There has been quite a bit of press recently around the launch of the USD Coin which is a stablecoin that is a collaberation between Circle and Coinbase.
The stablecoin market is one of the most interesting ecosystems in the cryptocurrency space at the moment. There have been a number of other stablecoin projects that have launched their own coins including TrueUSD, Paxos Standard and the Gemini Dollar.
Most of these projects are trying to capitalize on the mistrust that is currently present in the Tether (USDT) stablecoin. They all have a similar purpose in retaining a 1:1 peg to the US dollar but they go about it in slightly different ways.
Let us take a close look at the USD Coin and what is means for the stablecoin market.
On October 23, 2018 the massive U.S. based cryptocurrency exchange Coinbase announced support for the USD Coin (USDC), which is a stablecoin that they created in collaboration with Circle Internet Financial. Circle owns competing cryptocurrency exchange Poloniex and is one of the most well-funded cryptocurrency companies, worth over $3 billion and with investors that include Goldman Sachs and Baidu.
The USD Coin was developed by the Centre Consortium, a collaboration between Coinbase and Circle, however Circle will issue USDC. Each USDC issued is backed by a fiat U.S. dollar held in reserve bank accounts and there is a total supply of USDC of just over $190 billion.
With each USDC backed by a U.S. dollar it is not meant to move significantly from the value of the U.S. dollar, meaning investors are always able to buy and sell USDC for $1.
The USDC was created on the Ethereum blockchain and is ERC-20 compatible. This was done to support rapid transfers of USDC on the Ethereum network. It also takes advantage of the security of the Ethereum blockchain, and makes the USDC easy to store and exchange. Circle co-founders Jeremy Allaire and Sean Neville said:
Coinbase and Circle share a common vision of an open global financial system built on crypto rails and blockchain infrastructure, and realizing this vision requires industry leaders to collaborate to build interoperable protocols and standards
The USDC is unique in being the first stablecoin supported by Coinbase. While Circle first issued the coin in September, it didn’t gain traction until the Coinbase listing, and since then it has rapidly climbed to one of the more valuable cryptocurrencies. As of December 12, 2018 it occupies the 26th spot on Coinmarketcap.com in terms of market capitalization.
USDC will be issued by Circle, Coinbase will be the platform that users can access to make deposits, convert fiat currency into USDC tokens and it will facilitate USDC transactions while also providing the ability to shift back and forth from fiat to cryptocurrencies.
Coinbase, valued at roughly $8 billion and Circle, with a $3 billion valuation, are two of the largest blockchain companies, and the launch of the USDC stablecoin shows that even though Bitcoin has continued to slump throughout 2018, they are committed to the long-term future of the crypto-economy.
The USD Coin is just one of those bets, and so far it looks to have been a successful bet. Of course the support of the largest U.S. cryptocurrency exchange certainly helped. Coinbase calls the stablecoin “fundamentally different” from the other cryptocurrencies it has listed. It is also only the second ERC-20 token listed, with the recently listed 0x (ZRX) being the other.
Since nearly hitting $20,000 at the close of 2017 the price of Bitcoin has dropped consistently, but even before it has been wildly volatile. And the same is true of the altcoins, or cryptocurrencies other than Bitcoin. This volatility makes cryptocurrencies unsuitable as payment methods.
A stablecoin does away with the volatility, being pegged to the value of the U.S. dollar at a 1:1 ratio. This 1:1 representation is what gives the coin stability, and makes it suitable for payment transactions. Users no longer need to worry about rapid, massive changes in value affecting their payments or earnings. And each USDC is backed by a matching U.S. dollar held in bank accounts and subject to regular auditing. This allows for trust that the value of the stablecoin will remain $1.
As I’ve said, the USD Coin is being backed 100% by actual U.S. dollars. These U.S. dollars are held in reserve accounts and are regularly audited to unsure the reserve match the issuance of USDC.
At the Money 20/20 conference in Las Vegas, Coinbase President and COO Asiff Hirji said:
“We are issuing stablecoins backed 1:1 with the U.S. dollar, completely audited, completely transparent. We think this is a key step toward unlocking innovation in crypto.”
The stablecoin remains backed by physical fiat currency, and is designed for minimal price volatility.
Earlier this year the first, and at the most popular, stable coin Tether broke its peg to the U.S. dollar as it found itself surrounded by more controversy. Tether dropped as low as $0.91 as it was rumored that the Bitfinex exchange, which has close ties to Tether, was facing insolvency.
Tether has always been controversial due to the lack of transparency, its ties to the Bitfinex exchange and Bitmain, and questions regarding the actual amount of U.S. dollars being held in reserve by Tether.
After this latest controversy billionaire Bitcoin evangelist Michael Novogratz said that Tether should be more transparent about its operations. He added that he feels “Tether didn’t do a great job in terms of creating transparency,” but also noted that “the concept of stablecoins makes sense.”
Coinbase customers from all regions of the world are able to purchase and sell USDC on Coinbase Pro and Coinbase Prime. So far the regular Coinbase platform has only made USDC available to those with U.S. based accounts, with the exception of New York residents.
The stablecoin can be bought and sold through the Coinbase web-based application, and through the mobile Android and iOS apps. Once purchased the USDC tokens show as available assets in the customers Coinbase wallet.
Customers who purchase USDC with USD from a bank account or Coinbase wallet will have any fees waived, however credit card and debit card purchases are still subject to the standard transaction fee.
Users who purchase USDC off Coinbase can send those tokens to Coinbase, but only to the USDC wallet in their Coinbase account. If tokens are sent to the wrong address Coinbase will not be able to recover them. This is standard for cryptocurrencies. Always triple check addresses before sending any coins.
The USDC coin has also being listed on a number of other exchanges recently. Currently, they are listed on 36 other exchanges as they look to diversify their stablecoins. The USDC recently landed on the Binance Exchange which will no doubt have a big impact for adoption.
The first obvious use case is that since this is an ERC-20 token two Ethereum wallets will be able to send or receive any amount of USDC at any time of the day or night, and antwhere in the world, nearly instantaneously.
This makes both small ecommerce payments or large business related payments equally easy and quick. And because of the function of a stablecoin consumers are able to hold and use the USDC without worrying about rapidly changing values.
As the blockchain ecosystem grows, the utility of the ERC-20 compatible USDC will increase. There are already a large number of exchanges, apps and blockchain based games, but those numbers are preparing to explode in the coming years.
This ERC-20 based token can be used with any app that uses the Ethereum standard. That will make extremely useful as the number of Ethereum based apps and games grows.
Fintech companies and developers also benefit from a stablecoin like the USDC because it makes programming easier. With a stablecoin that maintains a nearly constant value, any app can be programmed to easily send and receive USDC via smart contracts.
The USD Coin wasn’t created as a replacement for the U.S. dollar and other fiat currencies. Instead it is a way to incorporate fiat currencies into the cryptocurrency ecosystem. Proponents of this say the combination of fiat and cryptocurrencies will be faster and superior to the existing payment rails.
With the drama surrounding the Tether stablecoin it hasn’t been surprising to see new stablecoins emerge. With the backing of Coinbase and Circle the USD Coin should be one of the top stablecoin offerings.
Given the reach of those two companies the USDC could one day replace Tether as the most popular stablecoin, although that will obviously take some time given the connection between Tether, Bitfinex and Bitmain. The longer Tether refuses to reveal its banks or agree to an audit is the closer stablecoins like USDC come to taking over as the top stablecoin.
While cryptocurrencies were created to replace fiat currency, the volatility seen from them has prevented their use in everyday commerce. Stablecoins are fundamentally different, and their creation could be the real beginning of the revolution that takes physical fiat currency out of circulation and replaces it with a digital equivalent.
Featured Image via centre.io
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