What Are Stablecoins?

Generally speaking, stablecoins are cryptocurrencies that are pegged to real-world assets, for example, fiat currencies. They usually use US dollars as the reserves, so each stablecoin issued has an equivalent U.S. dollar-denominated reserve. Currently, USDT, which enjoys the highest transaction volume and usage among cryptocurrencies, is pegged to the U.S. dollar. 1 USDT equals 1 U.S. dollar.

With the development of cryptocurrencies, there are also other types of stablecoins that are collateralized by cryptocurrencies or controlled by algorithms. Despite that, stablecoins backed by real-world assets still dominate the sector. In this article, we are going to introduce USDC, a real-world asset-backed stablecoin that has been gaining an increasing market share over the years.

The Development of USDC

Since its launch in 2018, USDC has seen a continuous increase in its market cap and trading volume. It currently enjoys a market cap of $55.8 billion dollars, ranking second in the stablecoins, which is slightly lower than USDT. Why can USDC grow so fast? It is because USDC is regulated by the government.

USDC, also known as USD Coin, was created jointly by the blockchain-based payment company Circle and the crypto exchange Coinbase. Every USDC has one dollar as collateral. The issuer Circle is a licensed cash flow service provider in the United States and is well-regulated. The monthly USD reserve is publicly audited by Grant Thornton LLP, a leading accounting firm. These transparent measures have helped USDC to gain more trust and popularity. This strengthens Circle’s confidence in announcing its next step of launching the Euro-backed stablecoin, Euro Coin, short for EUROC. Like USDC, EUROC is also a regulated real-asset-backed stablecoin, and each EUROC in circulation has an equivalent reserve in fiat currency.

USDC vs. USDT

USDT and USDC, both backed by real-world assets, are the two largest stablecoins in the crypto market. What are their similarities and differences?

USDT, issued by Tether, is the first stablecoin ever. It is now listed on various exchanges and widely traded by crypto enthusiasts. USDT is supported in a lot of oftrading pairs across the crypto market. Although USDT is not as transparent as USDC, it would be the top choice if you want to enjoy a more diversified market because of its highest market cap of $66 billion. USDC, as a latecomer in the stablecoin field, is accepted and trusted by an increased number of users as it is more transparent than USDT and its reserve asset only consists of cash and short-term treasuries.

Price Change

USDT one-year price change, all-time high and all-time low, by CoinGecko

USDC one-year price change, all-time high and all-time low, by CoinGecko

The above charts show the price fluctuation of USDT and USDC. As they are pegged to the U.S. dollar, the optimal exchange rate should be 1:1. However, when USDT was initially issued, its price was not that stable. The exchange rate had reached as high as 1:1.32 and as low as 1:0.57, which is a decline of 0.75. After experiencing such a volatility for about a year, its price finally reaches a stable level.

By contrast, USDC has not undergone a large volatility since its launch, with its fluctuations not exceeding 15%, ranging from 1:0.89 to 1:1.17. Even if there are large fluctuations, it can finally return to a normal level, making itself more stable than USDT.

Market Cap Comparison

According to Arcane Research, the collapse of Terra has significantly hit the crypto market, including stablecoins. At the end of the second quarter, the total stablecoin supply was about $151.3 billion, decreasing by ~$35.1 billion from the previous quarter. It was the most severe recession in the stablecoin history.

Total Stablecoin Supply by Token, 2022

According to CoinGecko, despite the fact that USDT has gone far away from its market cap peak after the plummets in May, it still enjoys a greater market cap than USDC. Although affected by the Terra crash, USDC maintained a steady market cap. Compared with USDT, the price of USDC scales new highs continuously, showing an uptrend overall.

USDT one-year market cap, by CoinGecko

USDC one-year market cap, by CoinGecko

Funds and Reserves: A Comparison Between USDT and USDC

USDT Dangerous Reserve

Issued by Tether, USDT is currently the most widely traded U.S. dollar-backed stablecoins with the largest circulating supply and the largest number of trading pairs. At the time of writing, the market cap of USDT reaches $67,586,980,043, with a total supply of $67,549,664,120 and the 24-hour trading volume of $24,251,289,073.

As a stablecoin, USDT uses fiat currency as a complete reserve asset to maintain its value. It is pegged 1:1 to the US dollar. In order to reduce risks, it needs to be 100% backed by U.S. dollars and endorsed by formal audit reports open to the public regularly.

However, a representing lawyer of Tether said in 2019 that Tether only holds $0.72 dollar for every USDT issued; later, he amended that USDT was fully backed by USD, but Tether was not audited by an accounting firm with the generally accepted accounting principles.

USDC Safe Reserve

At the time of writing, USDC’s market cap was $52,167,025,553, with a total supply of $52,202,127,594, and a 24-hour trading volume of $6,613,428,898.
In July, Circle released its first monthly report on the USDC reserve assets, showing a total of $55.4 billion USDC in circulation, backed by $12.28 billion in cash and $42.12 billion in U.S. treasuries. The sum of cash and three-month short-term U.S. treasuries is about $54.6 billion, slightly higher than the total market cap of USDC in circulation. It means that Circle is backing USDC with an exceeding asset reserve.
Circle claims itself to be a compliant stablecoin issuer. Grant Thornton LLP, one of the top five accounting firms in the United States, is responsible for auditing and publishing the audit reports on USDC, thereby proving that USDC has more than 100% US dollar-denominated assets as collateral.
Questioned by the public, Circle disclosed all its holdings of three-month U.S. treasury bills, saying that all the 19 treasury bills with maturity dates ranging from July 5 to September 29 worth $42.122 billion.

the Treasury bond securities reserved by USDC,

Will UCDC Surpass USDT?

cryptocurrencies

In the crypto market, USDT ranks the third by market cap, followed by USDC ranking the fourth. This means that USDT is still dominating the stablecoin market. Despite their high market caps, the two stablecoins incur many controversies. Many think that USDC, the second-ranked stablecoin, will keep going and may replace the dominant role of USDT. At the end of last year, Arcane, a blockchain analytics company, predicted that USDC might surpass USDT to become the largest stablecoin in the second half of this year.

USDT and USDC Market Value Prediction Chart

As the first-ever stablecoin created in 2014, USDT has definitely taken the most advantages the market offers. However, after the market share fell below 50% in November last year, USDT has been suffering from a sluggish improvement and a plummet in market cap, with its total supply decreasing by 15% and the annualized growth rate reducing to -28.7%.

On the contrary, USDC, which was created in 2018, has been growing at a steady rate. Its market cap has soared from $40 billion to $55 billion, its market share increased from 25.8% to 36.3%, and the total supply increased by 103%, with an annualized growth rate of 70.4%.

The above chart is based on the annualized growth rate of USDT and USDC, which predicts that USDC will replace USDT as the leading stablecoin in October with a market cap of over $60 billion.

USDT vs. USDC

Centralization Risk

The Terra crash has boosted the calls for regulation of stablecoins. Also, various regulatory agencies across the globe have exerted more strict censorship.

The Prelude of Blacklisted Addresses

In 2020, Center Consortium, jointly established by USDC’s co-founders - Coinbase and Circle, froze and blacklisted a suspicious account holding 100,000 USDC in response to a law enforcement request. According to Etherscan, the blacklisted address is 0x5dB0115f3B72d19cEa34dD697cf412Ff86dc7E1b. Center started to run the smart contract and started the blacklist mechanism on June 16. The blacklisting move refers to the freezing of coins on the address.

That is, if the address is blacklisted, it can no longer receive or transfer USDC on-chain, and the USDC controlled by the address will be taken over.

The USDC blacklisting event happened during the DeFi Summer in 2020 and had caused a panic among crypto traders. Stani Kulechov, CEO of Aave, said that if Center blacklisted and locked its USDC in the Maker Vault without warning, it would seriously affect the exchange rate of DAI in the liquidity pool.

Intensified Centralized Regulation

Two years later, more and more new stablecoins were created but unable to grow bigger. Under the circumstances, the budding USDC began to occupy themarket in DeFi. Today, USDC is used in various DeFi protocols and pools; and more and more users tend to convert most of their on-chain assets into USDC.

However, the Center has the power to freeze USDC. In August this year, in response to the US sanctions on virtual currency mixer Tornado Cash, Center froze funds in 44 wallets that had linked to Tornado Cash, resulting in ~$1.6 billion funds transferring from USDC to USDT within a month. This move had caused the market cap of USDC to drop by 2.4%, which is a loss of ~$1.3 billion.

Solutions to the Conflict Between Privacy and Financial Compliance?

Afterwards, Dante Disparte, Chief Strategy Officer for Circle, expressed his concern about the sanctions on crypto currency mixers, saying that it might aggravate the tension among open-source software protocols, the presumption and protection of privacy, and financial crime compliance.

Dante Disparte added that, in order to avoid future emergent halts of composable, coded currencies and crypto assets due to long-term compliance and national security concerns, it is needed to take industry-wide actions to prove that financial innovation, inclusiveness, and integrity are not trade-offs.

In order to avoid excessive regulation while maintaining compliance, and to protect users’ privacy, Circle said that it would make long-term policies to help educate the public, with a view to protecting privacy in blockchain finance.

Conclusion

There are so many different currencies for traders to choose from in the crypto market today. Stablecoins, as a bridge between cryptocurrencies and fiat currencies, are developing in an increasingly diversified approach. Users are allowed to choose a stablecoin to trade according to their preferences. Stablecoin plays an important role in promoting the development of the whole crypto market.

USDC is expected to surpass USDT this year. Even if USDT has the advantage of being a pioneer, USDC, as a rising star, should not be underestimated. In comparison, USDC has a continually increased annualized growth rate and total supply as well as a safety reserve that exceeds its circulation, which makes it a more promising stablecoin than USDT.

Anyway, the seemingly well-developed USDC faces many risks, especially the risk of decentralization. It has been criticized by users for being regulated, as blockchain features decentralization and, technically, should not be intervened by a third party. However, USDC is regulated by law enforcement agencies and even froze USDC assets several times in response to government requests. Though there were malicious actions indeed, the action of freezing funds in the DeFi protocol violates the original intention of cryptocurrencies. It will cause more than just loss of assets in the frozen wallets. It may influence the whole crypto market.

Author: JZ Translator: Binyu
Reviewer(s) : Edward , Ashley , Hugo
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