On October 23rd Coinbase announced that they will be working with Circle (as part of the CENTRE consortium) to list a US Dollar pegged stablecoin, “USD Coin” (USDC). Each USDC will be backed by a US Dollar with proof of reserves attested to by certified public auditors. Launching with a total supply of 100,000,000, USDC will be the first stablecoin to comply with US money transmission laws and its ERC20 specification will make it compatible with Ethereum smart contracts. This is the first of its kind, and quite frankly, it’s a big deal.
Stablecoins are not a new idea; one of the original and most utilized USD-pegged cryptoassets, Tether (USDT), has been circulating for years but its lack of a public audit or regulatory compliance has raised concerns. As a result, Tether is facing enormous pressure from the market and its price has now traded below $1 (USD) for the past 20 days – the longest departure from a peg faced by any stablecoin. Confidence in this opaque $2bn asset is faltering and without the timely release of a transparent audit an impending crash seems inevitable. Tether’s inability to remain stable is compounded by its inability to work with smart contracts, and the same applies to nearly all other stablecoins with the exception of a few. The realization then, is that 1 USDT does not equal 1 USDC, and it certainly does not equal 1 USD. Such an imbalance cannot be sustained over the long term.
USDC may be under the same “stablecoin” umbrella as Tether, but the reality is that the two are far removed from each other. USDC’s transparency and smart-contract-compatibility puts it in an entirely separate league, one which could well see USDC replace the use of Ether across the vast majority of Ethereum smart contracts.
USDC’s impact on the price of Ethereum
The importance of a stable smart-contract-compatible US Dollar cannot be overstated. It is likely that Ethereum-based stablecoins like USDC (and Gemini’s GUSD) will become the currency of choice for users and developers alike. Why spend or accept a volatile cryptocurrency when a stablecoin with all the benefits of crypto can be used instead? The introduction of USDC would – at first – seem to reduce the demand for Ether but the reality is a little more nuanced.
The demand for Ether is driven almost entirely by speculation. Mainstream users are not buying Ether in order to make predictions on Augur or buy CryptoKitties, these are still niche platforms which are – for the most part – a draw only for existing cryptocurrency holders. As a result, USDC’s displacement of Ether as a medium of exchange would seem unlikely to place downward pressure on the demand for ETH, this demand hardly existed in the first place.
Ether is currently required to pay Ethereum gas (transaction) fees and that includes sending ERC20 tokens such as USDC. Users who choose to hold the USDC stablecoin will also need to hold some Ether in order to cover the gas fee of a USDC transaction: adoption of USDC will correlate with the adoption of Ethereum. Furthermore, it is possible that future network upgrades for Ethereum will include the burning of gas fees; every USDC transaction will in turn burn a small amount of Ether. If Ethereum-based stablecoins are adopted as widely as many are anticipating, this possible reduction in the supply of ETH may well have a significant upward pressure on its price.
Price instability has been a long-standing complaint of outsiders who see cryptocurrencies as nothing more than a speculative tulip bubble. And it’s hardly surprising; the risk of having your spent Ether worth dramatically more or less than it was when it was first held has been a major barrier to the potential of Ethereum. With USDC, developers can now build new products safe in the knowledge that users will no longer be faced with a high level of currency exchange risk, and users can interact with smart contracts with the benefit of that same knowledge.
In other words, USDC gives developers and users confidence – one giant catalyst for network growth.
While there exists other stablecoins such as MakerDAO’s DAI (a collateralized stablecoin pegged to USD), none have more weight than USDC which has already reached millions of users simply through its addition to the Coinbase exchange. CENTRE also plan to onboard numerous USDC issuers to help decentralize US Dollar reserves with a goal to introduce other fiat-pegged coins such as EURC, GBPC and JPYC.
Ethereum has already established itself as the backbone of ICOs and it is now looking increasingly likely to become the backbone of stablecoins. Users who want to interact with publicly audited smart-contract-compatible stablecoins will need to use Ethereum; not EOS, Cardano or any other “Ethereum killer”. The introduction of USDC is just the beginning of another major step forward in the development of the Ethereum ecosystem – an ecosystem which is rapidly outpacing every other platform of its kind.