Stellar Lumens: Is XLM A Good Investment?
Stellar is a blockchain network co-founded by Jed McCaleb, one of the most prolific investors in the cryptocurrency space. Having founded Ripple, McCaleb is no stranger to launching successful projects in the industry. Still, Ripple had focused on one piece of the puzzle – enterprise adoption – and no one was directly attracting a mainstream audience. At least, not effectively.
Who is Jed McCaleb?
McCaleb was dubbed one of the top 10 people leading the blockchain revolution by The New York Times and started Mt. Gox, a platform to trade cards from the Magic the Gathering card game. It eventually transformed into a gargantuan Bitcoin exchange processing over 70% of global BTC transactions at its peak.
After serving as the CTO of Ripple until 2013, McCaleb then co-created the non-profit Stellar Development Foundation (SDF) in collaboration with Stripe CEO Patrick Collison to allow for more consumer-focused cross-border transactions. The project received $3 million in seed funding from Stripe, which was later given 2% (2 billion) of the initial ‘stellars’ for the seed investment.
The tokens were eventually renamed Lumens (XLM), and this was still the early days for blockchain — before the now-hallowed Ethereum network had even been proposed. Soon after, in 2014, Brazil’s first Bitcoin exchange, Mercado Bitcoin, announced that it would be using Stellar’s network to facilitate transactions on its platform.
By 2015, Stellar had accumulated over 3 million registered user accounts and had a market capitalization of over $15 million.
The sheer number of cryptocurrencies available today can make it daunting to figure out what’s worth investing in and what isn’t. The blockchain industry is notoriously risky, and with how volatile and unregulated crypto markets are, it’s key to amass as much information as possible before making any investments.
Stellar v.s. Bitcoin
Unlike Bitcoin, which can take multiple block confirmations to verify a transaction has gone through, Stellar confirms transactions in mere seconds. Of the blockchain’s 105 billion pre-mined XLM tokens, 55 billion tokens worth almost $5 billion were burned by the Stellar Development Foundation to streamline its development goals.
The burn was also conducted to better project the platform’s utility of the following ten years, but after climbing to a peak value of $0.70 in 2018, XLM is now only worth around half as much. The token had been trading under $0.10 for most of 2020. That isn’t to say Stellar and its associated XLM token aren’t valuable. In fact, it’s one of the top 10 cryptocurrencies by market capitalization.
While the ongoing Bitcoin bull-run has had a small effect on the price of XLM, pushing it above the $0.17 mark, the token’s price shot up by 40% in early January after Stellar announced its partnership with the Ukrainian ministry. While the project has seen its fair share of challenges over the last few years, Stellar is building a platform that could change how the world does business.
What Are Stellar Lumens (XLM) Used For?
The Stellar network was primarily designed to facilitate global payments using what we now call stablecoins. Today, stablecoins are a fundamental part of the blockchain economy, bringing existing fiat currencies to the blockchain and improving market liquidity. The most popular, Tether (USDT), has the third-largest market capitalization among all cryptocurrencies.
Stellar requires that participants maintain a minimum balance of 1 XLM and urges users to provide a minimum of 0.00001 XLM or 100 stroops as transaction fees. With XLM worth less than half a dollar, transaction fees are practically negligible, and by ensuring everyone holds some XLM, Stellar creates incredibly liquid markets to trade digital assets.
This isn’t to generate profits but to make malicious efforts like DoS attacks more expensive, and the fees are collected by the network and redistributed to create inflation. The Stellar network currently uses ‘anchors’ or entities that hold deposits and issue credit depending on the need. Think of them as bridges that connect the various currencies available on Stellar. All monetary transactions on Stellar (except XLM) use Anchor credit, and the system’s dependence on them for deposits and credit issuance does ultimately require some level of trust.
Always under construction
The Stellar network introduces significant core upgrades regularly, and in 2020 the Protocol 13 was implemented. This upgrade introduced a few essential features like fee bumps to facilitate fee increments for pre-signed transactions, allow validators the flexibility to raise fees, and assist applications in covering user fees.
It also enables more fine-tuned control over asset authorization, allowing users to nullify authorization while retaining orders on the books. This makes it much simpler to track securities and other regulated assets. The issuers can sanction accounts to use assets, while other users can make offers or deny the account.
The new protocol also introduced 64-bit account addresses, a critical update for exchanges and custodial services that keep a single deposit address. This improves how the network navigates payments to accounts and allows custodial services to give users personal account IDs to direct funds from the main underlying exchange address.
The Astronauts in The Stellar Foundation
McCaleb isn’t the only big name attached to the project. David Mazieres, a computer security systems professor at Stanford, is the Stellar Development Foundation’s chief scientist. Mazieres was responsible for creating the federated model for Internet-level consensus used by Stellar. Dubbed the Stellar Consensus Protocol (SCP), his model was a core component of the platform’s development foundation.
What is The Stellar Consensus Protocol (SCP)?
The SCP enables rapid transactions at lower fees and network-wide consensus within seconds. Each participant or node helps add transactions to a global ledger or selects a network of trusted participants to vote on their behalf. This network is called a quorum slice, and as long as they all overlap, the network can always reach a consensus.
Microsoft veteran and devoted contributor to the project, Nicholas Barry, is the SDF’s current CTO. Stellar’s CEO and executive director, Denelle Dixon, comes from a decade-long tenure at Mozilla in various crucial roles. The SDF Mandate claims the team wants to make Stellar the standard for global payments, and with no shareholders or annual reports, the future could be far more decentralized than we expect.
Stellar’s other founder, Joyce Kim, works as the executive director of Stellar.org. Earlier, Joyce had worked as a VC at Freestyle Capital, co-founded a mobile commerce startup, simplehoney, and is a managing partner at Sparkchain Capital.
In September 2017, the Stellar Partnership Grant Program was announced as a benefits program that would award partners up to $2 million in XLM for project development. Community members can also vote on which projects are allocated funds and grants, creating an environment that’s building up to self-sustainability.
Stellar also has a for-profit wing called Lightyear.io, which was later renamed Interstellar after acquiring Chain, Inc in 2018. The whole project spans across continents. It even has its own Stellar Community Fund (SCF), comprising a Seed Fund and a Lab Fund to help onboard businesses, research innovative use-cases, and stress-test the network.
Ripple v.s Stellar
One target, different trajectories
Ripple and Stellar have similar goals but entirely different approaches. Ripple looks to make blockchain more accessible to enterprise consumers and integrate with existing financial systems to improve adoption. Stellar is focused directly on mainstream consumers and offers a more flexible approach to developing distributed applications and using smart contracts.
In the age of decentralized finance, Stellar even has a built-in decentralized exchange, and its low transaction costs and quick confirmations make it quite a compelling platform for DeFi development. It was also recently announced that USDC, a prominent USD-pegged stablecoin, would be tokenized on the Stellar blockchain from Q1 2021, bringing over $2.7 billion in liquidity onto the network.
Through the Stellar Community Fund, the blockchain has also invested $5 million into Abra, a global crypto/fiat wallet exchange app in 2020. Abra has since implemented many new features onto its platform, including a simplified lending protocol to earn interest. Soon after Abra’s funding, Stellar was added to the Samsung Blockchain Keystore, showcasing the network to an entirely new market.
The Stellar Development Fund has also invested over half a million dollars into the Berlin-based instant payments platform, SatoshiPay. Having made investments worth over $6.3 million in 2020 alone, Stellar is en route to bringing blockchain to the average consumer.
To infinity and beyond
The financial services industry is a vast and interconnected array of systems that allow for so many modern conveniences we take for granted. However, their complexity and overhead costs have hampered progress, and as a result, not everyone in the world has access to these services.
Should You Buy Stellar Lumens?
Stellar is a promising platform that has established itself as a significant player in the blockchain space. Led by some of the most prominent community members and experts, Stellar’s fast, cheap, and accessible model makes it a terrific option among the many like it.
In 2015, the network announced its integration with African non-profit Praekelt Foundation’s open-source messaging platform Vumi, which uses cellphone talk time as currency using the Stellar blockchain. They have also partnered and integrated with various banks and institutions over the years, such as Deloitte, ICICI Bank, and IBM.
Just earlier this year, the Ministry of Digital Transformation of Ukraine announced that it would cooperate and partner with Stellar to develop Ukraine’s digital infrastructure, making the value of XLM surge by 40% in a single day.
Transactions across political and geographic boundaries today are slow and expensive, and while improving the centralized model can help to an extent, the trust risk outweighs the benefits. By building a more robust financial infrastructure that can support growth, innovation, and the integrity of its transactions, financial services could soon be accessible to the farthest reaches of the planet and without relying on a centralized entity.