Advantages and disadvantages of using USDC in the Arbitrum network
What is USDC on the Arbitrum network?
The USDC stablecoin on the Arbitrum network is a standard ERC-20 token for EVM-compliant networks. USDC on the Arbitrum network is issued in two ways:
- Automatically by an official Arbitrum bridge contract when a user transfers tokens from another blockchain into this network;
- By third-party contracts that provide a wrapped version of the USDC stablecoin known as USDC.e.
USDC on the Arbitrum network differs from similar tokens on other networks, such as Ethereum or Optimism, because it lacks direct backing from the issuer, which carries additional risks.
How to get USDC on the Arbitrum network?
There are at least three ways to get USDC on the Arbitrum network:
- Transfer USDC from another network, such as Ethereum or Optimism;
- Buy on an exchange and withdraw tokens to the Arbitrum network;
- Buy through an exchange and get USDC immediately in the desired network.
The first option assumes that the user transfers USDC tokens through the official (or third-party) Arbitrum bridge from any available network to the Arbitrum blockchain. In this case, the user's tokens go to the bridge's contract address, where they are then stored in the selected blockchain, and an equivalent number of USDC tokens are issued in the Arbitrum network.
In other words, it is impossible to transfer USDC tokens from one network to another directly: during a transaction, the network tokens from which the user sends assets are blocked and converted into tokens of another network.
In the second and third cases, buying USDC tokens for fiat or other cryptocurrencies and receiving them in the desired network is enough.
What are the advantages and disadvantages of using USDC in the Arbitrum network?
There is no difference in principle in which second-tier network users make transactions with USDC tokens: Arbitrum, Optimism, or any other. However, Tier 2 networks are considered less secure than the underlying Ethereum blockchain because they are more centralized. Firstly, this makes them more vulnerable to attacks and asset theft, and secondly, validators in such networks are more empowered and can control transactions.
The second disadvantage is lower liquidity compared to Ethereum. The lower the liquidity of a token, the stronger the sale of the same large amount can affect the rate of the stablecoin and the higher the chance of losing the asset's peg to the value of the U.S. dollar.
In addition, USDC has no direct backing from the Circle issuer. First, this means that the issuer will not be liable for lost funds in case of any incidents. Secondly, USDC is too closely tied to its wrapped version USDC.e and smart contracts of third-party applications, whose developers may be fraudulent and simply misappropriate users' assets.
However, there are advantages to using USDC on the Arbitrum network. The first is the significantly lower fees and high transaction speeds compared to Ethereum.
The second is that USDC holders can pay for transactions using stablecoin and do not need to store ETH on the Arbitrum network to do so. However, as of November 2024, this option is only available to Arbitrum Orbit users.