USDC- safe alternative to USDT. Most people think so.
Wait, there’s more. I believe USDC is the McDonald’s of stablecoins.
My thesis on why USDC is a sleeping giant, risk assessment, and possible alphas.
This is part 3 of the #stablecoinwar series. Let’s dive in. 🧵
I will get to what I mean by “McDonald’s of stablecoins”. Ngl, I was blown away while reading Centre’s whitepaper.
So let us run through how USDC works, and I’ll tell you about Centre’s audacious vision.
The mechanics of USDC
Similar to USDT, USDC is a fiat-backed stablecoin. Remember how USDT is backed by a confusing list of financial assets?
USDC’s financial breakdown
USDC is much simpler.
As of June 2022, USDC has about 24% of its assets in USD, with the remaining in short-term US Treasuries.
Yep, that’s it! Really simple and transparent, which is why sentiment is generally shifting towards USDC from USDT.
USDC ecosystem
Centre is an association that manages the open-source smart contracts for USDC. It is founded by Circle. In addition, Circle also mints and issues USDC.
This is a little confusing, so let’s invoke our favorite McDonald’s.
A little McDonald’s analogy
As you know, Ray Kroc was the legendary figure who franchised McDonald’s. Anyone who was then interested in setting up a fast food restaurant can do so without the hassle of creating their own menu/brand.
So, what’s the link to USDC?
Tying it back
Simple,
Centre = Ray Kroc
USDC smart contracts = McDonald’s menu/brand
Instead of minting and issuing stablecoins themselves, Centre audits and approves issuers, while providing them with the technology (smart contract) to issue their own stablecoins.
This franchise model allows Centre to be the McDonald’s of stablecoins- distributed and global, but preserves local variance.
All 3 properties allow it to fulfill its vision of turning money into another native form of Internet content.
How does this change things?
The future of internet money
When you send emails, you don’t care about your recipient’s location and service provider.
Stablecoins like USDT and USDC already achieve this to an extent. You can send them to anyone with an internet connection.
But 95% of the world are not in the US.
When you consider how the most dominant stablecoin provider, Tether, is a single entity, you realise that most of the world will get neglected.
They simply do not have the bandwidth/expertise for smaller local currencies.
This is where the franchise model comes in.
Centre and their protocols allow local providers, e.g. India’s Paytm, to register and issue Indian rupee stablecoin. Another local provider, e.g. Vipps in Norway, can also register and issue Norwegian krone stablecoin.
This is where magic happens.
Insead of needing 2-5 business days for international wire transfer, consumers of Paytm and Vipps can transfer money to each other using crypto technology. This means that money can be sent and received within minutes.
Money will become another form of internet content.
To be clear, this is Centre’s vision, and Paytm and Vipps are not using its stablecoin protocol. But this is a hint of the future, and it is one much more ambitious than Tether’s.
Let’s review what we have learnt thus far.
Circle creates Centre, which provides stablecoin protocols and approves/audits prospective issuers. Each issuer will facilitate USDC mint and USD redemption.
The green box is the area with huge unlocked potential.
In the next few years, you may see your local fintech firm issuing stablecoins, and you enjoying the ease of truly global commerce.
So, what are the risks associated with USDC?
Risk profile of USDC
Depeg risk
As mentioned earlier, USDC is backed by 2 assets- cash (~24%) and short-term US treasuries (~76%). They are also independently attestated.
The bigger risk lies in short-term US treasuries.
Short-term US treasuries
Short-term US treasuries are essentially a loan to the US government for a maximum of 52 weeks. In return, the US government will pay you some interest when the bill matures.
There is a possible problem with our current macro-environment.
To fight inflation, the Fed is raising interest rates. In other words, newer US treasuries will pay you a higher interest rate. Thus, the older bills that Circle currently owns will be less attractive.
What happens when everyone wants to redeem their USDC for USD?
Circle has to use their cash holdings to pay their customers. Once that is fully redeemed, they will have to sell their treasury bills in the secondary market. Because those bills are less attractive, the sell price may be lower than the price they were bought at!
If that happens, Circle may be unable to pay all their customers in time. However, customers will still be able to redeem their USDC if they are willing to wait for the bills to mature.
Circle is also more than USDC.
It has other revenue sources, which means that they are likely to survive in the short-term if users abandon USDC.
Regulatory risk
The US Treasury’s sanction of Tornado Cash reminded the crypto community of the power regulators hold over cryptocurrency.
While it is unclear how regulators will try to regulate stablecoins, some may view stablecoins as a replacement for fiat currencies, and thus an ‘enemy’. Given that Circle/USDC is fundamentally a ‘centralised protocol’, it is possible that USDC similarly gets blocked.
The counter-argument to such a possibility is that any blockage/censorship of USDC may impact a significant amount of people such that politicians will face the pressure to not do so.
Conclusion
Fundamentally, USDC is one of the safer fiat-backed currencies. However, it’ll still be helpful to mainly hold them for quick transactions, and hold decentralised assets like Bitcoin for the long-term instead.