Stellar is an interesting project with roots in Ripple. Stellar has established itself as a top 20 project in the cryptocurrency market. It is a proper payment protocol, which aims to solve global money transfer issues. This is the Stellar Lumens beginner’s guide. We will present you with the history, technology, and future potential of Stellar Lumens. We hope you enjoy reading our Stellar Lumens review!
Stellar Lumens Beginner’s Guide – the overview
Let’s begin by placing Stellar Lumens in the correct cryptocurrency category. It will help you understand the big picture and 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 are all P2P digital cash with very few other functions.
Ethereum is the most famous platform. This is a category of projects, which are also described as ecosystems, framework, 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 these platforms. The most popular one is Ethereum, hence, almost all popular tokens are running on the Ethereum platform. Tokens are usually either governance or utility tokens. They have a use case inside a specific application. Aave, Chainlink, and Basic Attention Token to name a few.
Stellar Lumens doesn’t naturally fit any of these categories. It is somewhere in-between currencies and platforms. It is a platform, but it doesn’t compete directly with Ethereum and other platforms. Stellar is all about making swift and cheap global payments.
The one clear competitor for Stellar is Ripple’s XRP. Especially now, when Stellar is moving more and more towards the banking sector.
A good example of Stellar use case is the IBM World Wire framework. This is a payment system built by IBM, which is using the Stellar blockchain for storing the transactions. See the video below for more information.
Next, 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 but Stellar Lumens instead.
The purpose of the XLM token is the same as it is on other platforms. Lumens are used to transfer value and pay for transactions.
Stellar has roots in Ripple
The history of Stellar Lumens begins in 2014 when Jed McCaleb founded the Stellar foundation to develop the Stellar protocol. McCaleb is a famous character in the crypto scene 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.
The story of Mt. Gox ended in 2014 when the exchange was hacked, and it lost over 800,000 bitcoins. Many investors are still waiting to get part of their lost funds from the bankruptcy. Though, McCaleb wasn’t running Mt. Gox at the time, since he had sold the exchange earlier to one Mark Karpeles.
Check the podcast below if you want to learn more about McCaleb’s history in the scene.
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, who is currently the main man of Ripple. XRP token was created in 2013. Both Larsen and McCaleb received 9,5 billion XRP tokens each. McCaleb still owns (Dec. 2020) about half of this amount.
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 Ripple XRP protocol is open source, just like Bitcoin and all other major cryptocurrencies as well. This means that anyone can use the code and make their own version. This is what McCaleb did with Stellar in the beginning and what Charlie Lee (Litecoin) had done with Bitcoin.
Things changed in 2015 when the usage of the Stellar network started to grow. This lead to the collapse of the consensus protocol of the network and nodes couldn’t agree on the consensus anymore. Stellar argued this was a vulnerability in the XRP Ledger program code, but Ripple never agreed.
In any case, Stellar decided to build its own consensus protocol. They brought in Professor David Mazieres, who published the SCP (Stellar Consensus Protocol) in 2015. This is an implementation of the FBA – Federated Byzantine Agreement.
The history of XLM
The Stellar Lumens token (XLM) was one of the top 10 cryptocurrencies at the peak of the 2017/2018 rally. The price of XLM went up thousands of percentages following the rise of XRP. These two tokens have had pumps and dumps simultaneously in history, which is probably not a coincidence.
The crypto winter of 2018 saw XLM lose ground to other altcoins. It was kicked out of the top 10, but XLM has remained a solid top 20 cryptocurrency.
Stellar has also tried to boost the token price with some extraordinary measures. Stellar foundation burnt about 55 billion tokens in 2019, about half of all XLM ever issued. 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 Jan. 2017 to Dec. 2020.
Due to the previously mentioned token burn, there are now only 50 billion XLM tokens in existence. About 22 billion of them are in circulation (Dec. 2020), which means the Stellar foundation is still holding a bit chunk of XLM.
In the summer of 2019, Stellar development foundation hired Denelle Dixon as the leader. This started a new direction for Stellar. It has stepped more and more into Ripple’s territory by approaching banks and other major global institutions.
There is a big debate going on about central bank digital currencies (CDBC) at the moment. Stellar wants a piece of this pie by aiming to be the platform of such currencies. More of this later.
Stellar is a fast payment protocol
Since Stellar is practically a fork of Ripple’s XRP Ledger, it has quite similar features. This is a proper payment protocol, which can transfer any currency around the world in a matter of seconds.
The Stellar network consists of nodes, which are servers running the Stellar Lumens software. This is how basically all cryptocurrencies are run. In Stellar, these nodes are also called validators, since there are no miners. Validators are the ones confirming transactions and finding consensus.
Since the transaction fees are exceedingly small, there is no financial incentive to run a Stellar node. This also means the number of nodes is significantly smaller compared to bigger networks. There are a couple of hundred nodes in the Stellar network, which are mostly run by partners or the Stellar foundation.
The major selling point of Stellar is that it can move both crypto and fiat currencies lightning fast. A new block is created every few seconds, which means transactions are almost done in real-time. The network can handle thousands of transactions per second (TPS).
Below is a picture showing how a USD is converted to an asset in the Stellar Network.
You could maybe compare this system to PayPal or Skrill. When you are using PayPal, you make a deposit from the legacy banking system to your PayPal account. After this, it’s easy and fast to move your funds inside PayPal’s own network from one user to another.
In Stellar, there are entities called anchors. These are the financial institutions enabling fiat money deposits. After this, your funds will become credits in the Stellar network. They can be transferred quickly to a Stellar wallet and converted to different currencies.
This is where the Stellar Lumens come into the picture. XLM is used to pay all transaction fees. These fees are so minimal they are basically zero. The purpose of these tiny fees is to prevent network spam.
You can also create smart contracts and distributed apps on the Stellar Network. It has also other features, which Bitcoin doesn’t have. If a transaction is sent to the wrong person, it can be frozen. Such features also mean that the Stellar Network is not truly a decentralized one.
The 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 replace the one used by Ripple.
You’ll find a very useful video below describing this protocol.
As it’s mentioned in the video, SCP is an implementation of the Federated Byzantine Agreement, FBA, algorithm. There are quite significant changes compared to the FBA implementations used by Ripple and Hyperledger.
The major difference is that Ripple and Hyperledger are using pre-defined trusted validators. In the Stellar solution, validators can choose their selves who to trust.
In theory, this 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.
When a node in the Stellar network is choosing trusted partners, something called 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.
Stellar is reaching for bank partnerships
Stellar Lumens really hit the mainstream in 2017. This is when everyone heard about their partnership with IBM. For a long time, most investors knew nothing else of Stellar except that it has partnered with IBM.
Below is a short video of the subject.
Since 2019, Stellar has changed its focus from “regular companies” to financial institutions. It is quite interesting because Stellar’s main rival, Ripple, has always been operating in this sector. This shift in focus placing Stellar and Ripple even more against each other.
As mentioned in the history chapter, Stellar has been run since 2019 by Denelle Dixon. She published a popular blog post in the summer of 2019 and told the investors where Stellar is headed.
This development has continued further in 2020. Dixon has represented Stellar in several different financial conferences and built contacts with banks. The deal with Elliptic is also in this category. It is a blockchain analytics company, which monitors transactions in the Stellar network.
We're excited to announce our exclusive partnership with @elliptic.
The world's first #Stellar transaction monitoring system is live today to empower businesses on our network.
Check out the news: https://t.co/iktGI3SNRw
— Stellar (@StellarOrg) April 30, 2020
The Elliptic deal is all about making Stellar a good partner from the KYC/AML point of view. This would make it possible for Stellar to become a platform for CBDCs. This is what Denelle Dixon said in the spring of 2020 at Consensus distributed:
“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 also a pretty good CV for becoming a CDBC platform. There are already several fiat currencies issued on the Stellar platform. It was also recently published, that popular stablecoin USDC will launch in the Stellar network in 2021. According to the news article, Stellar is even named “The Official Chain of USDC”.
In December 2020, Ukraine’s government chose Stellar as the blockchain platform to build a new CBDC!
Time will tell how Stellar will succeed in this sector. Follow the key events from the Stellar blog.
Investing in Stellar Lumens
As mentioned above, the focus swift of Stellar is placing it more and more as a competitor against Ripple. How do these two differ from each other?
Ripple has its focus on the RippleNet product. This is a closed network, where banks are transferring information between each other. XRP token is not really needed here at all. It’s the native token of the public XRP Ledger.
It was recently revealed in a news article, that Ripple’s XRP Ledger is not moving much value. About 98 percent of the network transactions are empty. This is not the case with Stellar. Stellar is using just one public network for all transactions. The XLM token is also part of every transaction (fees). The consensus algorithm used by Stellar makes the network also more decentralized.
Below is a video comparing these two projects.
Whether you are interested in Ripple or Stellar, the big question is: how the price of the native token is going to develop? This is where you need to ask some serious questions.
It is clear to everyone, that massive price spikes in 2017, 2018, and 2020 have had nothing to do with real-world adoption or technological advances. XRP and XLM have also seen big price moves simultaneously, which is a bit odd. These tokens have absolutely no links in terms of the value proposition.
These massive price rises have been also followed by big dumps. Such moves are often a result of price manipulation by market whales. There are three major questions when it comes to the price of XRP and XLM.
- The transaction fees are close to zero. This means that it’d take an insanely large amount of network traffic to increase the token price.
- There is no staking in the consensus protocol, which would create natural demand and locking the token out of the market.
- The founders still hold large amounts of the token.
You can compare this set-up to Ethereum, which had the 2.0 version launch recently. Millions of ETH tokens have been staked in less than two months already. Cardano, Tezos, and other PoS platforms have over half of the circulating supply locked in staking.
The average transaction fees in Ethereum are in dollars or even in the 10-20$ range. When whales are moving funds between DeFi apps, they pay sometimes 100$ or even 1000$ for one transaction. This is worth hundreds of millions of XLM transactions.
An investor should ask: what needs to happen for the token price to go up organically? What events would require hundreds or thousands of participants to lock XLM out of the market? How to get real demand for this token?
Stellar Lumens price and how to buy XLM
Coinbase is the market-leading option for newcomers and amateurs. If you want an easy way to purchase XLM, we recommend using Coinbase.
More experienced users should go to Binance, which has the best liquidity and more trading tools 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 a desktop wallet from Stellar.org, which is easy to use.
Images: Stellar Foundation