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Over the past years since the invention and use of Bitcoin, cryptocurrency has disrupted the traditional finance sector. Cryptocurrency is considered a form of disruptive innovation as it has transformed the state of finance and made banking and trading of assets accessible to anyone and everyone.
With cryptocurrencies, users can make transfers at cheaper rates and store several asset types in decentralized networks. However, several market behaviors can impact cryptocurrencies, leading to a bull or bear in the market. One of the effects of these actions is the increase in volatility.
To mitigate volatility, digital currencies linked to real-world assets were developed. USDC is a digital asset used to maintain the value of digital currencies and is called a stablecoin.
This article will explain what USD Coin (USDC) is, how it works, and its pros & cons.
USD coin (USDC) is an open-source, smart contract-enhanced, decentralized digital currency totally backed by the US dollar. Circle refers to it as the “digital dollars for global business.” Circle is a globally recognized financial tech firm that provides growth for investors and businesses worldwide through open and innovative financial systems.
The value of the USD coin has more stability in the price, unlike other digital assets that fluctuate, thereby causing volatility. Hence, USDC is considered a stablecoin.
Stablecoins are digital currencies commonly backed by real-world assets like the US dollar, euro, and Japanese yen and were designed to remain stable.
It is important to note that the US government doesn’t back the USDC token despite its name, and contributions can be made to the project by anyone, which makes it an open-source project.
USD Coin is the first fiat-collateralized stablecoin implementation of the Centre’s stablecoin network. USD Coin was launched in October 2018 as an ERC-20 compliant token on the Ethereum network. It is managed by the Centre consortium founded by Circle and involves a partnership with one of the leading cryptocurrency exchanges, Coinbase.
In 2020, the circulating supply of USDC exceeded 14 billion, which led to a 500% growth and the emergence of Covid-19 made the stablecoin popular since investors employed using the token as a hedge against fiat currency.
In August 2020, the Centre association revealed a USDC version update, USDC 2.0, which included advanced features and functionality for digital wallets and services that support stablecoin.
Considering the controversy with Tether (USDT), like its association with Bitfinex, USD Coin may be a better alternative as its transparency is vetted by experts.
USD Coin is similar to Tether (USDT) as they were both developed to create price-stable crypto assets. In contrast to the Tether project, the USD Coin was developed on the idea that the industry required a more transparent fiat-collateralized stablecoin with stronger governance. They attempt to resolve this challenge by making available monthly proof of reserves on Centre and providing guidelines for members regarding USD Coin issuance. The stablecoin depends on a proof-of-reserves structure to maintain the reserve.
To become an issuer within the consortium, members must adhere to key rules that include compliance, accounting, licensing, custody of fiat reserves, and technology & operations.
Cryptocurrency exchanges are the major users of the USD Coin as a digital equivalent for fiat currencies, and it is the only known fiat-collateralized stablecoin available on the burgeoning decentralized finance ecosystem.
Minting and burning of coins are managed by Centre contracts and can be used for wallet interoperability use cases. Users who onboard through a web application or any other stablecoin on-ramp managed by a licensed token-issuing member can make a transfer of fiat currency into that Centre issuer’s account. Then a series of commands are executed to mint, verify, and validate fiat tokens pegged to the value of deposited funds.
Redemption of tokens follows a reverse process. Tokens are burned when users visit web applications or any other stablecoin off-ramp managed by a licensed Centre token-issuing member. When verified and validated, funds from reserves are transferred to the customer’s bank account.
USDC is an alternative to Tether (USDT) or other USD-backed digital currencies (or stable coins) like TrueUSD (TUSD). The coin was developed as a service to transform US dollars into a digital asset and make them available for use over the internet and blockchain networks. However, the digital currency can be changed to USD when the need arises.
USDC is based on the ERC-20 smart contract in the Ethereum blockchain. It is also supported on other blockchains, including Solana, Algorand, Tron, and Stellar. It is an open-source project which makes it transparent.
Transparency is provided by auditing transactions every month and is operated to ensure that the circulating supply is equal to the amount of USD kept in reserve bank accounts. This process works when USD is sent to these bank accounts, which are then used to generate an equal amount of USDC through a smart contract based on the Ethereum blockchain and sent back to the user.
USD Coin is a fiat-collateralized stablecoin, meaning that USDC tokens are backed by fiat money like US dollars.
Despite that USDT is used more frequently for trading, USDC is mostly described as a safer stablecoin option since the project is made to comply with audits and governmental regulation and is more transparent.
USDT and USDC are both popular choices to be traded and used as trading pairs on DeFi (decentralized finance) protocols. With USDC being 4 years behind USDT, they have long been the most widely traded stablecoin with notoriously the highest trading volume. USDC is gradually closing the gap and is now available on many of the same widely-used blockchain networks as Tether.
Due to Tether’s lack of consistency to release reports on how the coin is backed, it has received several scrutinies. On the other hand, Centre consortium has consistently released updates on how the USD Coin is supported. This has positioned USDC well in terms of regulations and has built trust.
Although Tether eventually released updates of its reserve in march 2021 and has taken steps to become transparent and build trust by providing a consistent update, still some users call on Tether to perform a complete audit.