DeFi & stablecoins
Stablecoins: Understanding USDC and USDT
Stablecoins aim for a stable price in a reference currency. USDC and USDT illustrate their functioning, uses, and the risks that persist.
Ethan BrooksEditorial pen name
The intended peg
A stablecoin is a token designed to follow a reference, often the US dollar. USDC, issued by Circle, and USDT, issued by Tether, thus aim for a value close to one dollar. However, their price on a platform can nonetheless deviate from this: this gap is called a loss of parity, or depeg.
02How it works+
These two tokens rely on reserves managed by their issuers. Circle publishes the composition of USDC's reserves, including liquidity and comparable assets. Tether also publishes information and attestations about its reserves. The categories of assets, the frequency of publications, and the conditions of redemption must be examined separately for each issuer.
Reserves and intermediaries
03Key points to remember+
Direct redemption from an issuer and sale on a platform are two different operations. The first depends on access conditions, verification, and potentially fees. The second depends on the buyers present and the actual liquidity available on this market. Displaying a goal of one dollar therefore does not guarantee an immediate, free, and accessible conversion for everyone.
Stablecoins allow, in particular, for transferring a familiar unit of account to a blockchain and settling certain exchanges. They sometimes exist on several networks. Before a transfer, the network used, the contract address, and the recipient's compatibility are just as important as the displayed symbol. A fake token can take on a well-known name.
Their risks overlap: reserves, custodian banks, issuer, platform, blockchain, and contracts used. A version transferred via a bridge can add a technical intermediary. Moreover, a token indexed to the dollar varies in euros with the exchange rate.
Finally, holding a stablecoin does not automatically generate interest. A proposed yield generally implies an additional activity, such as lending, with its own risks of loss or unavailability. The sought-after price stability and the security of the investment are therefore two distinct questions.
Separate the token from conversion
A stablecoin can move between wallets without anybody requesting a bank currency redemption from the issuer. Such a transfer moves existing units. Creating units, removing them from circulation and converting them involve other operations. Understanding these stages separates circulating supply, trading volume and the ability to exit into a local currency. They do not describe the same activity. A busy transfer history therefore cannot, on its own, establish how many new units an issuer created or how many holders used a banking conversion service.
Imagine an individual accessing a stablecoin through a platform. Conversion conditions can depend on that platform, while direct redemption depends on the issuer and the applicant's eligibility. A dollar reference does not remove this chain of intermediaries. The token's intended reference value must also be distinguished from its actual trading price at a particular moment. A market deviation does not automatically describe the accounting position of the reserves. These are related questions, but they require different information and definitions.
Distinguish stability from yield
Holding a token intended to maintain parity and placing it in a yield-generating service are different situations. Yield comes from an additional mechanism, such as lending, liquidity provision or another activity. That mechanism introduces dependencies that the stablecoin's brand alone does not explain. Similarly, a representation moved to another blockchain can involve a bridge or another contract. The displayed name and symbol remain insufficient to describe those risks or redemption possibilities. Understanding the complete arrangement means identifying what happens after the token is acquired.