Why TerraUSD and Terra Are Surging Today

What happened

The price of the controversial algorithmic stablecoin TerraUSD (CRYPTO:UST) and its sister cryptocurrency Terra (CRYPTO:LUNA) surged today after project founder Do Kwon's proposal to rescue the embattled project received approval from the Terra community.

Over the last 24 hours, the price of TerraUSD traded more than 41% higher and Terra traded roughly 24% higher as of 11:29 a.m. ET.

So what

Over the last several weeks, the popular algorithmic stablecoin TerraUSD has essentially collapsed. Stablecoins are digital assets pegged to a commodity or currency like the U.S. dollar. They are typically backed by real assets.

But algorithmic stablecoins are not backed by real assets and use complex technology and algorithms to maintain their peg. TerraUSD is supposed to stay right around $1 and is linked to Terra because when users mint new UST tokens, they also need to burn Luna.

Image source: Getty Images.

Recently, amid broader crypto volatility, TerraUSD lost its peg to the dollar and collapsed to roughly $0.05 at one point.

Now, Kwon has proposed a rescue plan that includes issuing new LUNA tokens and a new blockchain network. The proposal will also remove the algorithmic nature of TerraUSD and collateralize it with reserves to help the stablecoin reclaim its peg.

More than 65% of voters in the Terra community reportedly approved the rescue plan, according to media outlets, and Terraform Labs, the company behind the project, plans to launch the new blockchain network on May 27.

Now what

I'm certainly not against traditional stablecoins, but given everything that has happened, I am not interested in purchasing Terra at this time and believe it could be an extremely risky investment.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Terra. The Motley Fool has a disclosure policy.