What Is Stellar Lumens (XLM) Used For?

What Is Stellar Lumens (XLM)?

Stellar’s cryptocurrency, the Stellar Lumen (XLM), powers the Stellar payment network. As a cross-border transfer and payment system that connects financial entities, Stellar aims to unite the world’s financial infrastructure, connecting banks, payment systems, and individuals with near-instant and secure transfers.

If the Internet connected the world’s computers to enable the free global flow of information, Stellar aims to do the same for money. To accomplish this vision while maintaining neutrality, Stellar is not set up as a bank or a business. Instead it’s a decentralized, open network that is supported by a nonprofit foundation called the Stellar Development Foundation (or SDF, for short).

The network’s native token, lumens, serves as a bridge that makes it less expensive to trade assets across borders. All of this aims to challenge existing payment providers, who often charge high fees for a similar service.

If all of this sounds familiar, it is worth noting that Stellar was originally based on the Ripple Labs protocol. The blockchain was created as a result of hard fork, and the code was subsequently rewritten.

How Does Stellar Work?

At the lowest level, Stellar is a system for tracking ownership. Like accountants have for centuries, it uses a ledger to do so, but Stellar’s innovation is that there is no actual accountant. Instead there’s a network of independent computers each checking and rechecking the work of the others. Stellar is a system without a central authority—meaning no one can stop the network or secretly adjust the numbers to his liking—yet even without a central authority the ledgers are verified and updated, every five seconds.

A unique algorithm, called the Stellar Consensus Protocol (SCP), keeps everything in sync. There are many ways to get agreement across a decentralized system—Bitcoin’s visionary proof-of-work method was the first and is still the most famous. But, like many first drafts, proof-of-work left room for improvement. SCP strives to be better by being configurable, fast, and highly energy efficient. If you’re interested in the deep details, you can read the peer-reviewed paper, published by SOSP, the oldest and most prestigious systems conference, for complete technical details.

For every account holder, Stellar’s ledger stores two important things: what they own (account balances, like “100 pesos tokens” or “5000 lumens”) and what they want to do with what they own (operations, like “sell 10 dollar tokens for 50 lumens” or “send 100 peso tokens to such-and-such account”.) Every five seconds, all the balances and all the operations are broadcast to the entire network and resolved.

The computers that run the core Stellar software and therefore publish and check the ledger are called nodes. So, when you send someone a euro token on a Stellar-built app, the nodes check that the correct balances were debited and credited, and each node makes sure every other node sees and agrees to the transaction. The current Stellar network is verified by hundreds of nodes across the globe; the nodes and how they communicate is public information, and anyone can install the Stellar software and join the consensus process. This is different than how accounting works at, say, a bank, where a single corporation unilaterally decides what happens, more or less in secret.

Right above this core layer sits a powerful API so that to build on Stellar you don’t have to understand the particulars of distributed consensus. Simple, well-documented functions allow you to move new digital money using models that you’re used to. It’s very easy to trade tokens between accounts, make markets, and issue assets.

Understanding Stellar Cryptocurrency

Cryptocurrencies are digital or virtual currencies that were developed for trading on decentralized networks called blockchains. Doing so ensured they couldn’t be counterfeited like regular currencies. It also prevented them from being double-spent.

Unlike fiat money, cryptocurrencies aren’t issued by central banks, which means governments don’t interfere in their trading activity. A variety of cryptocurrencies popped up following the success of Bitcoin—created in 2009—including the lumen.

As mentioned above, the lumen is Stellar’s cryptocurrency. There are roughly 22.5 billion coins in circulation, with a maximum supply of 50 billion.3 The Stellar Foundation originally had over 100 billion lumens in existence but burned roughly half of its outstanding coins in November 2019.4 The move caused a short-term rise in the price of XLM, though the rally quickly faded. Coin burns are controversial because they imply the kind of manipulation that decentralized systems are supposed to protect against.

Although the value of Stellar’s lumen dropped by more than two-thirds as of May 2020, it is still one of the best performing altcoins, taking the 11th spot on CoinMarketCap.3 The coin’s market capitalization was around $8.3 billion as of March 25, 2021.

Who Builds On Stellar?

For end-users, Stellar is a fast, efficient network for trading, saving, and spending digital money. For builders, it’s open financial infrastructure. Anyone can access it; there’s no permission or application needed. That basket of currency tokens we just mentioned, those are on the network, ready to use. We have euros, bitcoins, dollars, Mexican pesos, Argentinian pesos, Brazilian reais, and Nigerian naira. Their respective issuers handle deposit, redemption, and compliance, so builders can focus on end-user experience. This same openness also applies to the token layer: a financial institution can issue new digital tokens to fill a market need, say, for the Swiss Franc, without joining a proprietary “association” or dealing with a gatekeeper. The total power of Stellar grows with each new company and developer. See our robust SDKs and documentation to get started with your own wallet, app, or token.

The ongoing development of the basic Stellar technology is guided and supported by the Stellar Development Foundation, a non-profit company based in the U.S. The Foundation helps maintain Stellar’s codebase, supports the engineering and business communities around Stellar, and is a speaking partner to regulators and institutions. The Foundation has no shareholders, so it can be purely dedicated to the success of Stellar as a neutral, equitable, and public network. 

Transparency is a tenet of the network. Stellar’s code is open-source and available to anyone’s audit or contribution. Many of SDF’s current employees were first inspired to get involved with the technology in their free time or for their own projects.

The Power Of Stellar

Stellar is an open, interoperable payment and currency system. Below, we explain a few of Stellar’s powerful features—asset issuance, the network’s distributed order books, and the path-payments system—that will enhance and simplify any fintech product.

Can I Mine Or Stake XLM?

Unlike many popular cryptocurrencies, XLM cannot be mined or staked to receive rewards and increase the asset’s supply. While Stellar works like technologies like Bitcoin, its key distinguishing feature is its consensus protocol. The present-day Stellar is a result of a 2014 fork that created the Stellar Consensus Protocol (SCP) following which Stellar became an open-source system. Under this protocol, the transaction authentication process is confined to a select set of trustworthy nodes rather than being left open to the whole network of nodes.

Instead of being mined by proof of work, Stellar is secured by a unique blockchain mechanism called the Stellar Consensus Protocol (SCP).

Side-By-Side Comparison Of XRP And XLM

Ripple and Stellar are both useful when transferring money across borders. But the two still have some substantial differences, even if they were both created by the same person. Here’s a comparison of these two options.
 
FEATURE                                                                   XRP                                                                                                                               XLM
Formation
2012
2014
Founder
Jed McCaleb
Jed McCaleb
General Purpose
To transfer funds between borders
To transfer funds between borders
Accessibility
For banks and other professional institutions
To the general public
What Influences the Value?
Deflation
Inflation
Maximum Available Supply
100 billion
50 billion
Who Is it Distributed To?
Mostly controlled by the founders
The public hold a vast majority of it
 

What Makes XRP or XLM Different?

 
Accessibility
Both platforms have an interesting background. Jed McCaleb co-founded Ripple in 2012 as a platform designed for banks to access. But in 2014, McCaleb co-formed Stellar to focus on providing an open approach to banking. The method of operation that Ripple and Stellar use are similar, but it is the difference in accessibility that stands out.
Stellar is an open-source platform, meaning anyone can access the system. But Ripple requires people to receive permission to use it, meaning only banks and other financial groups can use the blockchain.
 
Inflation and Deflation
XRP is a deflationary currency, meaning the purchasing power of the currency will likely increase as time goes on, due to its increasing scarcity. This is because XRP’s transaction fees are burned, or permanently removed from circulation. Meanwhile, Stellar has a fixed annual inflation rate of 1 percent. The inflation helps ensure people who can access XLM can continue to receive a decent value for the currency as inflation progresses worldwide.
 
Distributed Points
XLM was distributed to the public upon release, with more than 90 percent of the currency going to the public. At least half of the XRP tokens are owned by the currency’s founders. They are aiming to regulate the XLM system and ensure its continued functionality..

What Makes XRP and XLM Similar?

 
Coin Limits
Both XRP and XLM have limits to how many coins are available. Mining is not available for either cryptocurrency, as all coins available are already minted. XRP features a maximum supply of 100 billion coins, while XLM has 50 billion. About half of each is in circulation as of October 2021.
 
Fees
The two networks also feature little to no fees. The minimal transaction fees points to each cryptocurrency’s intended purpose: to help people transfer fiat currencies securely, with minimal cost. Transaction costs are consistently lower than equivalent fiat currencies.
 
Transaction Time
The transaction time for each currency is relatively minimal. It takes about five to ten seconds to complete a transaction. The design helps people transfer funds quickly, which is better than what people get out of traditional bank transfers.

Key Features And Takeaways Of Stellar

Stellar, like Ripple, and so many other cryptocurrencies, operate as decentralised payment systems which depend on consensus mechanisms to process transactions. Stellar, as one of the top 100 cryptocurrencies in the industry has the following features and takeaways:

The Stellar Consensus Protocol (SCP) is the proprietary consensus mechanism used for transaction authentications, confined to selected nodes, rather than being subjected to the entire blockchain and all participants.

Transactions on Stellar are considered as approved once it is authenticated by nodes who are representatives of specific groups. This approach shortens the approval cycle, and it is one of the many reasons that Stellar can boast with fast transaction speeds.

Stellar is especially used by developed economies who are limited and even restricted to banking services. Stellar allows these users to send and receive payments in some currencies such as EUR, USD, and GBP.

Stellar is widely known for its ability to support exchanges between cryptocurrencies as well as fiat currencies.

Stellar aims to combat poverty around the globe and to subsequently increase financial access.

How To Buy Stellar Lumens

The purpose of buying Stellar lumens is really to access the Stellar network. You can purchase these tokens on major cryptocurrency exchanges, including Coinbase, Kraken, Binance, and Bittrex. You can also purchase lumens on Stellar’s native exchange, Lobstr.

Wallets

Cryptocurrency wallets are usually required to store the private key required to access your Stellar lumens or any other form of cryptocurrency. You have several options when looking for a wallet to store your lumens, including hardware wallets like Ledger and Trezor, downloadable wallets like Keybase, Solar Wallet, and Lobstr, and online wallets like Coinbase.

Transaction Times

Cryptocurrencies often require a certain number of confirmations on their blockchain technology before a transaction can be processed. Many currencies require dozens of confirmations and can take several minutes or several hours to process. Stellar transactions can be processed almost instantly, and some exchanges such as Coinbase rely on only one confirmation.

Fees And Expenses 

Each cryptocurrency exchange charges its own fees, and the amount you pay will depend on the exchange where you purchase your lumens. There’s also a fee to use the Stellar network, with a minimum fee of 0.0001 lumens per transaction.

Other Ways To Invest In Stellar Lumens

Another way to gain exposure to Stellar lumens in your portfolio is to invest in the Grayscale Stellar Lumens Trust. When you invest in a Grayscale trust, you’re investing in a security whose value is derived from Stellar lumens without buying or storing the lumens yourself.

Pros And Cons

 

Transaction Fees

 

Should You Buy Stellar?

There are many opportunities for Stellar in future, however, there are also some challenges such as competition with key players such as Ripple and several other platforms that work according to the same agenda.

What makes Stellar unique is the type of services that it offers specially to people in countries where there is limited access to financial services and systems. The speed with which Stellar processes transactions is another point that counts in its favour, with potential for this to increase.

While most other projects aim to provide benefits to corporations and large businesses, Stellar has a more noble goal in mind in creating an inclusive digital economy, thus serving individuals, which may earn it significant loyalty points in the long-term.

In addition, Stellar also has partnerships with existing organisations, helping increase adoption and spread use cases more rapidly. One of the largest partnerships that Stellar has, is with IBM and IBM has recently signed 6 banks to issue stablecoins which are based on XLM, opening a new world for Stellar and ensuring a lot of room for further growth.

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