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What is Stellar (XLM)?

Stellar (XLM) is a cryptocurrency and a blockchain designed to revolutionize global money transfers. The history of Stellar Lumens began in 2014 when Jed McCaleb founded the Stellar Foundation to develop the protocol. Stellar has shifted its focus more and more towards financial institutions.

Since Stellar has its roots in Ripple’s XRP ledger, these two are similar from a technical point of view. The purpose of Stellar is to provide a platform for fast and cheap transactions. Stellar developed the SCP  in 2015 to solve network performance issues.

The Stellar project is moving forward and making valuable partnerships.

What is Stellar (XLM)?

Stellar (XLM) is a cryptocurrency and a blockchain designed to revolutionize global money transfers. Stellar is an efficient payment protocol with limited smart contract support. The project has progressively focused on catering to financial institutions.

Stellar relies on the SCP (Stellar Consensus Protocol), a unique consensus algorithm ensuring security, scalability, and decentralization. Unlike traditional proof-of-work or proof-of-stake mechanisms, SCP achieves consensus without relying on a closed system, making it energy-efficient and fast. This consensus mechanism is pivotal in enabling Stellar’s rapid and low-cost transactions, setting it apart from many other blockchain platforms.

The Stellar platform operates using its native token, Lumens (XLM). Lumens are crucial in the Stellar network, primarily covering the network transaction fees. The terminology “Stellar Lumens” is a fusion of “Stellar,” representing the project, and “Lumens,” the name of the native token. Typically, when people mention Stellar, they refer to the Stellar Development Foundation or the overarching project.

Here is basic information about XLM:

Founder Jed McCaleb
Category Payment protocol
Ticker XLM
Circulating supply 27.5 billion XLM
Max supply 50 billion XLM
All-time low (date) $0.001227 (Nov 18, 2014)
All-time high (date) $0.9381 (Jan 04, 2018)

See the current price of XLM from this page: Stellar price.

Stellar’s inception dates back to 2014, making it one of the older cryptocurrency projects still running. It was founded by Jed McCaleb, who played a pivotal role in Ripple before disagreements led him to part ways and subsequently create Stellar. McCaleb crafted Stellar’s unique version utilizing Ripple’s open-source XRP protocol. Hence, Stellar has its roots in Ripple.

Over the years, Stellar has collaborated with various financial institutions, further emphasizing its commitment to becoming a leading global payment protocol. Recent endeavors include a partnership with blockchain analytics firm Elliptic and a Central Bank Digital Currency (CBDC) development project alongside the Ukrainian government.

The History of Stellar

The history of Stellar Lumens began 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 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 long before McCaleb argued with Chris Larsen and the company board. He departed the project in 2013 and later left Ripple’s board. After this, McCaleb founded the Stellar organization. He also threatened to dump his XRP tokens into the market. It was a very hostile situation.

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. Below is a screenshot of a Forbes article about McCaleb in January 2023.

jed mccaleb 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 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 through extraordinary measures. In 2019, the Stellar Foundation burned 55 billion tokens, about half of all XLM. 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).

Even if the token price has increased 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 increased 10,00-10,000 percent.

The reason for Stellar’s poor performance is the lack of staking. Investors are also pumping money into 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”, giving insights into Stellar’s new direction.

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

As the Elliptic deal shows, Stellar tries to comply with regulators and financial institutions regarding KYC/AML processes. This will ensure 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 for CBDCs since several tokenized fiat currencies are already running in its network. In 2021, Stellar also integrated USDC stablecoin.

The video below goes through plenty of updates from 2021.

The most exciting 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 will allow users to create Moneygram accounts via Stellar wallets. Next, you could convert fiat currencies (cash) to USDC stablecoin in your Stellar wallet at a local Moneygram office.

The Moneygram partnership is still in beta. It might turn out to be a very fruitful partnership for Stellar. Another question is whether this deal will help the XLM price increase.

Stellar made a major technical update in March 2024 when it added support for smart contracts. Stellar is not EVM compatible, but smart contracts are implemented in the Rust programming language.

Stellar network nodes

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

Like all other cryptocurrencies, Stellar is a network of nodes. 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 build the consensus and create new blocks.

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

Since transaction fees are minimal, there are no financial incentives for running a node. Transaction fees are also not given to nodes. This is one major reason there are few nodes (a total of about 140 watchers and validators), most of which 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 incentivize them 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 for anything else except to pay 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 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 from the start as a payment protocol. Unlike Bitcoin, for example, it can also move fiat currencies and other assets, making Stellar a natural CBDC platform.

The Stellar network has three types of assets: Lumens, anchored, and non-anchored assets.

Lumen (XLM) is Stellar’s native token. 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. These assets 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. Think of PayPal as an example.

When you deposit fiat currency into your PayPal account, it becomes a token you can transfer in real time inside the PayPal network. You can also receive currencies from other users, withdraw them from PayPal, and send them 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)

Stellar developed the SCP  in 2015 to solve network performance issues. It implements the Federal Byzantine Agreement (FBA) protocol 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: Stellar)

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.

A quorum slice is created when a node in the Stellar network chooses trusted partners. Network nodes share information about trusted parties; a quorum slice is like one piece of such information.

Before a quorum can be reached, one node needs multiple quorum slices from other nodes. Nodes constantly vote, confirm transactions, and record them on the blockchain.

This is a difficult subject to explain in simple terms. The video above explains it, or you can read more on the website.

Investing in Stellar Lumens

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

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

  1. Transaction fees are so small that a standard user does not need to acquire a large amount of the native token. Even a couple of dollars worth of XLM is enough for thousands of transactions.
  2. Because of the previous point, the network would have to experience insane transaction demand 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 out of the market.

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

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

It isn’t easy to see how XLM would become a target for institutional investments. Smart contract platforms, metaverse tokens, and NFTs provide 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.

If you want to buy Stellar Lumens (XLM), this article provides step-by-step instructions: How To Buy Stellar (XLM).

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