USDZ, the stablecoin from Anzen, backed by Circle Ventures, has been experiencing considerable price instability.

The token is now trading at about $0.9534, down significantly from the expected peg of $1. This has got investors and market participants talking.

Anzen's USDZ, a stablecoin backed by Circle Ventures, has been exhibiting considerable price instability recently.

The token is now trading at about $0.9534, having dropped from the expected peg of $1, which has got investors and market participants talking. They are now questioning the stablecoin’s stability and future viability. While the intention was for USDZ to track the value of the US dollar, recent events have caused some to wonder if the problem is with the underlying reserves.

USDZ, which has an approximate total supply of 120 million tokens, is backed mainly by cash, cash equivalents, and credit portfolios. If one were to attempt to account for all the different types of assets backing USDZ, one would arrive at a figure of about $122 million. By this reckoning, the reserves backing USDZ are theoretically sufficient to maintain the coin’s peg to the dollar.

However, underwriting concerns arise from the fact that only about 5.27% of USDZ’s reserve assets are cash or cash equivalents, which augurs poorly for the stablecoin’s ability to maintain its peg during market stress. Most of the backing of USDZ comes from non-liquid assets, such as credit portfolios, which may not be as accessible or stable as one would like in times of market turbulence. This is not only a modern take on dollar backing, but it also has some folks worried about whether USDZ can really withstand significant market fluctuations—especially when liquidity is critical for maintaining the stable peg.

USDZ’s recent price drop, which has gone as low as $0.9534, underscores the possible dangers connected to these reserve placements. In a moment of market panic or when the token needs liquidity to prop it up, the cash and cash equivalent reserves seem paltry. Just how are we supposed to defend the peg in anything resembling a believable way?

And guess what? We’re not alone in facing this not-so-enviable situation. Other stablecoins have run into difficulties when their reserves weren’t liquid enough, weren’t diversified enough, or some combination of both.

Anzen has obtained some degree of credibility in its stablecoin endeavor, USDZ, through partnership with Circle Ventures, a major player in the stablecoin and cryptocurrency markets. Circle’s association, especially in light of its flagship product, USDC, has instilled a good deal of confidence in USDZ’s supposed stability. But what happens when even a stablecoin backed by such nineteenth-century financial figures as Franklin, Hamilton, and Twain starts to experience price fluctuations?

How unstable is USDZ? For traders and investors who rely on stablecoins for consistent value in a highly volatile market, this is a particularly concerning question. Stablecoins like USDZ are often used to hedge against price declines in other cryptocurrencies, providing reassurance and refuge for investors seeking to park their assets in a stable, dollar-pegged token. But if the token you’re using as a refuge starts to fluctuate in price, then what are you using as a refuge?

USDZ’s price is now more stable. This isn’t true for traders and investors. It fluctuates like another cryptocurrency and is even seen by some as a not-so-much-stable stablecoin. This perception has opened up — and continues to open up — debates in the crypto community about what makes a consistently reliable stablecoin. Among the most mentioned are:

How transparent are its reserves?

How liquid are they?

How resilient are they to large-scale shocks, like, say, the bankruptcy of a major player?

After all, if we’re storing our wealth in something called a stablecoin, it should be stable, right?

The recent instability and depegging of USDZ highlight how much more stable we need stablecoins to be. When it comes to risks, I think USDZ has a couple of big ones that could contribute to a repeat situation like we’ve seen play out recently.

First off, USDZ’s reserves could be a lot more liquid; in fact, its reserve mix is so illiquid that it may be causing the volatility we’ve seen lately. Second, we’re still learning a lot about how to manage the kind of credit risk that’s present in USDZ’s portfolios. To fully trust any stablecoin, we need to be able to see and understand that risk.

In addition, Anzen must repair the peg and reestablish the price of USDZ to guarantee that it can function as a secure and dependable stablecoin. Doing so will likely require a blend of different strategies: they will need to diversify their reserve assets, enhance their liquidity management, and deal with the wider market in order to restore the faith that its stakeholders need to have in the token for it to work.

The peg must be maintained, and the stablecoin’s design must ensure that it is stable in the ever-evolving world