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Cryptocurrency Explained: USD Coin

December 22nd, 2020Joey PrebysJoey Prebys

Main Points

  • USD Coin (USDC) is a cryptocurrency that was created to tokenize the United States dollar.

  • USD Coin is pegged to the United States dollar, so 1 USD Coin can always be redeemed for $1.00.

  • USDC is a stablecoin - its price remains relatively stable compared to other cryptocurrencies because it is backed by a reserve asset.

What is USD Coin?

USD Coin (USDC) is a cryptocurrency that is pegged to the United States dollar. It was launched in September 2018 to tokenize the US dollar and make it easy to use online and on the blockchain. At any time, USDC tokens can be changed back to USD - and the value will always remain at a 1:1 ratio. The issuance and redemption of USDC tokens are powered by the Ethereum blockchain using an ERC-20 token and smart contract.

USD Coin is a project led by CENTRE Consortium. The CENTRE Consortium is a collaboration between the payments company Circle and the cryptocurrency exchange Coinbase.

Circle, a crypto startup backed by Goldman Sachs, developed the technology and governing framework behind USDC. Circle relies on regulated financial institutions to issue USDC and support the reserve of assets backing its value. Coinbase, the popular cryptocurrency exchange, is responsible for being the first commercial distributor of USDC.

To fully understand the benefits of USD Coin, you must first understand what a stablecoin is. 

A stablecoin is a type of cryptocurrency backed by a reserve asset like a government-issued currency or gold to offer price stability. Stablecoins have become popular because they provide the fast processing and privacy of cryptocurrencies while simultaneously offering the stability of fiat currencies like the US dollar, euro, or yuan. This price stability is accomplished through the collateralization, or backing, of the reserve asset. 

The price of bitcoin and other cryptocurrencies is ever-changing. Prices fluctuate, often drastically. For example, when bitcoin breached $23,000 for the first time on December 17, 2020, the price fluctuated by 6.90% throughout the day. Bitcoin’s volatility doesn’t always work in its favor, though, because the price can also decrease at similar rates depending on the market. 

Stablecoins are designed to solve this volatility problem by being a digital asset tied to another asset with a stable value - like the US dollar. 

How does USD Coin Work?

Circle guarantees that a single US dollar backs each USD Coin. The process of turning US dollars into USD Coins is called tokenization. The tokenization of US dollars happens in a three-step process:

  1. A user sends US dollars to the coin issuer’s bank account.

  2. The issuer uses a USD Coin smart contract to create the equivalent amount of USD Coin.

  3. The newly minted USD Coins are sent to the user, and the substituted US dollars are held in reserve. 

Redeeming USD Coins for US dollars is just as easy as minting the coins, but the above process happens in reverse. The creators of the USD Coin are required by regulation to provide full transparency with the financial institutions maintaining the US dollar reserves. Because of these regulations, USDC issuers are required to report their USDC holdings frequently. 

Suppose you are interested in tokenizing your US dollars or redeeming USD Coins for dollars. In that case, you can do so by registering an account with Circle. When using Circle’s platform, there is no fee for tokenizing or redeeming.

Why Buy USD Coin?

Stablecoins like USDC are helpful because they allow you to digitally store funds at a stable price without the need for a bank account. USD Coin is a popular choice for people in country's where the national currency is subject to hyperinflation. USD Coin allows anyone anywhere in the world to maintain in US dollars the global reserve currency.

Final Thoughts

Are you interested in buying USDC? You can quickly and safely purchase USDC by using a CoinFlip ATM. Find your closest location!

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