Faster Settlements: Crypto transactions, including transfers, are generally faster and cheaper compared to traditional bank transfers. This can be beneficial for international payments or situations requiring quick settlements.
• Some Merchants Accept USDC: A growing number of merchants are starting to accept USDC for payment. You can check if a specific store accepts it through their payment options or browse online directories of USDC-accepting merchants.
• Crypto Debit Cards: Some crypto debit cards allow you to load USDC and spend it like a regular debit card at any store that accepts Mastercard or Visa.

Within the DeFi Ecosystem:

• Earning Interest: Certain DeFi platforms allow you to lend your USDC and earn interest on it. This can be a way to generate passive income from your holdings.
• Trading and Liquidity: USDC is a commonly used stablecoin for trading other cryptocurrencies on decentralized exchanges (DEXes). It also plays a role in providing liquidity for DeFi protocols.

Here’s how to get started with USDC:

1. Choose a Platform: You’ll need a crypto exchange or wallet that supports USDC. Popular options include Coinbase, Binance, Gemini, MetaMask, and Trust Wallet.
2. Buy USDC: Once you have your platform, you can buy USDC using fiat currency (e.g., USD) through bank transfer, credit card, or debit card (depending on the platform). You can also buy USDC with other cryptocurrencies you already own.
3. Transfer or Store USDC: After acquiring USDC, you can transfer it to another wallet, use it for payments, or engage in DeFi activities depending on your goals.

Converting your fiat currency into USDC

1. Open a cryptocurrency exchange account: Look for a cryptocurrency exchange that accepts USDC. A few USDC-compatible exchanges include Coinbase Pro, Bitfinex, Kraken, and Huobi Global.
2. Add fiat money to your account: Deposit your fiat currency into your exchange account. You can do so via bank transfer or your credit card.
3. Use your funds to buy USDC: You’re all set to buy and convert your fiat currency into USDC.

Converting your USDC into fiat currency

1. Find a platform to convert your USDC: Find a crypto exchange that can convert your USDC into the fiat currency of your choice.
2. The exchange removes USDC from circulation: Once you’ve entered an amount, the crypto exchange will send a request to USDC’s smart contract, enabling the blockchain to remove the necessary amount of USDC from global circulation.
3. Receive the money in your account: The USDC smart contract will approve the transaction, and the crypto exchange will send the converted fiat currency to your bank account. You may have to incur transaction charges, so your final amount could differ depending on the rate at the time of transfer.

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