If you just started using DeFi applications on an L2 recently, you may have wondered why there are USDC.e and USDC. 

This article explains USDC, its connection with USDC.e, and the current status between these two. Feel free to skip the sections that you already know. 

What is USDC

If you don’t live under a rock, you probably have heard about USDC. USDC (USD Coin) is a stablecoin pegged to the US dollar, widely recognized for its stability and reliability in the cryptocurrency market. Circle, a company domiciled in Boston, Massachusetts, U.S.A., issues the tokens. It primarily circulates on the Ethereum blockchain but has extended its presence across various blockchain networks like Solana and Cosmos to facilitate broader adoption and utility.

At the time of writing, USDC is the second largest stablecoin by market cap, only trailed by Tether’s USDT. 

What is USDC.e

Simply put, USDC.e exists because of the emergence of L2s. Before explaining further, we must understand what an L2 is. An L2 is a general term to describe a scaling solution on an L1, like Ethereum. There are two camps of L2: optimistic rollups and zero-knowledge rollups (“ZK Rollups,” in short). The former camp protects users’ assets through economic incentives, the latter by math. You can read this article to understand the difference between these two.

Most of the time, these L2s launch without support from Circle. In other words, from the get-go, there is no native stablecoin on these newly-launched networks. Given how important a role stablecoins play in the world of DeFi, what these L2 operators did was allowing users to deposit USDC on their contracts on L1, say Ethereum. Afterward, the L2 operators mint a token on their network, say OP Mainnet, as an IOU (I Owe You) for the deposited USDC on Ethereum. The IOU is the USDC.e, where "e" stands for Ethereum. This way, these L2s can support “USDC” from day one.

You might wonder how this is possible if you’re new to this space. Like, “Isn’t USDC issued by Circle, which is a different company than an L2 operator?“ Yep, you’re right. And that’s the beauty of DeFi. In DeFi, a lot of things are permisisonlessness and composability. So, L2 operators can issue an IOU on their networks with the USDC deposited on Ethereum.

Current Status 

However, even as Circle, the entity behind USDC, has begun issuing USDC natively on L2 networks like Arbitrum One and OP Mainnet, USDC.e remains popular. This persistence is mainly due to its established network effect and longer history. That being said, USDC's liquidity has been drastically improved. For instance, below is the rate comparison on how much ETH I would get if I swap 10,000 USDC and USDC.e on Arbitrum One. Now, USDC yields more ETH than the bridged version.

Recently, Optimism, the operator behind OP Mainnet, disabled the function to bridge USDC. Instead, they ask users to use third-party bridges that support CCTP to bridge native USDC to their L2. We believe more L2s with native USDC issued on their network will encourage users to use the native stablecoin. 

CCTP, or Cross-Chain Transfer Protocol, allows users to return USDC to Circle on one chain. In turn, Circle mints the returned amount (deducted by some fees) on another chain. Circle works with several user-facing platforms (the third-party bridges mentioned before) to provide this service. Since Circle is the sole issuer for USDC, this way allows it to maintain its stablecoin supply while supporting more chains.    

Parting Thoughts

The differentiation between USDC and USDC.e highlights the innovative strategies deployed within DeFi to foster interoperability and liquidity across diverse blockchain environments. As the sector continues to grow, understanding such nuances becomes crucial for participants seeking to navigate the complex landscape of digital finance effectively.