In case you’re not familiar with stable coins, you can read my article about Tether (USDT-USD) to get caught up. However, what Tether set out to accomplish may actually be achieved by USD Coin (USDC-USD), which operates in a much more transparent and trustworthy manner (even though it’s still very new, being launched less than two months ago).
Source: Crowd Fund Insider
Purpose and Classification
The most practical application of a stable coin is the ability to move funds between exchanges quickly, and without having to worry about a change in value during that time.
As you know, moving US Dollars between a cryptocurrency exchange and your bank can take several days. Moving dollars between two exchanges also is rife with complications and delays. Bitcoin (BTC-USD)(COIN)(OTCQX:GBTC) is quicker, usually requiring only six confirmations which is usually an hour. But, Bitcoin can be very volatile, even though it does seem to be slowly stabilizing.
These problems are exacerbated by the fact that when the market moves, everything seems to “jam up.” It might be that the exchanges don’t have enough employees, it might be that the cryptoassets are seeing volume that’s over what they can handle, or sometimes sites just crash under heavy traffic.
Many people have been using Tether, but with the terrible history and sketchy background of the founders – this is not ideal. Enter the USD Coin.
Taxonomy: Stable Coin
Age, History, Current Status
Trading of USDC was announced on the Coinbase (COINB) blog on October 23rd, of 2018.
As they explain in the video, there are many possible applications for a digital dollar if it’s done correctly.
However, USDC was just launched this year. So, it may take some time for it to become well known and trusted.
There’s not much to talk about in terms of software development because essentially USDC is an ERC-20 contract. The code can be found on GitHub. If you want to read the smart contract deployed to the Etherum (ETH-USD) blockchain you can do that here.
Comparison of the smart contract could be done on Crypto Miso, but unfortunately the contract is not listed there. Perhaps because it’s so new.
The USD Coin is currently number 32 in market cap, with more than $177M in tokens circulating at about $1 each. The two competitors to USDC that are the most well known are Tether, coming in at number 8, with $1.8B in market cap, and the True USD (TUSD-USD) which has a market cap just over $197M.
The Paxos Standard is less popular, but ironically it sits right next to the USDC in terms of market cap. Invasion of the stable coins!
The USD Coin trades on many platforms. Some of these platforms are more popular than Coinbase, such as Binance (BNB-USD) and Poloniex.
In the last 24 hours, over $10M USDC were moved through exchanges.
Token Issuance Model
The token Issuance model is very simple. For every dollar in the bank, one USDC will be issued. As people enter into or exit out of their positions, the market cap of this coin should change, but not the price of a single unit.
While this means that USDC cannot appreciate in value, it also has the property of always being redeemable for $1 USD. So far, the price does seem to be stable, even if it does occasionally oscillate in price somewhat. At least when the price does stray from the $1 mark, it tends to be on the high side if anything.
The security of this token comes in two parts. The first is that of the underlying blockchain, in this case Ethereum’s blockchain (modified of course by the quality of the smart contract). The second part comes from the audit data which you can find here.
If you do look at this audit document, you will notice that it’s actually conducted by an accountant firm, which is nice (Tether famously had an “audit” by a law firm). However, this does leave me with the remaining question of outstanding loans. For example, are the only outstanding claims on those dollars the tokens themselves?
I guess I’m just wondering how a financial auditing firm can audit a token that’s not actually a company. Are there other liabilities? If you happen to be such an accountant, I would like to hear from you in the comment section below on this topic.
There really isn’t a white paper for USDC itself, but the coin is part of a larger framework called CENTRE. CENTRE does have a white paper, which explains how all the pieces fit together.
Basically, there are groups of members. Each member has the ability to mint or destroy tokens, and the members are linked by a series of state channels. This framework reminds me a lot of the Lightning Network, which uses state channels on a second layer above the Bitcoin network.
CENTRE was founded by Circle, but it’s intended to be spun off into its own legal entity. One thing that’s not clear to me is how this organization is funded. If you go on Coinbase right now, you can buy USDC or sell them for no fee. If all the coins are claims to real dollars, where does the money come from to achieve the organization’s goals? Such as:
- Provide R&D capability, support and maintenance of the CENTRE open source software project. This includes managing the open source code repository and facilitating and supporting third-party developer engagement, evangelism and code contributions.
- Provide the business development, governance and compliance functions for the CENTRE Network, including business development required to usher new nodes into the network for consumer wallets, merchants, payment acquirers, and others.
- Provide optional certification testing, trust authority services, compliance reviews, and due diligence programs to allow node owners to opt into proving, maintaining, and broadcasting high degrees of trust to satisfy legal obligations and to increase reputation and presence among other network participants.
- Contribute engineering and support services to the underlying distributed ledger infrastructure (such as Ethereum) on top of which CENTRE operates – CENTRE white paper.
I suppose it’s possible that the teams of Coinbase and Circle see this service as adding so much value to their business that they can make this up in some other way, but it’s a bit of a head scratcher to me.
The USDC community on Reddit has a total of 5, count them five subscribers.
There doesn’t appear to be a USDC Twitter account, but there’s one for CENTRE (with a whopping 460 followers).
I’d say there’s some room for improvement on the community front. Parent companies Coinbase and Circle have 1M and 42K followers, respectively.
I have to start with the obvious one here and just say that since the USD Coin is so new, anything could happen. I’m glad that we’re seeing stable coins being used that are not Tether, which I still see as a ticking time bomb.
I do like that there’s audits happening, I like that Circle and Coinbase are willing to put their names on this thing. I’m interested to see how this plays out.
If you need to move money quickly between exchanges, the USD Coin might be a good choice. For some assets on Coinbase, using the USD Coin is the only way to purchase them. This is the case with newly listed Zcash (ZEC-USD) and Basic Attention Token (BAT-USD).
I like that the price is fairly stable, or at least more likely to be high than low. I hope that from an accounting perspective, moving into USDC from USD is not considered a “taxable event.” As of right now, I don’t think it’s if the value does indeed remain stable. But things could change if the USDC were to lose its peg.
Another thing I wonder about is how the regulators will respond. It seems like what we’re seeing now is people “privatizing” the dollar. I understand there are sets of rules to follow, but I also wonder how long it will be until the government decided to get in on the action. How is that going to play out?
I hope you guys found this article useful to you. If you have any comments or questions, please leave them below.
This article was published first in Crypto Blue Chips.
Disclosure: I am/we are long BTC-USD, ETH-USD, BAT-USD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may hold USDC in order to place orders which are only traded in USDC, but other than that I don’t use or hold the coin.