ZoneBitcoin EditorialIn terms of market capitalization, USDT and USDC are the two largest stablecoins in the crypto industry. Even though today, many stablecoins backed by the Euro are emerging, it is still too early for them to have a real impact on the markets. Traders have been using dollar-backed stablecoins for years and over time they have become pillars of the crypto industry and decentralized finance (DeFi).
Generally, USDT and USDC are the most used in terms of volume. Although the two cryptocurrencies have similar objectives and commonalities in several respects, it is nonetheless true that they are different.
In this troubled period in the financial market with the fall of the Silicon Valley Bank, we could see for a few hours a loss of 10% in the value of USDC. A stall which caused a lot of noise but which very quickly stabilized and regained its anchor to the American dollar.
It is in this context that it appears more important than ever to understand and discover in more depth how USDC works.
And in order to make the description more relevant, it seemed wise to us to compare USDC with USDT.
What is a Stablecoin?
A stablecoin is a type of cryptocurrency whose value is backed by the value of an asset in the real economy. A stablecoin can be backed by all types of assets. For example, there are cryptocurrencies backed by the gold asset.
However, when we talk about stablecoins, we are typically talking about cryptocurrencies that digitally represent a fiat currency, such as the dollar or the euro for example. So, regarding USDC for example, it is a stablecoin backed in a 1:1 ratio to the US dollar. This means that 1 USDC = 1 dollar.
Stablecoins were precisely created to provide “stable” assets to the crypto market, known for its extreme volatility. This helps traders, for example, have a stable store of value that they can use for their transactions.
What is USDC stablecoin?
USDC is a stablecoin issued by the company Circle, since 2018. The objective of the Circle consortium was to create a token that can be used by all ecosystem players to carry out transactions in dollars. The introduction of stablecoins and USDC makes it possible to achieve true financial interoperability by facilitating the exchange of values between different blockchains.
Today, the stablecoin USDC is primarily available as an ERC-20 token. However, it can be used on other blockchains like Algorand, Avalanche, Solana and also Tron.
Today, USDC is the second most popular stablecoin and has the second highest market capitalization of all stablecoins.
You should know that in March 2021, the company Visa announced that it would authorize USDC for the payment of certain invoices. Thus, USDC is also one of the cryptocurrencies compatible with the new ISO 20022 standard which will soon be put into effect.
What is the connection between Circle and Coinbase?
Unlike USDT, which was launched in 2014, USDC is a newer coin and only came to market four years later. The coin is currently managed by a consortium called Center, founded by Circle and Coinbase.
Circle is therefore the only organization that can issue USDC, however it is not the only owner of the token. Indeed, the company Coinbase is also part of the consortium including the two companies Circle and Coinbase.
- To summarize the Circle company, it must be considered as a crypto company issuing tokens. It is a technical and infrastructure provider of a digital currency.
- Regarding Coinbase, it is an online platform that allows you to buy and sell cryptocurrencies. Since the fall of the FTX exchange platform, Coinbase has become the second largest exchange platform in terms of volume. It is also one of the oldest on the market and it is certainly also one of the most regulated as it is domiciled in the USA. The company is therefore regularly in the spotlight of the SEC and other US government agencies.
In 2018, Circle and Coinbase decided to come together to create the Circle consortium to specifically issue the USDC stablecoin.
The decision to create a new stablecoin in 2018 is partly explained by the fact that at that time, the only stablecoin in circulation was USDT which was experiencing numerous upheavals with the American justice system.
-> Read the article to find out more: Here is the saga of USDT (Tether) and here is why the story is scary
What supports USDC?
USDC is pegged to 1 dollar. This means that for every USDC on the market, there is a $1 in the USDC reserve. If for example all USDC holders decide to sell them for dollars, then they should be able to do so without any problem since all dollars are in reserve.
However, if they are not properly backed and supported, then they become de-indexed and lose value. This is for example what happened with TerraUSD (UST) which completely lost its value in a few hours and which led to lthe total bankruptcy of Terra blockhain of the irreverent do kwon. Bankruptcy which had repercussions on many DeFi companies…
👋 The UST stablecoin was actually what we call a “algorithmic stablecoin” which did not have sufficient fiat reserves and which relied on a complex system to keep the token pegged to the dollar. Fatally, this algorithm failed sensationally, particularly due to shaky protocols. lending subsequently leading many companies to go bankrupt…
However, USDC is not an algorithmic stablecoin. It is a stablecoin that is backed by a 1:1 US dollar reserve. This means that for each USDC issued, there is one US dollar in bank reserves. If all customers decided to convert their USDC, everyone could do it. In theory.
Thus, the real difficulty for companies issuing stablecoins is to precisely justify the amounts in reserve that they have. There S&P Global Ratings, part of the three largest financial rating agencies, analyzed Circle's reserves and ranked it among the most transparent stablecoin issuing entities, in June 2022.
This is also the opinion of one of the largest accounting firms in the world, Grant Thornton, which publishes monthly statements on USDC reserve guarantees. Please note that these are not audits as such but rather “certificates”. It is a document which therefore “attests” to the veracity of the data or information declared by companies.
Should we trust USDC?
Recently, after the closure of the Silicon Valley Bank, the company Circle and the stablecoin USDC suffered from a pronounced panic movement. The company actually had around 8% of its cash within the company. Thus, after the announcement of the bankruptcy, the 2nd largest bank bankruptcy after that of the Washington Mutual during the 2008 financial crisis.
The wind of panic shook the market and the USDC unscrewed its anchor to the dollars. It lost around 10% of its value in the space of 24 hours. Investors had reason to tremble, because they conflated it with the fall of Terra Blockchain's UST...However, this has nothing to do with it, insofar as UST had no reserves ( or only a small proportion) of dollars but Luna token in majority !).
However, the American government has decided to launch a bailout plan for Silicon Valley Bank. The price of USDC has regained its anchor and the wind of panic seems (for the moment) to subside.
Why does USDT hold first place?
Here is the table of the top 10 stablecoins in terms of market capitalization, according to the site coinmarketcap. As you can contact, in first place we find USDT. And the difference between the two capitalizations is very considerable. That of USDT is almost double that of USDC.
Thus, USDT is clearly the most popular stablecoin in the world. And, it is even ranked in 3rd place, after Bitcoin and Ethereum, again according to the market cap.
—>Read the article: How is market capitalization (MarketCap) a useful indicator?
This demonstrates the confidence traders have in USDT, particularly when carrying out transactions on exchange platforms.
The UST which is also called “Tether” after the name of the company which launched it in 2014: Tether Limited Incorporated. In the past, USDT was called “Realcoin” but very quickly, the name that was chosen was “Tether”, certainly less pretentious… Originally, USDT was to be hosted on the Bitcoin network but it is inasmuch as ERC-20 token, on Ethereum, that the token was then deployed before being extended to most blockchains. Indeed, currently, Tether is a token present on 11 different blockchains while USDC is present on 8 blockchains.
Tether Limited Inc belongs to the international company iFinex which owns the Bitfinex platform.
For example, USDT suffered (and still suffers) from a “rumor” that the company does not have sufficient reserves. At present, the Tether company, issuer of USDT, has not completed its numerous cases with justice…
There are, in fact, stubborn doubts about the guarantee that USDT holds 100% of its deposits in dollars...Moreover, USDT does not have certificates from the best accounting firms like USDC does. .
However, USDT most certainly enjoys its position because it launched first. Very often, and this is something we observe in many sectors, it is not so much the quality that will make a product successful but simply the fact that it was created first.
However, history shows us that rankings change despite everything...
There are also other stablecoins besides USDC and USDT. There are also now stablecoins backed by the euro and others backed by other assets such as gold.
We will come back in future articles to detail the other alternatives.
See as well:
[…] USDT and USDC: What you need to know about the two largest stablecoins […]