The Stellar network is an open-source, decentralized payment protocol that facilitates inexpensive cross-border trades between crypto and fiat currencies. Lumens (XLM) is its native coin.
Keep reading to learn more about why Stellar and XLM might interest investors.
How Does Stellar Lumens (XLM) Work?
Currently, investors who want to exchange various cryptocurrencies for established fiat currencies (e.g. the dollar, euro, yen) typically run into a lengthy and expensive process.
Stellar has created a semi-decentralized consensus platform which facilitates the exchange of major fiat currencies such as the USD, GBP, EUR, and others with crypto and other assets. Financial transactions are typically executed between two and five seconds, with thousands of transactions processed each second.
The native token of Stellar, Lumens (XLM), is used to power these cross-border transactions of both tokens and money. In this way, Stellar shares similarities with the Ripple XRP Ledger (and its cryptocurrency XRP), which is also meant to provide a protocol for payment providers and financial institutions.
Stellar vs. Ripple
Stellar was co-founded in 2014 by Jed McCaleb — who also co-founded Ripple, the global payment and exchange network — to make those trades faster, cheaper, and more accessible.
While some say that Stellar was a fork of Ripple, McCaleb has stated that it’s not. Stellar Lumens (XLM) runs on its own code. And unlike Ripple (XRP), Stellar is focused on providing payment, remittance, and exchange options for individuals rather than institutions
The Proprietary Stellar Consensus Protocol (SCP)
Like most cryptocurrencies, XLM uses a blockchain-based technology, and so the transactions on the Stellar network are kept on a distributed public ledger, which can be accessed by anyone around the globe. Consensus within that shared public ledger is where Stellar differs from many other forms of cryptocurrency, such as Bitcoin. Bitcoin uses what’s probably the most popular way to reach consensus on a blockchain, called proof-of-work (PoW).
But the Stellar network takes a different approach, by distributing the consensus function to mini-networks — called the Stellar Consensus Protocol (SCP). Each Stellar network participant, or node, chooses other participants they trust. And the consensus of each mini-network functions for the overall Stellar network. By relying on mini-networks rather than mining (sometimes called proof-of-work or PoW), Stellar’s consensus method has a shorter approval or validation cycle, which results in less-expensive transactions.
The idea is anyone using a service powered by Stellar could transfer everything from traditional currencies to tokens representing new and existing assets. These assets can then be traded between users (across borders) with less friction using its cryptocurrency, the Lumen (XLM).
Advantages and Disadvantages of Stellar Lumens (XLM)
With its focus on making global payments more accessible for ordinary and unbanked consumers, Stellar Lumens (XLM) has a few pros and cons investors should consider.
Thanks to its proprietary consensus mechanism, Stellar Lumens has faster, cheaper transaction speeds, and transactions typically cost less than a penny. This is a significant advantage over other global payment companies which charge higher fees.
One of the ways that Stellar can create a faster exchange network without sacrificing stability and security is through its use of anchors. Anchors are financial institutions that act as on/off ramps that facilitate the exchange of different currencies.
Most recently, the platform announced that in 2022 Stellar would begin to offer smart contracts, which seems like a natural extension of Stellar’s basic m.o. to create affordable financial transactions. As noted on the SDF blog: “Since the Stellar network was built for the future of payments, it’s critical that smart contracts on Stellar are secure for users and can scale without exorbitant network fees. If done right, this could set smart contracts on Stellar apart from the rest.”
Although the vision of Stellar Lumens is certainly promising, the platform and crypto do have some downsides — especially the relatively low value of XLM. Some speculate that Stellar is more focused on growing its network and services, and less on the value of its coin.
Whether or not that’s true, it might be necessary to focus on developing and expanding Stellar’s features and offerings in order to stave off competitors like Ripple (XRP), Ethereum, and others.
Last, XLM does not offer investors a lot of opportunity in terms of volume and liquidity.
• Proprietary consensus system supports faster, cheaper transactions.
• XLM has a relatively low value.
• Network of anchors supports interoperability among currencies.
• Competitive global payments environment.
• Plans to allow the creation of smart contracts in 2022.
• Low volume and liquidity make it difficult to trade.
Who Created Stellar Lumens (XLM)?
Stellar is operated by the Stellar Development Foundation (SDF), a nonprofit organization founded by Jed McCaleb and others. The Stellar project also received initial funding from a number of financial institutions and payment companies. Stellar Lumens was launched in 2014.
McCaleb also founded the now-defunct Bitcoin exchange, Mt Gox, and designed the Ripple (XRP) Ledger, a global payment alternative for financial institutions. Other contributors to XLM’s ecosystem include: David Mazieres, a creator of the Stellar consensus protocol; Denelle Dixon, the SDF’s Executive Director and CEO; Joyce Kim, founder of Stellar and former Executive Director of the SDF.
Why Does Stellar Lumens (XLM) Have Value?
The primary value of the Stellar project is its focus on global currency interoperability for payments, remittances, and other forms of exchange. In today’s climate, for the most part, the payment landscape is highly regionalized. Different geographic regions have their own payment systems (e.g. ACH, SPEI, SEPA) and they are not interoperable.
Stellar, by contrast, has created a system whereby the world’s currencies can be represented in the form of digital fiat tokens on a decentralized ledger where they can freely interoperate. In other words, currencies not only can interoperate with each other, but also among the crypto wallets and apps that leverage the Stellar network.
A Limited Supply
Stellar Lumens was launched with 100 billion XLM, but the supply was halved when 50% was burned by the Stellar Development Foundation, in response to community opinion. The total supply is now about 50 billion, with close to half that currently in circulation, as of Feb. 23, 2022.
In addition to its finite supply, XLM has value thanks to being used as fuel for transactions on the network. A small amount of lumens, 100 stroops (0.00001 XLM) – a fraction of a penny – are deducted as fees whenever a transaction is made.
Price of Stellar Lumens (XLM)
As of February 23, 2022, Stellar is the 31rst largest crypto, with a market capitalization of $4.62 billion. There are roughly 24.9 billion Lumen coins in circulation, with a maximum supply of 50 billion.
Why Use Stellar Lumens (XLM)?
Lumens are the tokens of the Stellar network, used to send money and assets and exchange currencies. Lumens allow a user to send one currency that arrives as a different currency for the receiver. Typically this process requires that a given transaction might transition through a number of currencies, seamlessly.
The Stellar Network does this by seeing if the currency pair swap is available. If not, it can look for a demand for the initial currency from a Lumens holder; once it’s acquired the Lumens, it can search for a pair of Lumens and the desired currency. This process is made possible by so-called anchors within the Stellar network.
Anchors facilitate the exchange of currency within the network by being able to hold a deposit as well as issuing the credit in a different currency. Due to all the anchors being on the same network this process is incredibly fast.
Does Stellar Lumens (XLM) Have Staking?
No. At the moment Stellar Lumens uses a form of consensus verification that is similar to proof-of-stake, but currently investors cannot stake XLM.
Stellar does not operate using a proof-of-work system either, so new coins are not mined. Unlike the tokens of other blockchains, Lumens aren’t mined or awarded by the protocol over time. Instead, the supply of XLM is set at about 50 billion and no new coins will be created.
Stellar Lumens (XLM) is a digital currency that is similar to Ripple (XRP), both being created by Jed McCaleb, and both focused on making global payments more efficient, affordable, and accessible. That said, Stellar Lumens is geared toward helping individuals transfer money, rather than institutions — specifically overcoming long transaction times and high fees for cross-border transactions.
Given the partnerships the Stellar Lumens platform has seen with companies like IBM, their mission seems to have gained some traction, and the network has continued to grow. But the XLM coin itself seems limited to its role as the native form of payment on the Stellar network. Lumens themselves have not yet gained widespread acceptance in either the retail space or on crypto exchanges.