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Use Case

USDC (USD Coin) is a stablecoin developed by the CENTRE Consortium, a collaboration between Circle and Coinbase. Launched in September 2018, USDC is designed to maintain a 1:1 peg with the US dollar, providing users with a stable digital asset suitable for various use cases, such as payments, lending, trading, and DeFi applications.

Specific advantages that stablecoins offer compared to the legacy financial system or volatile crypto-native assets like BTC are:

• Unit of Account Stabilization
• Volatility Protection
• Cost Reductions

Unit of Account Stabilization

Stablecoins share the same standard characteristics of a unit of account, a base function of money. Unit of account refers to a divisible standard numerical monetary unit of measurement, which can be used to value market assets. In other words, there's little volatility in the currency price, meaning its unit of account value remains the same.

Volatility Protections

Limiting or removing volatility from a currency’s price ensures the underlying principle of loans can be understood throughout the life of the loan. This makes the currency desirable in lending/borrowing markets, a major component of modern economic value generation. If a currency’s price can fluctuate, the loan’s principle is lost, and it makes it harder to generate demand from borrowers.

Cost Reductions

Minting and managing physical currencies comes with expenses. Resources must be extracted to either mint coins (out of mining metals) or print paper notes. These resources then need to be processed and go through a production process to physically create banknotes and coins.

Conventional financial conduits necessitate the involvement of numerous intermediaries, encompassing commercial bank payment infrastructures and card networks. The coordination of these entities entails payment providers imposing a fixed fee in addition to a supplementary charge ranging from 1.5% to 3% per transaction. In contrast, stablecoin-based payment systems revolutionize the conventional payment paradigm through the utilization of blockchain technology. This approach disintermediates the payment process, mitigates counterparty risk, and results in significantly reduced costs compared to traditional channels. Recent advancements from Solana and Circle demonstrate the potential for merchants to adopt stablecoin payments at substantially lower expenses.

As reported by the World Bank, the average cost of transferring remittances internationally equates to 6.30% of the total sum transmitted. Consequently, an individual seeking to remit $300 through traditional means would incur approximately $19 in fees. By employing stablecoins for the identical transaction, the associated cost would be less than $1.

When well-engineered, stablecoins could offer retail users and businesses a viable asset for managing both domestic and cross-border payments and for storing value without exposing them to the credit risk associated with commercial banks. The money market fund (MMF) industry currently serves a similar purpose, yet MMFs are not widely accepted as money, primarily because they are not functionally designed to serve as payment instruments.

Effectively designed stablecoins could potentially play a role akin to CBDCs. However, they would maintain the existing relationship between an individual's economic activity and visibility from the government while also posing less operational and execution risk. Notably, other jurisdictions, such as the U.K. and Europe, are already making strides in this direction, suggesting that it's high time for the U.S. to take a proactive stance.

Trading Pairs

The primary application of USDC is within the decentralized finance (DeFi) sphere, rendering it relatively non-liquid on centralized exchanges (CEXs). As of the previous week, USDC accounted for less than 0.5% of the total trade volume on CEXs. Yet, CEXs had a significant impact in triggering the recent market turmoil.

The prevailing concern among traders during this period of uncertainty was how to cash out their USDC holdings.

Currently, there are only eight active USDC-USD trading pairs on CEXs, effectively acting as a real-time conversion rate into dollars. Over the chaotic weekend, these trading pairs emerged as the sole direct fiat exit route in the face of halted redemptions with Circle and Coinbase.

It's important to note that the bulk of cryptocurrency market activity doesn't directly involve the US dollar. Most traders rely on offshore exchanges, which don't offer a direct USD conversion for USDC, but do provide USDC-USDT pairs. Complicating matters, Binance, the largest exchange globally, had removed all USDC trading pairs from its platform as of September.

The surge in stablecoin usage was largely propelled by the necessity for both centralized and decentralized exchanges to facilitate stable USD trading pairs, as demonstrated by the connection between stablecoin issuance and BTC/ETH trade volume. Notably, users appear increasingly motivated to hold onto stablecoins, given that these occasionally yield returns competitive with traditional USD deposits.

Source: Kaiko

Dollar Access for the Third World

However, the transformative potential of stablecoins extends far beyond trading use cases. These tokens can provide access to the US dollar independently of local banking systems, a potentially revolutionary advantage for individuals residing in regions plagued by hyperinflation. Take, for instance, Venezuela and Argentina, where citizens grapple with staggering annual inflation rates of 114% and 79%, respectively. This results in nearly half the value of their life savings eroding within a single year. For these individuals, stablecoins could offer a promising alternative. By providing users with a stable and accessible substitute to local currencies, stablecoins could enable individuals to shield themselves from the repercussions of inflation and currency depreciation. Notably, there is a positive correlation between stablecoin usage and high inflation rates; approximately one-third of minor retail crypto transactions in Venezuela and Argentina were executed using stablecoins between July 2021 and June 2022.

Competitive Advantage

Distinct from other stablecoins in the market, USDC maintains a unique stature, as corroborated by the information available on Circle's online platform. Notably, it entrusts its reserves to preeminent financial institutions in the United States, such as BlackRock and the Bank of New York Mellon. These reserves, in the form of cash, are securely held within US financial establishments, while US Treasuries are consigned to reputable third-party custodians.

USDC has found its place as an effective replacement for the U.S. dollar across significant exchanges such as Coinbase, Kraken, Binance, Poloniex, and Gemini. It stands out from its peers in the stablecoin space owing to three primary distinguishing features:

Firstly, USDC exhibits an approach characterized by transparency and proactiveness in putting in place protective measures, preparing for potential governmental inquiries in the future. Secondly, the backing of USDC is wholly derived from fiat collateral, setting it apart from other stablecoins that rely on the prospective worth of their use cases or the fluctuating values of other cryptocurrencies. Lastly, the issuance of USDC operates under the regulatory purview of U.S. state money transmission supervision, and Circle's operations are continuously examined and scrutinized.

The crypto market has long been viewed with caution by regulated entities due to concerns over regulation and security. Given that USDC is fully collateralized by cash and U.S. Treasuries, it offers a compelling value proposition for financial institutions. Institutions can hold USDC with the assurance that it will not be subject to market volatility. This is a significant stride in the crypto sphere, enabling regulated entities to introduce cryptocurrency products without the apprehension typically associated with crypto volatility.