What are Stellar Lumens?
In 2014, Stellar Lumens set out to narrow the gap between the cryptocurrencies and the financial worlds. Since then, Stellar cryptocurrency has taken on a string of partnerships with some of the biggest firms in tech and finance. The partnerships include IBM, Stripe, and Deloitte, as well as at least a dozen payment processors and financial institutions in European and Asian countries.
Stellar’s purpose is to become the world’s digital payment rail by connecting individuals, banks and payment systems. It enables you to transfer money to anyone, anywhere, fast and securely, with a cheap transaction cost. This fee alone may put Western Union out of the game.
Some argue that Stellar crypto began as a hard fork from the Ripple protocol. Interestingly, Jed McCaleb who founded Stellar Lumens coin, founded Ripple too. However, Jed McCaleb has said himself on his Twitter page that the two tokens have different codes and they ARE NOT A FORK.
If Stellar isn’t a Ripple fork, then what is it?
The main difference between the coins is that Stellar Lumens targets individuals, while Ripple targets financial institutions like some of the biggest banks globally.
To put it into perspective, Stellar’s target are everyday people. Ripple, on the other hand, targets some of the largest banks in the world, like Santander, Bank of America, and HSBC.
Another difference is the type of business behind the coins, as the Stellar Foundation is a non-profit organization so they receive tax exemptions, there are no shareholders, and no dividends — only salaries and expenses.
Stellar Lumens also uses a different protocol than Ripple, which we will explain more later.
The co-founder of Stellar Lumens, Jed McCaleb, also founded Ripple and Mt. Gox, but he left Ripple in 2015. The reason for his departure is difficult to say, as different sources give different information.
In a highly criticized, 15,000-word article in the New York Observer, the story was positioned to make it look like McCaleb was forced to leave because of his bad reputation following the Mt. Gox hack.
The Mt. Gox hack was the largest hack in cryptocurrency world up until this year when Coincheck was attacked for over a half a billion USD. The Mt. Gox hack cost users over $460 million worth of BTC.
At the time, Mt. Gox was the largest exchange in the world, and accounted for 70% of all BTC transactions. McCaleb had founded the website nearly a decade before the hack as a Magic: The Gathering online trading platform (Mt. Gox standing for Magic: The Gathering Online eXchange).
After the Mt. Gox Hack
After the hack, Wells Fargo suspended all accounts that had cleared funds for crypto firms, as well as those companies’ operating bank accounts, leaving company owners stranded. This included Ripple Labs account, which had a 20-year working relationship with the bank leading up to the closure.
Around that time, Ripple Labs CEO Chris Larsen was told that McCaleb should no longer be associated with the firm. Despite having left Ripple to stay on as a board member at that time, even his little involvement as a board member was a publicity crisis for Ripple due to his association with Mt. Gox.
After that, A LOT of drama ensued between Ripple’s CEO and McCaleb. At one point, McCaleb asked for Larsen’s departure which was turned to 5-1 board decision in favor of Larsen maintaining his position (the neigh vote was, of course, McCaleb). That request probably made for a weird exchange at the office’s coffee station.
Soon, McCaleb received help for Stellar Lumens through a 3-million-dollar investment from Stripe, which was an Irish-based payment-processor. Given the investments close proximity to Wells Fargo shutting down the Bitcoin taskforce, Stripe had to maintain public distance from Stellar due to its own relationship with Wells Fargo. However, now the partnership is in full force with public disclosure.
However, McCaleb had spoken with Coindesk to dismiss most of these claims. He noted the story published in the New York Observer was one-sided, and includes many false parts. One such point that McCaleb dismissed was the story’s focus on Stellar’s Executive Director, Joyce Kim, who left Ripple to work on Stellar with McCaleb.
The story made Kim look like McCaleb’s crony, and it alleged that Kim was given access to privileged conversations she shouldn’t have seen. As we said, though, a lot of the points in the New York Observer’s story were dismissed by McCaleb later on as he said the points seriously lacked right information and were filled with bias.
Despite the doubts of McCaleb’s reputation within the blockchain community, Stellar has gone on to become one of the most well-known cryptocurrencies, with partnerships from IBM and other tech giants.
Stellar’s development team is filled with industry leaders, including board members and advisors who are leaders at places such as Stanford University and WordPress.
How can Stellar Lumens be Used?
You can think of Stellar Lumens as Bitcoin’s faster, more scalable relative that doesn’t need mining. Lumens can be traded anywhere in just 3 to 5 seconds. This is ideal for cross-border payments. Worldwide, cheap and fast transactions from your mobile, tablet or desktop can be specifically useful if you are in an isolated location without access to banks.
With Stellar Lumens, you won’t need to deal with an expensive fee from firms like Western Union. This means that when you send or receive money from someone abroad, you won’t need to pay fees of 10% or 20%. Instead, you would pay about 0.00001 Lumens, which is really cheap.
Stellar has a built-in exchange on which you can trade coins such as Bitcoin, Ethereum, or Stellar’s own Repocoin. You can also trade Lumens on the exchange. Stellar’s exchange is beneficial if you aim to exchange XLM cryptocurrency to EUR (Euro), then give it to a friend money on a transfer site such as tempo.eu.com.
From January to August of 2017, Stellar faced the platform’s Initial Coin Offerings raise over 1.3 billion in those 8 months alone. ICOs like Mobius (which raised just under 40 million dollars) chose Stellar over more famous blockchains due to Stellar’s scalability and consensus protocol.
ICOs on the Stellar Lumens platform is customizable and can include a variety of features- including the infamous Lightning Network. The customization for ICOs is extended to a number of behaviors, including escrows, issuing dividends, bonds, inflation, and collateralized debt.
How do Transactions Work?
Stellar Lumens can process up to 1,000 transactions per second, at a fraction of a penny each. The fee is usually used to prevent the network from experiencing attacks. You can send cross-border payments to anywhere worldwide using Lumens.
Unlike Bitcoin, Stellar does not use Proof of Work, instead, it uses what is named the Stellar Consensus Protocol (SCP). Stellar’s SCP enables payments to be made quickly and securely.
Additionally, Stellar’s SCP code enables Lumens to be used without any mining is necessary for operation. Some argue that without mining, Stellar Lumens is less decentralized and less secure than Bitcoin is. However, Stellar has nodes all over the world. Therefore, some consider it to be semi-centralized.
Acquiring Stellar Lumens coins without mining, you’d have to buy them from a crypto exchange. The best exchanges to do this, by popular opinion, are Coinbase and Simplex. While Simplex isn’t really an exchange, it enables you to buy Stellar coins with a credit or debit card, in a fast and secure way.
Once bought, it is recommended that you store the coins in a safe and reliable crypto wallet – the Ledger Nano S is the go-to option for most people.
Beyond the current value of the coin itself, there are some other exciting directions that Stellar will move in, in the short term.
The Potential of Stellar
Stellar Lumens is specifically useful in the South Pacific, where it is expected to be responsible for 60% of cross-border payments in the retail exchange corridor. Stellar and IBM are bringing banking infrastructure to some of the most isolated islands in the world, which do not have access to the financial services that some of us might be used to – opening a bank account for little or no money.
This part of the world was selected because it fell outside of major trading corridors and includes a mix of developing and mature economies, ranging from global power Australia to Vanuatu. The initiative is new, so it may expand outside of the area when it gets more footing. IBM is using Lumens to power this initiative. It may be the first of many.
Renewable energy is another potential way Stellar Lumens may grow in the coming years. Currently, Irene Energy is holding a crowdsale on Stellar’s internal exchange. Irene uses blockchain and artificial intelligence to enable users to choose which energy producer they’d like to receive energy from… and choices include your neighbor.
You can think of it as Tinder for energy sources — you can choose which source is the best for you. Irene Energy is also developing tools that allow a futuristic level of transparency in energy supply chains.
As the blockchain world is ready for more fiat-to-crypto trading pairs, Stellar Lumens can be at the forefront. For instance, using the Ugandan Schilling to purchase the XLM equivalent. FairX, a mysterious upcoming crypto exchange currently operating in stealth, will be powered by Stellar’s network. The firm will bring the one bringing trading pairs to Stellar’s network.
Pitfalls of Stellar
Stellar’s potential can be limited if faith is lost in the management team; the development team holds the rest of the coins that will be distributed in the future. Say, if the cofounder, Jared McCaleb, ends up in another lawsuit such as the ones he found himself in after he tried to dump his Ripple coins upon leaving the company. If faith is lost in McCaleb, it is bad news for Stellar Lumens.
Another area of concern is the size of Stellar’s team, which consists of only 10 employees, 3 board members, and 8 advisors. However, to soothe concerns about the size of the team, it is comprised of industry leaders and experts. Such as the founders of WordPress and Angelist, the CEO of Stripe, and the President of Y Combinator.
Again, this team includes the person who founded Mt. Gox, which oversaw a 460-million-dollar hack. However, his reputation within tech has landed him support from some of the best minds within the blockchain and technology communities.
Despite the fact that he founded Mt. Gox, McCaleb and his team marches forward, and his reputation improves gradually. And to McCaleb’s credit, he probably had no control over the attack despite being associated with it as a founder of the site. He didn’t even operate the site when the attack happened.
Fortunately, Stellar’s site and internal exchange have never been hacked.
Are Stellar Lumens Secure?
Stellar Lumens has a nearly clean security history. The exchange and Stellar network have never experienced any hacks. However, there was one instance where Lumens were taken from an online wallet website, but that was beyond Stellar’s control; it was a flaw in the wallet, not in Stellar’s.
The very small fee for Stellar transactions (again, less than one penny) is used to prevent what is known as Denial of Service (DDoS) attacks. These types of attacks happen when servers are flooded. So, by charging a small fee, overloading the system becomes too expensive for attackers to accomplish.
Stellar is secure enough to be used right at this moment as a part of IBM’s global blockchain initiative. This fact shows its level of security.
Can Stellar be Abused?
With more and more regulations being released, abusing the cryptosystem is becoming more difficult. Just like any other token or currency, abuses can happen within the system. Insider trading, financial fraud, laundering, and asset hiding can take place using cryptocurrencies such as Stellar Lumens.
Nothing in particular about Lumens stands out to make it particularly vulnerable to attacks. But almost all cryptos can be abused in some way.