What Is Stellar? Introduction To XLM

March 21, 2018

What Is Stellar? Essentially, Stellar (XLM) is an extremely fast settlement mechanism — a peer-to-peer cryptocurrency originally based on Ripple, founded and developed in early 2014 by Jed McCaleb, who helped start Ripple (XRP) but later found his differences with the board of Ripple Labs to be unworkable.

Stellar focuses on the peer-to-peer market and has seen a number of important partnerships arise, including IBM. Aside from technological changes that have differentiated it from Ripple in the years since its forking, this is the primary difference that needs to be understood when discussing Ripple and Stellar. Ripple Labs aims to facilitate transactions between large financial houses while Stellar would prefer to be a highly in-demand cryptocurrency for seamless payments between people and merchants.

Stellar facilitates near-instant payments between parties and its network includes “anchors,” which are trusted third-parties who help on-board network participants using traditional means like bank accounts and other fiat institutions. For example, partners like Mifos and Moni both work to create banking solutions using Stellar technology.

According to their website, the mission of the Stellar Development Foundation (SDF) is to promote global financial access, literacy, and inclusion – which is achieved through providing developers with the technology to create financial products and services for their communities.

What Are Stellar lumens?

Lumens are the native token of the blockchain, and there are a LOT of them. Right now there are over 18.5 billion orbiting the cryptocurrency sphere, of 103.78 billion available (see inflation, below).

They are distributed according to a charter:

  • 50% for distribution via the Direct Sign-up Program
  • 25% for distribution via the Partnership Program
  • 20% for distribution via the Bitcoin Program
  • 5% held by SDF to support operational costs

In the years between the divergence of XLM and RIpple (XRP), the technologies have differentiated themselves substantially enough to support two independent market capitalizations. At the time of writing, Stellar’s was over $3 billion, with a daily trading average of more than $24 million in volume and a token price of more than 20 cents. Some experts have forecast prices as high as $1 for Stellar in 2018.

Partnerships announced in the last months of 2017, such as with IBM, generated renewed interest in Stellar, taking the price from a steady $0.02 to as high as $0.85. (Yes, that’s right… pretty stellar performance!)

Another source of new interest was the announcement that major social media platform Kik would be using the Stellar blockchain, as opposed to the Ethereum one it originally planned to use, for its Kin cryptocurrency.  

Today’s figures represent a more than 5,000% increase from the earliest performance of Stellar lumens (XLM). Stellar sees the most gains on good news, such as the announcement of the IBM partnership as well as the Kin switch. The massive highs and new interest in cryptocurrency brought about in 2017 is unlikely to slow any, so news stories involving Stellar and its partners are likely to continue bumping interest, and therefore demand, for Stellar.

Stellar’s XLM Has Inflation

Very important to know for new investors: one of the key differentiators between Ripple and Stellar is that Stellar has a yearly 1% inflation rate. Coins added this way are distributed democratically, with nodes voting for who should receive them. This is why there are more lumens today than there were at genesis in 2014.

In order to vote for himself, however, a user must hold .05% or more of the lumens supply. A way that Stellar users have developed to get around this is by, in short, “interest pooling.” Everyone votes for a certain address, a portion of the weekly 1% inflation is delegated there, and then the voters take their share of the rewards. There are multiple pools which facilitate this, with XLMPool.com being among the largest.

Forked Off Ripple

Initially, Stellar’s code was similar enough to Ripple that it functioned in much the same way. Stellar made a number of changes to the way consensus is reached, and this caused a minor fork in the Stellar blockchain in December of 2014. Some techno drama ensued when Stellar co-founder Joyce Kim published a blog post claiming that the fork was the result of flaws in the Ripple Protocol. Kim wrote:

We […] believe it is caused by the innate weaknesses of the Ripple/Stellar consensus system […] compounded by the number of accounts in the network. […] Our monitoring of the network has made it clear that the underlying Ripple/Stellar consensus system is not performing at this level of scale, which is still small relative to the global financial system. In order for such protocols to perform at real-world levels with the expected degree of safety, this number of accounts should not be a problem.

In response, Ripple CTO Stefan Thomas wrote:

We have not reviewed Stellar’s modified version of Ripple consensus, but as far as the Ripple consensus algorithm is concerned, the protocol provides safety and fault tolerance assuming the validators are configured correctly.

Jed McCaleb

No explanation of Stellar is complete without an explanation of the important role played by Jed McCaleb, who also created the pre-torrent era (think Napster) peer-to-peer file-sharing program eDonkey2000. He built the first major Bitcoin exchange, Mt. Gox, and played a vital role in the development of Ripple.

As a co-creator, McCaleb was originally allocated 9 billion XRP, 9% of the 100 billion created. After some interpersonal conflicts at Ripple Labs, he and Joyce Kim left to found Stellar with backing from successful payment provider Stripe. More than one lawsuit was filed in relation to these 9 billion XRP, but McCaleb eventually won a settlement which permitted him his gains and vindicated his right to liquidate his holdings.

Stellar XLM Summary

  • Stellar, like Ripple, offers incredible transaction speeds — with settlements happening in as few as four seconds.
  • Both Stellar (XLM) and Ripple (XRP) were spearheaded by Jed McCaleb.
  • Stellar’s key differences are a small, controlled inflation rate and its intent (peer-to-peer as opposed to inter-institutional transactions).
  • All Bitcoin holders have been entitled to a portion of Stellar’s token supply.
  • Stellar has the backing of payment processor Stripe and has made important partnerships across industries.
  • Despite rocky beginnings fraught with interpersonal drama, Stellar today maintains a multi-billion dollar market capitalization and a comfortable per-token price.  

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