USDC is the second largest stablecoin with a market capitalization of $53 billion. It is pegged 1:1 to the US dollar, which means that the value of one USDC must be equal to $1.
In the volatile world of cryptocurrencies, stablecoins offer the closest thing to fiat-like stability. They are used in transactions and exchanges because their value remains more or less constant. Indeed, they are attached to a stable asset, such as a fiat currency or a precious material. Hence the name “stablecoin”.
The most commonly used stablecoins today are USDT and USD Coin (USDC), both of which are pegged to the US dollar and operate with a cash reserve equal to the outstanding amount of the tokens. In this article, we learn about USDC and why it is expected to become the world’s leading stablecoin in the coming months.
What is USDC?
USDC is the second largest stablecoin with a market capitalization of $53 billion. It is pegged 1:1 to the US dollar, which means that the value of one USDC must be equal to $1. It was launched in 2018 by Center, a consortium formed between crypto-payments company Circle and Coinbase, a major cryptocurrency exchange.
How does USDC work?
USDC is a collateralized stablecoin. This means that for every USD coin minted, one US dollar is held by Circle, either in cash reserves or in other liquid instruments. This allows USDC to maintain its $1 valuation at all times. Through this mechanism, you can also choose to exchange your USDC for a real dollar whenever you want.
For every USDC burned, one dollar is released from cash reserves. This unique ability to bring stability to the volatile world of cryptocurrency has catapulted USDC to global acceptance, with a current circulation of over 54 billion tokens.
USDC set to reverse Tether (USDT) in coming months
When it comes to stablecoins, USDT has always been the big winner. However, recent events and developments have mixed things up. Over the past six months, USDC has grown its market capitalization by more than 40%, and for the first time in stablecoin history, USDT has a market share of less than 50%.
To put this into perspective, in August 2020 the market cap ratio between USDT and USDC was above 9. In July 2022 it fell to 1.20, the lowest ever during this period. . This year alone, Tether’s market cap has grown from $78.4 billion at the start of the year to $66.9 billion at the time of writing.
Amid falling market share, USDT also suffered a de-anchor during the Terra-Luna fiasco. Speculation that the USDT token was not 100% backed by cash and other traditional assets caused its valuation to drop. The stablecoin fell to a low of $0.95 in May and was only able to regain its $1 valuation in July. Such a prolonged unpeg is a significant cause for concern for a stablecoin.
This is not the first time USDT has lost its peg with the dollar. In 2018, its value dropped to $0.85 on Kraken due to rumors that BitFinex (one of Tether’s sister companies) had gone insolvent. In contrast, USDC has lost its peg twice since 2018, both times falling to $0.97. The first unanchor happened during the COVID-19 pandemic and the second during the crash of Terra. However, the token quickly recovered its $1 valuation in both cases.
Reasons for USDC’s Rise in Popularity
Circle, a founding member of USDC, is open to weekly audits, is SEC compliant, and holds its cash reserves and liquid financial instruments with the finest guns in finance. Circle is also audited by Grant Thornton, one of the world’s largest accounting firms.
In contrast, USDT provides quarterly attestations of Tether reserves and is audited by UK mid-tier accounting firm MacIntyre Hudson (MHA). However, in June 2022, Tether CTO Paolo Ardoino pledged to have its reserves audited by one of the top 12 accounting firms in the near future.
Additionally, Circle has taken special care and effort to ensure that USDC is open source and available on all major blockchains. This helps developers to easily integrate USDC as a payment protocol on their websites and apps through a readily available API. Businesses and entrepreneurs will now find it much easier to transact across borders and let their international business thrive without someone taking a slice of the pie in the form of transaction fees.
USDC has become the go-to stablecoin for individuals and businesses due to its global availability, acceptance, and trust, which comes with the backing of real USD reserves that are verified and updated weekly.
As part of the organization’s founding principles, cash reserves may never be used for any business-related purpose or operation, and Circle has been successful in ensuring that the principle is adhered to. Whether it is 3 months or more away, USDC will soon gain popularity as a free and fair flow of money and could be crowned as the new king of the stablecoin kingdom.