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What makes stablecoins like USDC stable?

And why full-reserve stablecoins are optimal for investors

by Alex Broudy, Technical & Financial Writer
Jun 23, 2022

Simply put, stablecoins are digital assets that use outside capital to stabilize unit price. For instance, USD Coin (USDC) stabilizes its unit price (with each unit equal to $1) by collateralizing USDC with U.S. Dollars (USD) and short-term government obligations denominated in USD. This full-reserve collateral keeps USDC stable and redeemable on demand.

USDC is backed 1:1 with short-term U.S. Treasuries and cash equivalents, which are managed by BlackRock, custodied by the Bank of New York Mellon, and have been attested to monthly by leading global accounting firms like Grant Thornton since 2018. Additionally, the issuer of USDC, Circle, publishes the results of its company audits annually, including all USDC reserves.

Using public blockchains to record and verify stablecoin transactions removes the need for traditional counterparties and reduces the cost of moving money from point A to point B. While many stablecoins use emerging blockchain technologies to make the user experience faster and easier, asset management best practices remain an important part of ensuring liquidity. For this reason, full-reserve stablecoins like USDC remain optimal for investors.

“Old-fashioned, reserve-backed stablecoins such as USDC continue to be the only viable digital dollars we work with.”

— Adil Abdulali, Chief Investment Officer at Securitize Capital

While there remain market, liquidity, and regulatory risks associated with emerging technologies and the financial instruments they support, USDC has proven to offer a more stable building block solution for firms developing modern financial services because of its full-reserve status. This demonstrable transparency and auditability offers more assurance that USDC remains liquid and redeemable on demand. So, when USDC holders choose to transact or invest, they experience near-instant settlement, lower fees, and 24/7 accessibility on the frontend while trusted asset managers and custodians maintain liquidity on the backend.

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