Stellar Lumens Definition, History & Future

Stellar is a decentralized network that aims to connect the world’s financial systems and enable fast and low-cost cross-border payments. Stellar’s native cryptocurrency, called the lumen (XLM), powers the network and serves as a bridge currency for transactions between different currencies. Stellar also allows users to create, send, and trade various types of digital assets on its platform. In this article, we will explore the history, features, challenges, and future of Stellar and its cryptocurrency.

History of Stellar

Stellar was created in 2014 by Jed McCaleb, a co-founder of Ripple, and Joyce Kim, a former lawyer and entrepreneur. They founded the Stellar Development Foundation (SDF), a non-profit organization that oversees the development and governance of the Stellar network. The SDF’s mission is to unlock human potential by creating equitable access to the global financial system¹.

Stellar was initially based on the Ripple protocol, but later forked and developed its own consensus algorithm, called the Stellar Consensus Protocol (SCP). SCP is a variant of the Federated Byzantine Agreement (FBA), which allows nodes to choose their own trusted validators and reach agreement without relying on a central authority.

Stellar launched its native cryptocurrency, the lumen, in 2015. Lumens are used to pay transaction fees and account initialization fees on the network. They also act as an intermediate currency for cross-currency conversions. Lumens are distributed by the SDF through various programs, such as direct grants, partnerships, airdrops, and community initiatives.

Stellar has partnered with various organizations and companies to promote its network and use cases. Some notable examples are IBM, which uses Stellar to power its World Wire payment service; MoneyGram, which integrates Stellar into its remittance platform; and Grayscale, which offers a trust product for investors who want to gain exposure to lumens.²

Concerns About Stellar

Despite its achievements and potential, Stellar also faces some challenges and risks. Some of them are:

• Competition: Stellar competes with other blockchain platforms that offer similar solutions for cross-border payments and asset issuance, such as Ripple, Ethereum, Cardano, Solana, etc. Stellar needs to differentiate itself from its rivals and maintain its market share and adoption³.
• Regulation: Stellar operates in a highly regulated industry that involves money transmission, securities, and anti-money laundering laws. Stellar needs to comply with the relevant regulations in different jurisdictions and avoid legal disputes or sanctions that could harm its reputation or operations.
• Security: Stellar relies on cryptography and distributed ledger technology to secure its network and transactions. However, there is always a possibility of cyberattacks, hacking, or bugs that could compromise the network or user funds. Stellar needs to ensure its network security and resilience against potential threats.
• Scalability: Stellar claims to process up to 1,000 transactions per second (TPS) with an average confirmation time of 5 seconds. However, as the network grows and more users join, Stellar may face scalability issues that could affect its performance or user experience. Stellar needs to improve its scalability and efficiency without sacrificing security or decentralization.

Stellar Essentials

Stellar has some unique features and characteristics that make it stand out from other blockchain platforms. Some of them are:

• Anchors: Anchors are entities that issue digital tokens that represent fiat currencies or other assets on the Stellar network. Anchors act as bridges between the traditional financial system and the Stellar network. Users can deposit or withdraw their assets with anchors using various methods, such as bank transfers, credit cards, mobile money, etc.
• Path Payments: Path payments are transactions that involve multiple hops and currency conversions on the Stellar network. Path payments allow users to send one currency and receive another currency at the best available rate. Path payments also enable users to send payments to recipients who do not have accounts on the network or do not hold the desired currency.
• Decentralized Exchange: The Stellar network has a built-in decentralized exchange (DEX) that allows users to trade any pair of assets issued on the network. The DEX uses an order book system that matches buy and sell orders based on price and quantity. The DEX also supports atomic swaps, which are instant and trustless exchanges of assets without intermediaries.
• Smart Contracts: The Stellar network supports simple smart contracts that can execute predefined logic based on certain conditions or triggers. Smart contracts on Stellar are expressed as sequences of operations that can be composed into complex transactions. Smart contracts on Stellar are limited by design to ensure security and scalability.

The Future of Stellar

Stellar has a vision to become a global payment network that connects people, businesses, and institutions across borders and currencies. To achieve this vision, Stellar has some plans and goals for the future. Some of them are:

• Stellar Quest: Stellar Quest is a series of challenges and tasks that aim to educate and engage developers and users on the Stellar network. Participants can learn about the network’s features and functionalities, as well as earn rewards in lumens or other prizes.
• Stellar Community Fund: The Stellar Community Fund (SCF) is a grant program that funds projects and initiatives that contribute to the growth and development of the Stellar ecosystem. The SCF is open to anyone who has an idea or a proposal that aligns with Stellar’s mission and values.
• Stellar Upgrade Protocol: The Stellar Upgrade Protocol (SUP) is a process that allows the network to implement changes and improvements without disrupting the existing operations. The SUP involves proposing, voting, testing, and activating new protocol versions that introduce new features or fix issues.
• Stellar Roadmap: The Stellar roadmap is a document that outlines the strategic direction and priorities of the SDF and the Stellar network. The roadmap covers various aspects, such as network development, ecosystem support, user adoption, regulatory engagement, etc.

What Is XLM Cryptocurrency?

XLM is the ticker symbol for lumens, the native cryptocurrency of the Stellar network. Lumens have several functions and use cases on the network, such as:

• Transaction Fees: Lumens are used to pay transaction fees on the network. Each transaction costs 0.00001 XLM, which is equivalent to $0.000001157 as of September 9, 2023. Transaction fees are collected by validators and redistributed to inflation pools or burned.
• Account Initialization: Lumens are used to initialize accounts on the network. Each account requires a minimum balance of 1 XLM, which is equivalent to $0.1157 as of September 9, 2023. Account initialization ensures that accounts are legitimate and prevents spam or abuse.
• Bridge Currency: Lumens are used as a bridge currency for cross-currency conversions on the network. Lumens facilitate path payments and asset exchanges by providing liquidity and reducing friction.
• Incentive Mechanism: Lumens are used as an incentive mechanism for users and developers to participate in the network and its ecosystem. Lumens can be earned by completing quests, winning grants, running validators, creating applications, etc.

Stellar vs Ripple

Stellar and Ripple are two blockchain platforms that share some similarities and differences. Both platforms aim to provide fast and low-cost cross-border payments and asset issuance. Both platforms use FBA-based consensus algorithms that allow nodes to choose their own validators. Both platforms have native cryptocurrencies that serve as bridge currencies and transaction fees.

Aspect	Stellar (XLM)	Ripple (XRP)
Purpose	Designed for facilitating cross-border payments and tokenization of assets.	Designed for enabling fast and cost-effective cross-border payments and settlement of financial transactions.
Founders	Jed McCaleb and Joyce Kim	Chris Larsen and Jed McCaleb
Launch Date	2014	2012
Consensus Algorithm	Stellar Consensus Protocol (SCP)	Ripple Protocol Consensus Algorithm (RPCA)
Supply	Initially 100 billion XLM, with yearly inflation.	Initially 100 billion XRP, with no mining/inflation.
Governance	Stellar Development Foundation (SDF)	Ripple Labs (formerly OpenCoin)
Use Cases	Cross-border payments, remittances, asset tokenization, ICOs.	Cross-border payments, real-time settlement, enterprise solutions.
Partnerships	IBM, Deloitte, KPMG, Stripe, and many more.	Santander, American Express, MoneyGram, Standard Chartered, and more.
Technology	Open-source, decentralized, modular architecture.	Proprietary, centralized, permissioned network.
Network Speed	High throughput, capable of processing thousands of transactions per second.	High throughput, capable of processing thousands of transactions per second.
Transaction Cost	Low transaction fees, often fractions of a cent.	Low transaction fees, can vary depending on usage.
Regulatory Status	Generally well-received by regulators due to its focus on compliance and transparency.	Has faced regulatory challenges due to its close association with XRP and Ripple Labs.
Market Capitalization	Varies over time, typically among the top cryptocurrencies by market cap.	Varies over time, typically among the top cryptocurrencies by market cap.
Price Volatility	Relatively stable compared to many cryptocurrencies.	Can be more volatile due to various factors.
Decentralization	Aims to be more decentralized with multiple validators and community involvement.	Critics argue that it’s less decentralized due to the control exerted by Ripple Labs.
Smart Contracts	Supports smart contracts through Stellar Smart Contracts (SSC).	Limited smart contract functionality through XRP Ledger’s features.
Interoperability	Designed to be interoperable with other blockchains and financial systems.	Focused on its own network and interoperability with banks and financial institutions.
Token Distribution	Conducted several airdrops and partnerships to distribute XLM.	Majority of XRP held by Ripple Labs and subject to escrow agreements.
Notable Achievements	IBM World Wire uses Stellar for cross-border payments.	RippleNet has over 300 financial institutions as members.
Recent Developments	Developments in cross-border payment partnerships and tokenization of assets.	Focus on improving liquidity and expanding its network.
Community Support	Strong community support and active development.	Active community, but some controversy due to centralized nature.
Future Plans	Focus on financial inclusion, cross-border payments, and decentralized finance (DeFi).	Continued partnerships with financial institutions and promoting real-time settlement.

However, there are also some key differences between Stellar and Ripple. Some of them are:

• Target Audience: Stellar targets individuals, especially those in developing countries who lack access to traditional financial services. Ripple targets institutions, especially banks and payment providers who want to improve their existing systems.
• Distribution Model: Stellar distributes its lumens through various programs that involve direct grants, partnerships, airdrops, and community initiatives. Ripple sells its XRP through over-the-counter (OTC) deals or programmatic sales on exchanges.
• Governance Model: Stellar is governed by the SDF, a non-profit organization that operates independently from any entity or interest group. Ripple is governed by Ripple Labs, a for-profit company that owns a large stake of XRP and has significant influence over the network.
• Technical Features: Stellar supports simple smart contracts that can execute predefined logic based on certain conditions or triggers. Ripple does not support smart contracts natively, but relies on third-party solutions such as Flare Network or Codius. Stellar has a built-in DEX that allows users to trade any pair of assets issued on the network. Ripple does not have a DEX, but relies on third-party platforms such as Bitstamp or GateHub.

Advantages Stellar Has Over Ripple

Based on the comparison above, Stellar has some advantages over Ripple in terms of:

• Social Impact: Stellar has a more inclusive and altruistic vision than Ripple. Stellar aims to create equitable access to the global financial system for everyone, regardless of their location or status. Stellar also supports various social causes and initiatives through its grant programs and partnerships.
• User Empowerment: Stellar gives more power and control to its users than Ripple. Stellar allows users to choose their own validators and trust levels on the network. Stellar also allows users to create, send, and trade any type of digital asset on its platform.
• Innovation Potential: Stellar has more room for innovation than Ripple. Stellar supports simple smart contracts that can enable new possibilities for Web3 and DeFi applications. Stellar also has a built-in DEX that can foster a vibrant and diverse marketplace for digital assets.

Bottom Line

Stellar is a promising blockchain platform that offers a fast and low-cost solution for cross-border payments and asset issuance. Stellar has a strong social impact, user empowerment, and innovation potential that give it an edge over its competitor, Ripple. Stellar also has a native cryptocurrency, the lumen, that serves as a bridge currency and an incentive mechanism on the network. Stellar faces some challenges and risks, such as competition, regulation, security, and scalability, but it also has some plans and goals to overcome them and achieve its vision. Stellar is worth exploring and investing in for anyone who is interested in the future of global finance.

1. Messari. Stripe ↩︎
2. IBM. IBM Blockchain World Wire ↩︎
3. CoinMarketCap. Coin Info ↩︎