Cryptocurrencies
17
Jan
What is Stellar Lumens? The Beginner's Guide

This website has affiliate links. We may receive compensation if you visit partners we recommend. Read more about our advertising principles from the About Us page.

What is Stellar Lumens? The Beginner’s Guide

Stellar wants to solve global money transfer issues by building a fast and cheap payment protocol. Stellar, which has its roots in Ripple, is moving more and more towards financial institutions. This article is the Stellar Lumens beginner’s guide. We will present you the history, technology, and future potential of Stellar Lumens.

Stellar is a global payment protocol

Let’s begin by placing Stellar Lumens into the correct cryptocurrency category. It will help you understand the big picture and potential competition. We like to divide cryptocurrencies into three main categories: currencies, platforms, and tokens.

Bitcoin is the best-known currency. Other famous currencies are Dash, Litecoin, and Bitcoin Cash. They have no other main functions besides transferring and storing value.

Ethereum is the most famous platform. This is a category of projects, which are also described as ecosystems, frameworks, or operating systems. You can think of platforms like iOS or Android. They are essentially operating systems for Dapps and smart contracts.

Tokens are issued on platforms. They are usually either governance or utility tokens with a use case inside a specific application. Aave and Chainlink are popular tokens.

Stellar doesn’t naturally fit any of these categories. It is somewhere in-between currencies and platforms. It is a platform, but Stellar doesn’t compete with Ethereum and others in the Dapp space. Stellar is just a payment protocol.

The one obvious competitor is Ripple’s XRP. Especially now, when Stellar is moving more and more towards the banking sector.

We’d also make a couple of things clear when it comes to the name Stellar Lumens. This is a combination of Stellar, the name of the project, and Lumens, the name of the native token.

The project is run and governed by the Stellar development foundation. When people talk about Stellar, they are usually referring to this foundation or the project.

Lumen is the native token using the ticker XLM. However, people never really talk about Lumens. Usually, the native currency is referred to as Stellar Lumens. XLM is used for paying transaction fees in the Stellar network.

Stellar has roots in Ripple

The history of Stellar Lumens begins in 2014 when Jed McCaleb founded the Stellar foundation to develop the protocol. McCaleb is a famous character in the crypto space for many reasons. He is also the founder of the infamous Mt. Gox exchange, which used to handle about 75 percent of all Bitcoin trades at its peak.

Many might not be aware of the fact that McCaleb was a pivotal character in Ripple. He joined the project in 2011 and hired Chris Larsen a year later. XRP token was created in 2013. Both Larsen and McCaleb received 9,5 billion XRP tokens each.

It wasn’t for long until McCaleb got into arguments with Chris Larsen and the board of the company. He departed the project in 2013 and left Ripple’s board too later on. After this, McCaleb founded the Stellar organization. He also threatened to dump his XRP tokens to the market. It was a very hostile situation.

If you want to read more about this Ripple vs McCaleb case, check this article. The video below is also a good resource.

Since Ripple’s XRP protocol is open source, anyone can use the code and make their own version. This is what McCaleb did with Stellar.

Things changed in 2015 when the usage of the Stellar network started to grow. This led to the collapse of the consensus protocol. Stellar argued this was a vulnerability in the XRP ledger program code.

In the aftermath, Stellar decided to build its own consensus protocol. They brought in professor David Mazieres, who published the white paper for Stellar Consensus Protocol (SCP) in 2015.

The Stellar Lumens token (XLM) was one of the top 10 cryptocurrencies at the peak of the 2017 bull market. The bear market of 2018 saw XLM lose ground to other altcoins. It was kicked out of the top 10, but XLM remained in the top 15 for a long time.

Stellar has also boosted the token price with some extraordinary measures. Stellar foundation burnt 55 billion tokens in 2019, about half of all XLM in existence. This caused a quick price boost but didn’t have a long-term effect. Stellar also removed the annual inflation of XLM in 2019.

Below is a graph of the XLM token from 2017 to 2022. It has been one of the biggest losers during the bull run of 2020-2021 with Litecoin and Bitcoin Cash. All these coins used to be in the top 10 but are now ranked 22nd, 28th, and 30th (Jan. 2022).stellar-lumens-2017-2022

Even if the token price has gone up in the past two years, Stellar has lost a lot of ground. XLM has gone up a few hundred percent, but many other altcoins have gone up 1000-10000 percent at the same time.

The reason for Stellar’s poor performance is the lack of staking. Investors are also pumping money to the DeFi and NFT sectors. Traditional payment protocols haven’t received any attention for a long time.

Stellar in recent years

Stellar has shifted its focus more and more towards financial institutions. This is interesting because Ripple has always been branded as the go-to solution for banks. Stellar’s new approach will underline the rivalry between the two.

This development started in 2019 after the appointment of Denelle Dixon. She is the CEO and Executive Director of the Stellar Development Foundation. Dixon published a blog post titled Where we are headed in 2019, which gave insights about Stellar’s new direction.

Dixon has fast-tracked Stellar’s approach in 2020 and 2021. She has featured in many events related to the banking world. The deal with Elliptic falls also into this category. Elliptic is a blockchain analytic company, which will monitor transactions in the Stellar network

As the Elliptic deal shows, Stellar tries to comply with regulators and financial institutions when it comes to KYC/AML processes. This will ensure that Stellar is a potential platform for upcoming central bank digital currencies (CBDC). One example of this development is a CBDC development project with the Ukrainian government.

This is what Denelle Dixon said in the Consensus Distributed event in 2020:

“CBDCs was exactly the type of digital money Stellar was designed for, connecting today’s real-world financial infrastructure with the digital blockchain world.” (Source)

Stellar has a pretty good CV when it comes to CBDCs since there are several tokenized fiat currencies running in its network already. In 2021, Stellar also integrated USDC stablecoin.

The video below goes through plenty of updates from 2021.

The most interesting partnership is with Moneygram. Not least because Moneygram used to be Ripple’s partner. It is also one of the biggest remittance operators in the world.

Stellar’s native wallets will be integrated with Moneygram. This makes it possible for a user to create a Moneygram account via a Stellar wallet. Next, you could convert fiat currencies (even cash) to USDC stablecoin in your Stellar wallet at a local Moneygram office.

The Moneygram partnership is still in beta (Jan. 2022). It might turn out to be a very fruitful partnership for Stellar. Another question is whether this deal will help the price of XLM go up.

Stellar network nodes

Since Stellar has its roots in Ripple’s XRP ledger, these two are quite similar from the technical point of view. Both are designed to move tokens quickly with close to zero fees.

Stellar is a network of nodes like all other cryptocurrencies. There are two different nodes in Stellar: watchers and validators. Watchers are like Bitcoin nodes, meaning they monitor transactions and store the blockchain data. Validators are building the consensus and creating new blocks.

The video below will explain Stellar nodes in a couple of minutes.

Since transaction fees are extremely small, there are no financial incentives for running a node. On top of that, transaction fees are not given to nodes either. This is one major reason why there are few nodes (a total of about 140 watchers & validators) and most of them are run by the Stellar Foundation or its partners.

In practice, Stellar nodes are run by businesses that build on top of the Stellar ledger. This will give them an incentive to secure the network even without any fees.

It’s also important to know that there is no staking in Stellar. This is how all major smart contract platforms run these days: validators stake the native token to get the right to create blocks. In Stellar’s case, Lumen (XLM) is not used in anything else except for paying transaction fees.

Transaction fees are so tiny they are almost non-existent. The idea is to have a small fee to prevent network spam.

Anchors and assets in Stellar

The whole purpose of Stellar is to provide a platform for fast and cheap transactions. A new block is created every few seconds. The Stellar network can handle about a thousand transactions per second (TPS).

Stellar was built to be a payment protocol from the start. Unlike Bitcoin, for example, it can also move fiat currencies and other assets. This makes Stellar a natural CBDC platform.

There are three types of assets in the Stellar network: Lumens, anchored assets, and non-anchored assets.

Lumen (XLM) is the native token of Stellar. An anchored asset could be a U.S. dollar or a token representing a stock. It can be anything that has its value anchored to an external asset. They are also called redeemable, tethered, or collateralized assets.

A non-anchored asset is a token created in the Stellar network for example through an ICO. You can think of ERC-20 tokens in the Ethereum network.

The video below explains the topic very well.

This is where anchors are needed. They are bridges between anchored assets and the Stellar network. You can think of PayPal, as an example.

When you deposit fiat currency to your PayPal account, it becomes a token you can transfer real-time inside the PayPal network. You can also receive currencies from other users and withdraw them from PayPal back to your bank account. This is how anchors and Stellar work as well.

An anchor can be a bank, a payment operator, or a cryptocurrency exchange.

Stellar Consensus Protocol (SCP)

Let’s look at the Stellar Consensus Protocol next. As mentioned in the history chapter, Stellar developed this protocol in 2015 to solve performance issues of the network. It is an implementation of the Federal Byzantine Agreement (FBA) protocol, which is based on the Byzantine Fault Tolerance (BFT) model.

In a BFT system, the network has pre-determined validators. In Stellar’s solution, validators can choose freely which nodes to trust. According to Stellar, FBA is a decentralized version of BFT.

This structure makes Stellar a permissionless network, like Bitcoin. In practice, it’s not so straightforward.

“I’d consider it a decentralized permissioned blockchain. There is no central authority to receive permission from, but the system is based on proliferated trust so you need to get trusted by someone who is already trusted in order for your validation opinions to have any merit.” (Source)

As the quote shows, a node in the Stellar network requires a pre-defined trust before it can be trusted by the existing validators, or its decisions have no merit.

See the video below for detailed information about SCP.

When a node in the Stellar network is choosing trusted partners, something called a quorum slice comes into the picture. Nodes of the network are sharing information of trusted parties and a quorum slice is like one piece of such information.

One node needs multiple quorum slices from other nodes before a quorum can be reached. Nodes are constantly voting and confirming transactions and then recording them to the blockchain.

This is a quite difficult subject to explain in simple terms. You’d check the video above or read more from Stella.org or this article.

Investing in Stellar Lumens

Stellar is taking steps towards financial institutions. Does it become a platform for one or more central bank digital currencies? Time will tell.

This project is definitely moving forward and making valuable partnerships. However, the XLM token is losing ground in the cryptocurrency rankings. The question is: does XLM deserve to be in the top 10 again? It has fallen to 30th place in rankings and there is no end in sight in this downtrend.

XLM is sharing the challenges of XRP, Litecoin, and other payment protocols.

  1. Transaction fees are so small that there is no need for a standard user to acquire boatloads of the native token. Even a couple of dollars worth of XLM is enough for thousands of transactions.
  2. Because of the previous point, there would have to be insane transaction demand in the network to create a lot of demand for the XLM token.
  3. Stellar’s consensus protocol doesn’t have staking. This is a big minus because staking creates a natural demand for the token and locks massive amounts of them out of the market.

These issues cannot be solved easily. Tiny transaction fees are the strength of Stellar, which means that they shouldn’t get ever any higher. You can’t change the consensus protocol either that easily.

A potential investor must consider XLM’s price drivers carefully. What would it take to have a lot of demand for the token? What about CBDCs? Could it help to boost Lumens’ price if Stellar would be named as an official platform for central bank digital currencies?

At the moment, it’s difficult to see how XLM would become a target for institutional investments a.k.a the BIG MONEY. Smart contract platforms, metaverse tokens, and NFTs provide so much more potential. XLM is clearly out of favor with other payment protocols (XRP, LTC, BCH, etc.). All tokens in this category have fallen hard in the past years.

Stellar Lumens price and how to buy XLM

The native token XLM is listed on all popular cryptocurrency exchanges. Coinbase is a great option to purchase Stellar Lumens. It’s one of the biggest exchanges on the planet.

Buy XLM from Coinbase

More experienced users should go to Binance, which has the best liquidity and more trading options available.

There are several different ways to store Stellar Lumens. The popular Ledger Nano X hardware wallet is the safest option. You can also download one of many desktop wallets made by Stellar partners.

The official website of the project is stellar.org. The Twitter handle is StellarOrg, and the official Reddit page can be found at Reddit/r/Stellar.