OpenFi: USDC Coin (USDC)
This week, I partnered again with Flipside Crypto to dive deep into USD Coin (USDC) metrics to understand how it has become one of the most prevalent stablecoins used for payments and DeFi.
Thanks to Flipside Crypto for providing this data! They are a leading business intelligence firm for crypto projects, bringing valuable data and analytics to answer OpenFi’s key questions.
Disclaimer: The following piece is simply a summary of my opinions and should not be construed as investment advice or regulatory analysis.
O: Opportunity - How large is the Total Addressable Market? Does the project disrupt an existing market, or does it create a new market?
Score: 4.5/5
USDC is collateralized stablecoin backed by US dollars. The project is managed by the Centre Consortium, an organization founded by payments giant Circle, US-based exchange Coinbase, and BTC mining company Bitmain. Each token minted is backed at least 1-to-1 with USD reserves held in custody. These reserves are audited through monthly attestation reports by the accounting firm, Grant Thornton LLP. In crypto, this level of transparency is rare and sets USDC apart.
Collateralized USD-backed tokens dominate today's stablecoin market. Launched in September 2018, USDC has captured a material market share of $10.6 billion. This represents about 17% of the $62.5 billion total stablecoin market, which has been steadily growing. At one point last year, the overall market cap of stablecoins grew by over $100 million per day. As the regulatory environment around stablecoins loosens up, we should see this growth continue with the rise of many new use cases in DeFi, traditional finance, and CBDC initiatives.
Based on research by Flipside, we can see that USDC is more widely used in DeFi protocols while its top competitor, USDT, sees more volume on centralized exchanges.
30 day TVL and volume comparison between DAI, USDC, and USDT
P: Product - How innovative and differentiated is the product? Is there product-market fit? How easy is it to use the product (i.e. good user interface and experience)?
Score: 4.5/5
There is nothing new about collateralized stablecoins. Early adopters like BitUSD, NuBits, and USDT were all backed with either fiat or crypto. USDC sets itself apart by providing a solution that's as centralized and compliant as possible. Looking at USDC and Centre, the regulatory and operational framework is more similar to that of a traditional bank than a bootstrapped crypto project. New users are onboarded for KYC and AML compliance. Assets are audited regularly to ensure collateral reserves. Centre also offers ancillary products, such as payment systems, marketplaces, APIs, and asset management infrastructure, to support its stablecoin users.
Transactions are relatively frictionless when using USDC. Most centralized exchanges don't charge fees associated with sending and receiving USDC transactions within their platforms. Typically, the only fees paid by the users are gas fees on the Ethereum network when interacting directly with the ERC-20 smart contract (or other blockchain network fees). However, these fees can be substantial, especially for smaller transactions during periods of network congestion. Due to this reason, Centre has started to expand USDC to other layer 1 chains with better performance. So far, these include Algorand, Solana, and Stellar, with additional integrations, I'm sure, coming in the near future.
For the token itself, how well does USDC adhere to its dollar peg? Flipside's research shows that USDC is actually far less volatile than its competitors. Based on the chart below, USDC has the lowest deviation from the $1 peg. In fact, its price has never dropped below $0.9292 or above $1.0791 in its three-year history.
30 day price comparison of DAI, USDC, and USDT
E: Experience - Does the team have any previous experience building software and technology? Is the team well-versed in blockchain? What previous experience does the team have to ensure success?
Score: 5/5
Centre's CEO, David Puth, joined in December 2020. David is a seasoned financial services veteran who was previously CEO of CLS Group Holdings, a global consortium of over 70 critical financial services institutions. Prior to CLS, he was Head of Global Markets at State Street.
In addition to Centre, the USDC project also leverages the collective knowledge and experience of its founding partners, Circle and Coinbase, both of which are giants in the crypto space. Circle, founded by CEO Jeremy Allaire and Sean Neville, has received over $271 million in investments over 8 rounds. Its investors include top crypto VCs like Blockchain Capital, Digital Currency Group, and Pantera, as well as traditional funds like General Catalyst and Goldman Sachs.
Coinbase, on the other hand, is the largest US-based cryptocurrency exchange with over 43 million users and $90 billion in assets. Headed by CEO Brian Armstrong, Coinbase partners with over 7,000 institutions and 115,000 ecosystem partnerships. From its beginnings in the Y Combinator startup incubator program, Coinbase has since received over $540 million in investments from top funds like Union Square Ventures, a16z, NYSE, USAA, Draper Fisher Jurvetson, as well as many other crypto VCs. The company plans to go public via direct listing next month. The listing could value the exchange giant at over $100 billion, making it the largest IPO in history.
N: Network Effects - Will more people in the network benefit when others join? Are there high switching costs and stickiness in using the platform?
Score: 4/5
While USDC doesn't offer a platform, the token does have natural network effects when viewed together with its surrounding ecosystem. Over the past few years, the project has developed a strong brand for itself and as a result, seen widespread adoption. In the past year alone, USDC's market cap has increased over 15x. This is largely due to USDC's massive, expanding group of partners, developers, and users. USDC is minted and burned by the Centre Coin Treasury in conjunction with the needs of its partner organizations. These include some of the biggest crypto projects and mainstream companies. Just a few days ago, USDC announced a partnership with Visa to bring blockchain-enabled transaction settlement to Visa's 1.1 billion customers worldwide.
Other partners, like wallet providers and centralized exchanges, typically only support a handful of stablecoins. A large part of this is due to liquidity and compliance considerations. USDC is uniquely positioned in that it's the second largest stablecoin by market size and also one of the most compliant stablecoins. This has led to integrations with over 20 top crypto wallets and over 50 different exchanges around the world - no small feat!
The DeFi ecosystem is where we're seeing the most traction for USDC. Many top lending platforms and yield farming apps use USDC in common base pairs. As noted in my OpenFi post on Uniswap, the token pairs using USDC rose in popularity by over 80% over the last 3 months. Even centralized lending solutions that cater to institutions like BlockFi use USDC for its top interest-bearing accounts. I expect to see this type of organic growth continue. As more partners adopt USDC, positive feedback loops reinforce the overall ecosystem.
F: Fundamentals: Do the underlying unit economics make sense within the current network? How quickly are users growing? How much value has been transacted or locked up?
Score: 4/5
USDC and many accompanying products are offered to users for free. So how does Circle, the company primarily responsible for Centre and USDC, make money?
The company, through its partnerships, charges a small fee for each mint. Minting is done in conjunction with partners based on analysis of supply and demand in the ecosystem. Most usage to date has been on Ethereum. Across all other layer 1 chains, there’s less than $500m in USDC in circulation. The Centre team also relies on its partners for technical integrations which takes away a significant amount of operational overhead.
3 month USDC mint and burn statistics
However, the lion's share of Circle's revenue comes from its institutional trading and services arm. Since 2017, Circle has been one of the largest crypto asset traders in the world. It’s a market maker on most centralized exchanges. Circle also provides OTC liquidity services to many major financial institutions.
USDC users can generally be segmented into two categories: monthly active users and longer-term 3 month retained users. On-chain data shows that while active users typically use USDC as a means for transactions and conversions, retained users typically have USDC locked up in DeFi applications like Compound. USDC still lags behind its competitors, DAI and USDT, in DeFi protocol adoption.
USDC active vs. retained users
Overall adoption of DAI, USDC, and USDT in DeFi
I: Incentives - Are there proper cryptoeconomic incentives in place for network stakeholders and users to support blitzscaling?
Score: 5/5
While USDC doesn’t have any direct incentives, one of the biggest use cases by far for USDC is decentralized lending. Especially on the borrowing side, USDC has $1.8 billion in liquidity on Compound and over $230 million on Aave. On each platform, it's one of the most liquid assets and offers some of the highest yields (usually between 10% and 20%). This is rare to find and a testament to USDC's value in the ecosystem.
USDC also has partnerships with centralized exchanges for users to earn yield. Coinbase currently offers users 0.15% APY while some brokers like Voyager offer upwards of 11% APY.
Holding USDC has almost no downside given its high liquidity and low price volatility. The only exposure would be to the USD itself, which has long been the dominant reserve currency in the global economy. The ability to earn interest with minimal effort provides the necessary incentives to support its growth for a long time.
Total Score: 27/30