Blockchain Superstar: Will Stellar Lumens Take Off in 2023?
It has been years since Stellar shined in the crypto space, but find out how it's been cozying up to governments and financial institutions.
Updated Jul 1, 2022
Many companies on MoneyMade advertise with us. Opinions are our own, but compensation and in-depth research determine where and how companies may appear.
While blockchains fulfill many of our sci-fi fantasies, a decentralized network for instant payments isn't one of them. Making a network that satisfies the trilemma of decentralization, scalability, and security is ideal but perhaps too idealistic with our current capabilities. Some may argue that we set too high of standards for what blockchains should be so that they're incapable of doing the things we need them to do—mainly sending money anywhere over the internet instantly without an intermediary.
Stellar has made a lot of headway when it comes to institutional adoption and integrating their network with the traditional financial infrastructure, but the same can't be said of Stellar's consumer adoption.
Bitcoin gave us a secure decentralized currency network, but the main problem was that it couldn't efficiently handle transaction volume on a global scale. Another issue was that Bitcoin was volatile, but even stablecoins on Ethereum suffer through slow transaction speeds. The Stellar blockchain chose a different approach that didn't address the needs of users in spite of traditional finance, but rather embraced the existing monetary system so that anyone could access blockchain as a payment option.
What is Stellar?
What is Stellar?
Stellar is an open-source blockchain payment network for issuing and transferring tokenized assets. Stellar enables peer-to-peer asset transfers similar to Bitcoin except much faster since transactions are processed within five seconds. While Stellar's processing speed gives it an edge over other blockchains, what really sets it apart is that it's not secured through proof of work or proof of stake like most other blockchains, but rather uses a federated byzantine agreement system (FBAS) architecture.
Stellar's native asset is the Lumen (XLM) and it's used for creating Stellar crypto wallets and paying transaction fees. XLM can't be staked, since Stellar doesn't use a proof of stake consensus mechanism, nor can it be mined, so the only way to get some is by buying it from an exchange like Coinbase.
While the initial Lumens supply was 100 billion, the non-profit Stellar Development Foundation (SDF)—which provides technical support and forges institutional partnerships for Stellar—burned 55 billion Lumens valued at nearly $4.7 billion in late 2019. This left the Lumens supply at 50 billion, with about half of that currently in circulation. Despite this massive tokenomics change, there has been no significant impact on XLM's price action due to the SDF's selling pressure keeping it suppressed.
How Stellar works
How Stellar works
The main function of Stellar is to provide individuals and institutions with a more efficient way to send and receive transactions. There are a total of 49 nodes validating the Stellar network, but only 23 "top tier" nodes. Top tier nodes are full nodes operated by the SDF and six partner organizations tasked with keeping the blockchain in sync with network activity. Basic validators are computers that submit and validate transactions, but only full nodes are also responsible for publishing blockchain transaction history.
Anchors are organizations that Stellar relies on to serve as token issuers and fiat off- and on-ramps. In other words, anchors are companies and financial institutions that can issue stablecoins on Stellar or enable users to deposit and withdraw funds to and from Stellar. Users interact with anchors whenever they send money across borders or must convert between crypto and fiat currencies. The purpose of anchors is to connect Stellar with the traditional financial system to make blockchain payments accessible to all consumers.
Since Stellar lacks smart contracts and a substantial DeFi ecosystem, most of its utility is derived from anchors. Anchors that issue fiat- or commodity-backed stablecoins are audited to ensure that the tokens they issue are fully backed by the underlying asset. Anchors are also required to be fully compliant with laws, regulations, licensing obligations, and sanctions on top of their responsibility to run KYC checks. These stringent requirements ensure that only reliable and trustworthy anchors are permitted to issue stablecoins and provide services on Stellar.
Adoption of the Stellar network has mostly been driven by partnerships with payment processors and stablecoin issuers. For instance, the SDF partnered with international money transfer service MoneyGram and USDC stablecoin issuer Circle to establish the infrastructure for stablecoin-based money transfers using Stellar. Partnerships like this bring Stellar closer to its goal of being the cheapest and fastest way to send remittances and cross-border payments.
Stellar's partnership with Circle has been one of the most crucial since it introduced 160 million USDC to the network—an important first step for Stellar's stablecoin liquidity. The integration of Stellar to MoneyGram will also serve as an important step in onboarding users to Stellar's payment network. Additional partnerships with fintech firms like Stripe, Wirex, and Tala have also furthered Stellar's aim of being a top global payments facilitator.
Among Stellar's most important relationships are those with governments and banks around the globe. The SDF is at the forefront of developing central bank digital currencies (CBDCs), which are digital currencies officially issued by reserve banks and governments. The government of Ukraine will be the first to build its CBDC using the Stellar blockchain.
Additionally, the German bank BVDH decided to issue a Euro stablecoin on Stellar and the SDF has participated in discussions on cross-border payments with the International Monetary Fund. Partnerships like these suggest that Stellar could be the blockchain of choice for central banks, governments, and other international institutions for issuing currencies and transferring financial assets. However, it may be too soon to push Lumens into the bullish category in light of such adoption.
Problems with Stellar
Problems with Stellar
Stellar has made a lot of headway when it comes to institutional adoption and integrating its network with the traditional financial infrastructure, but the same can't be said of Stellar's consumer adoption, especially when it comes to existing crypto users. First, bullish sentiment for XLM has been all but non-existent among crypto investors over the last few years. This is largely because Stellar does very little to appeal to blockchain enthusiasts.
Stellar lacks many popular features that have recently given way to mainstream crypto adoption. Things like NFTs, DeFi, or native bridges that make blockchains interoperable with each other are absent from Stellar. This is mostly due to the lack of smart contracts, although implementation of them is alongside interoperability on Stellar's 2023 roadmap. However, the fact that these things have yet to be implemented since 2014 speaks volumes about where Stellar's priorities are.
XLM is the number 25 cryptocurrency by market capitalization, but this value has mostly been driven by institutions like governments, banks, corporations, and non-governmental organizations. Despite its position, Stellar's utility as a payment and remittance settlement layer is limited since it sacrifices decentralization for faster transaction speeds compared to other blockchains. While decentralization won't necessarily improve its function, there is an argument to be made that Stellar to provide better incentives for regular folks to secure the network.