What Looms for Stellar’s Lumens

Stellar is not a darling of the Crypto space but I am not political or emotional about any project. I just want a good project to throw my weight behind and I have to say, Stellar is looking pretty good right now.

Whenever I dive deep into a project, I like to understand what the project is trying to achieve. Is there even a demand for it? I also look at the team behind the project, their relevant experience and background. This is not easy in the Crypto space; a lot of teams are anonymous but this is a necessary step for any investor. The next most important fact is the tokenomics behind the project, this ultimately gives it value. So why am I excited about Stellar?

I am going to start with what Stellar is trying to achieve. If I think of this simply, the life of the unbanked globally is very expensive and intermediaries are making a killing. Usher in Stellar and the Lumens. Stellar is a cheaper, more efficient way to transfer money globally in a decentralised manner. In many ways this feels like an oversimplification of what Stellar does. So let’s go a little deeper.

Let’s say you want to send $50 to Argentina and you need the recipient to receive US Dollars rather than Pesos. Well, traditionally you will use Western Union or Moneygram, etc. They would normally payout in Pesos and we all know how inflationary developing country currencies can be. The sender normally can pay as much as $3 for that transaction. Okay, so Stellar is in many ways a DEX (Decentralised exchange), on this DEX intermediaries called Anchors can create Dollar Tethers (Stable coins pegged 1:1 to any currency). The Lumens are used as a Bridge asset and for transaction fees. Let’s say you wanted to send $100 to Brazil and the recipient wished to receive USD as opposed to Real. Then you will need to locate an Anchor that has a USD tether, send the USD to that Anchor’s wallet where the recipient can keep these US Dollars till he wishes to withdraw to local currency. Alternatively, you can send $100 to an Anchor with a Peso Tether and withdraw those Peso immediately to your bank account or if your Anchor gives cash this can be done too.

Okay, there are some fees involved because intermediaries are not completely eliminated but if we take for example Cowrie, a Nigerian money transfer company, that has a Naira Tether charges 0.06% for its transactions on Stellar and even has its own USD denominated debit card. The transfer of digital assets is not the only thing done on Stellar, take Smartlands; anyone can transform an asset into digital form to raise funds. A construction company in South Africa can digitise its shares and issue them via a Stellar Anchor and raise funds for their business. Here we see the use of blockchain technology in real world applications.

Now that we understand the use cases of Stellar and the problem it is trying to solve, let’s look at the team behind Stellar. Stellar has an impressive team behind it. Jed Mcaleb founder of Ripple, former employee of Pantera Capital, the VC’s behind Coinbase, 1INCH, Brave, Balancer, Circle to name a few. There is also David Mazieres, Professor of computer science at Stanford and founder of Intrinsic that he sold to VMWare and a host of other talented developers and software engineers. What also caught my eye was the fact that Stripe was an early investor in Stellar and that got me thinking about Stellar’s ability to take on the international online shopping space and interestingly Wyre is a service provider on Stellar. That’s just some food for thought when we think of what the future of Stellar could look like.

So we have an idea about the team and the use case. What about tokenomics? I have deliberately sidestepped the Stellar consensus protocol but to give a quick overview think of the consensus model like Facebook or some other social media platform where my immediate friends are the most trusted. So let’s say me and my first 20 friends form a group that Stellar calls “quorum slices”. Then let’s say those 20 friends, first 10 friends, form another quorum slice. So to some degree we can agree that this immediate circle can be trusted to keep a true and accurate ledger and reach consensus on this but since we are all friends we could collude to some degree or disagree on the true state of the ledger, so to ensure that this does not occur. I can take 5 friends from a quorum slice outside of my close network and add them to mine, this creates balance, so the chances I am going to convince those 5 people to join in my collusion are slim and when this gets replicated across multiple quorum slices, the chances of a 51% attack occurring is even more remote. Consensus is reached every 2 to 5 seconds, so transactions in the ledger are constantly being updated and agreed upon increasing speed of transactions. This is the basic version of the Stellar consensus protocol but there is always the Whitepaper if you wish to go deeper.

Let’s get back to the tokenomics. 100 billion XLM (Lumens) were premined and 55 billion Lumens were burned in 2019, a community decision. This means Stellar’s supply has been cut in half and there is no intention to produce anymore Lumens. Stellar is a bridge asset and every Stellar account needs a base amount of Lumens to run. So with adoption the demand for Stellar will keep rising. In 2017 Stellar had 279,000 accounts, today they have 5.4m accounts with roughly 50,000 active daily accounts. So when we think about this it is hard to argue the potential that Stellar brings to the table.

After this deep dive, I have a few questions about Stellar. It’s an awesome project but we have to be critical as well. It can’t be all roses.

Stellar clearly understands the needs of the developing world and has a noble mission to support the unbanked but let’s face it, the unbanked don’t trust banks and intermediaries and Stellar requires an Anchor, an intermediary. This means that fees will still be a big part of the network and intermediaries still play a major role, not great for a project that is pushing peer to peer transactions. This poses questions around mass adoption. I do however believe Stellar is realising this and is thus moving to court the very institutions it is trying to cut out. Could this be a case of a John Hancock type super hero? Do bad to do good. Time will tell.

I am also thinking about how closely Stellar’s blockchain resembles Ripple and if anything the consensus protocol could be a decentralised fork of Ripple. If this is the case Stellar has perhaps put itself in the crosshair of a much more capable competitor. That said, Ripple is still bugged down in the legal tussle with the SEC, so it is hard to tell how much of a threat Ripple is to Stellar’s growth for now.

All put into perspective Stellar is an awesome project. The technology is sound and battle tested in the real world. The Ecosystem is growing with multiple use cases and more growth potential. The team is impressive and possesses both the experience and technical skill to give this project longevity. Despite some of the questions I have this is a great project for me and my portfolio. I don’t expect the same wild growth like some Crypto projects in DeFi but Stellar is in a niche that is practical and has shown to be a sustainable growth sector. So I will definitely be hedging my bets on Stellar for the future.