Stablecoins are cryptocurrencies designed to maintain a stable value. Where cryptocurrencies like bitcoin are known for their price volatility, the aim of a stablecoin is to maintain a consistent and predictable level of buying power.
Today, stablecoins play a critical role within crypto asset markets by serving as a fiat on-ramp for participants. Additionally, they allow traders to seamlessly exit volatile crypto asset positions. Moving forward, stablecoins will play a major role in the reimagining of the financial system using blockchain technology and will serve as truly global, borderless money.
While some stablecoins use complex algorithms to maintain stability and others are backed by cryptocurrencies, “fiat-backed” stablecoins take the most straightforward approach. This is the method employed by CENTRE’s USDC.
As the name suggests, fiat-backed stablecoins are created with a 1:1 backing of a fiat currency. For every USDC that is issued, there is a corresponding US dollar held in a reserve bank account. At any given time, 1 USDC can be redeemed for 1 US dollar.
By tying the value of USDC to a stable fiat currency, the potential for speculation is dramatically reduced, resulting in a price stable asset.
Fiat-backed stablecoins are reliant on a third party maintaining reserves of fiat currency. As such, trust in the third party holding the asset is an integral part of a properly functioning fiat-backed stablecoin.
Instead of centralizing trust in one company, Circle created the CENTRE Consortium, with Circle and Coinbase as the founding members. CENTRE is an independent entity that will oversee the rules for the issuance and redemption of USDC and will ensure that reserves are always backed 1:1 and that issuers remain compliant with the law. To further instill trust, USDC fiat reserves are attested to on a monthly basis by independent CPA Grant Thornton.
Circle and Coinbase are the initial members of CENTRE and the first issuers of USDC. In the future, we expect additional members and issuers and more fiat stablecoins backed by other fiat currencies like the Euro and the Yen.
Ethereum Token Standard (ERC-20)
USDC was built on Ethereum, which is an open platform for developing blockchain applications. Combining the stability of the US dollar with the power of the Ethereum blockchain opens the door for a variety of use cases.
Critical market infrastructure
Since the introduction of Bitcoin in 2008 and the subsequent creation of thousands of other crypto assets, markets for trading these assets have sprouted up all over the world.
Stablecoins provide a fiat on-ramp into these vibrant markets. New entrants can swap their fiat currencies for stablecoins before trading on crypto-only exchanges. Given the inherent market volatility, stablecoins also provide participants with the ability to fluidly exit their crypto asset positions in times of downward price swings, and move their fiat assets across exchanges in seconds to pursue cross-exchange arbitrage strategies.
Cryptocurrencies and smart contracts enable truly programmable money. Programmable money has the potential to completely reimagine traditional financial products. However, a price stable currency is needed if blockchain based financial products are to challenge the legacy incumbents.
For example, issuing a loan in a volatile cryptocurrency requires that both the borrower and issuer take on significant risk (imagine borrowing 1 bitcoin when it was worth $100 and having to pay it back when it was worth $20,000). With USDC, a price stable and programmable loan can be issued on the Ethereum blockchain - interest and principal can be paid automatically using smart contracts. For the $247 trillion global debt market*, this has massive implications.
Smart contracts and fiat stablecoins can also fundamentally change the way that companies raise capital and investors buy, sell and trade traditional securities. People will invest in companies using fiat stablecoins and receive a “security token” instead of traditional shares. These security tokens can be programmed to pay returns to token holders in fiat stablecoins and will be tradeable 24/7 on global exchanges.
Reinventing traditional debt contracts and securities is just the tip of the iceberg. Stablecoins issued on public blockchains will likely enable a host of financial innovation that hasn’t even been thought of yet.
Global, interoperable money
Money should work like email - unencumbered by distance, borders and service providers. USDC is a step towards making that notion a reality.
An email sent to someone on the other side of the planet arrives just as efficiently as an email sent to someone around the corner. Traditional transactions typically take longer and become more expensive as the distance between two parties increases. USDC works more like email - a transaction sent from New York to Australia is processed no differently than a transaction sent from New York to New Jersey. Geographic boundaries become irrelevant.
Someone using Yahoo mail can email a Gmail user, but an AliPay user can not pay someone who uses PayPal. This is because today’s payment applications lack interoperability or the ability to settle transactions directly over the open internet. USDC was built on open standards, which means that it is interoperable with any application that also adopts those standards. USDC can be sent from Circle’s apps and services or Coinbase Wallet to a Ledger Nano or any digital wallet compatible with the ERC-20 token standard. Users are no longer confined by their choice of digital wallet.
The future of USDC
As the adoption of stablecoins grows, opportunities will be created that enable hundreds of millions, and eventually billions, of people to join the developing open, global digital financial system. Stablecoins like USDC will provide a bridge from the old system to the new.
*Global debt as of July 2018, per the Institute of International Finance