What is the difference between Bitcoin and USD Coin?
Two digital assets from different sides of the tracks.
One born into anarchy and chaos that never knew its parents, but that somehow conquered the world.
One born of well-to-do parents with money, backed by assets and claiming to represent the world’s reserve currency.
Obviously different. But how? And why? What’s the future for this odd couple, forever intertwined by exchange pair activity?
Bitcoin Banter
To Recap…
Bitcoin is a digital asset created by “Satoshi Nakamoto”. The aim was to create an entirely new global currency that wasn’t controlled by anyone. The Bitcoin protocol allows anyone with the (now expensive) equipment to mine new coins and verify transactions. The total supply was set at 21 million bitcoins, of which 18 million have already been mined, though reports suggest only 14 million bitcoins will be in circulation, the rest being lost.
This lack of central control and inherent scarcity is what set Bitcoin apart from Central Bank currencies (fiat), which could be issued whenever the bank felt like it.
Nakamoto’s real genius wasn’t necessarily in the concept of Blockchain (that existed earlier), but in the way he solved the problem of “consensus” – getting untrusted, anonymous nodes in a network to agree on what reality is. He managed to create a system where a random group of greedy people can still be forced to co-operate for the greater good… which is a definite achievement.
In a centralised currency, the sole source of truth is the central bank: access to its systems is given to trusted companies and individuals with varying levels of permission.
Bitcoin is trustless and permissionless and the source of authority is the shared decision of at least 50% of the computers in a network. “What the heck just happened?” is a consensus.
Miners are kept honest by allowing them to complete brute force mathematical calculations to compete for new coins (“mining”) and offering smaller rewards for validating transactions.
“Consensus” is how blockchains work generally, though they don’t all use the same mechanisms. Whichever method is used, smaller blockchains are more vulnerable to a 50% attack: when one party gets 50% control of the mining power (“proof-of-work”) or the locked-in value (“proof-of-stake”). If this happens, one party can literally attack history. This is called a “50% attack”.
Bitcoin, Ethereum and most of the top 10 cryptos are now big enough for this to be impossible (it’s too expensive and impractical), which is one reason why they’re technically trusted.
USDC, see?
USDC is a digital asset that’s meant to stand in for the US dollar in decentralised blockchain systems. It was created in 2018 by Circle Finance, in partnership with the Coinbase exchange. Goldman Sachs was one of the initial investors, too.
Most digital assets don’t make sense to most people unless you can say how much they’re worth in US dollars. Because a Central Bank Digital Currency version of the dollar doesn’t exist, stable versions (“stablecoins”) of real currencies are necessary. USDC wasn’t the first US dollar stand-in (Tether and DAI both came before it), but it is one of the most stable and best-financed.
Digital Dollars
Digital US dollars exist because most blockchains allow other digital assets to use their infrastructure. DAI lives on Ethereum, and Tether lived for most of its life near the Bitcoin blockchain (though there are versions of it on other blockchains now). USDC started as an Ethereum token and now exists on the Solana blockchain too.
Despite the fact that the blockchains they live on are decentralised, asset-backed digital dollars such as Tether and USDC are centralised: they’re owned by someone who is in full control of them.
USDC tokens aren’t mined but simply issued when appropriate, creating more of them. They can also be destroyed, a process known as “burning”. When US dollar tokens are redeemed for real dollars, you need to destroy a token to balance the books.
The promise to the world made when these tokens are issued is that the company issuing them has enough real dollars to back up the digital dollars. There has been much debate around “Tether” whether this backing is sufficient, but no one has the same concerns about USD Coin, which has an accounting firm producing a monthly report attesting to the status of the assets backing up the coin.
Useful!
Both Bitcoin and USDC are very different creatures, but they’re at their best when they’re working together, proving useful in the real world, often to the surprise of media commentators who often sound like “e-commerce is a fad” types, and misusing the word “Ponzi” repeatedly.
Bitcoin has become legal tender in some under-banked countries that have currencies continually being punished by the global markets. This brings its own problems because leveraged gamblers keep wrenching the price of Bitcoin all over the place.
Digital assets can also reach into war zones to keep economic activity flowing. This can be a good or a bad thing depending on your political beliefs. For observers worried about a global system that can unbank entire countries, Bitcoin, USDC and decentralised finance generally are a pointer to a future where it’s harder to link essential finance and politics so that normal citizens are penalised.
Spend, spend, spend, save, HODL
Bitcoin can also be directly spent now. Not only are there many payment processors for websites that accept crypto, but crypto debit cards are much more common than they used to be. They can be used in any shop that takes Visa or Mastercard, with the currency conversion happening at the point of sale. There’s still that pesky volatility though: how much are you going to pay for your coffee? When Bitcoin can drop 10% in 7 minutes, it’s a bit of a gamble!
Bitcoin is also something you can save and earn a yield on (just ask AQRU!). The decentralised finance market for lending and borrowing for both Bitcoin and US dollar stablecoins has gone through the roof, even as the crypto market has exhibited its usual volatility.
It’s not only useful for spending in actual shops (for instance, a crypto debit card could use a USDC wallet too), but it’s also useful for borrowing, lending, paying invoices and earning more USDC. It’s all the convenience of crypto with none of the knife-edge gut-wrenching feeling when it’s plummeting (though you also miss out on the occasional highs when it pumps).
Even if you don’t “save” bitcoin, you can merely HODL in the hope of benefits to come: because Bitcoin long-term has always tended to go up in value, and fears it would crash to zero have always been overblown.
Spreading the wings
Crypto, despite its growing pains, is finding more and more areas to reach into, with USDC following Bitcoin and crypto into brand new areas. More and more companies are setting up new ideas in all areas of finance. Some of these ideas are great, some are terrible, and time has a way of confirming which is which!
Despite the ups and downs of the crypto market, both Bitcoin and USD Coin have a bright future.
Traditional finance has begun to think about jumping ship to the blockchain, and the US’s hesitancy to embrace a digital currency as China has already done means a bright future for USDC.
Bitcoin is gaining recognition as a store of value and a speculative asset that is now in more and more regular Wall Street portfolios. It’s always one of the first things they sell when they panic, unfortunately. It’s also appearing in other investment portfolios worldwide as the potential gains look appealing in contrast to other stagnating traditional financial options.
USDC is doing a great job of giving institutions a trustable fiat option in the digital space.
The field of regulated security tokens is poised to be one of the growth areas of the future, and might not be long from taking off: New York Stock exchange has already invested in a security token company called tZero, for example. Since token prices generally tend to be denominated in US Dollars, there’s a big place for USDC as a bridge between the crypto ecosystem, the security token ecosystem and the regular financial system.