Stellar Lumens (XLM) began as a side chain when the CTO of Ripple, Jed McCaleb, left the company in 2013 to build a new blockchain with a modified version of the code developed to build XRP. After making significant changes to the handling of transactions and distribution of tokens XLM entered the market with distinct functional and philosophical differences from XRP. While XLM has become a unique currency from its origins it is impossible to fully understand XLM without also examining XRP. The divisions that caused McCaleb to leave Ripple has over the years developed in to a fierce competition for supporters and market share in overlapping arenas.
The start of Stellar Lumens begins with a revolutionary experiment in decentralized computation that became the cryptocurrencies supported by Ripple Labs and eventually XRP. The currency utilized Practical Byzantine Fault Tolerance (PBFT) that has validators to resolve transactions. The validators operate much like the Block Producers (BPs) in EOS. The development of PBFT allowed for much faster transaction processing with dramatically lower energy consumption than mining. McCaleb saw what he considered a critical fault in the logic behind PBFT tied to the philosophical differences that lead to his departure from Ripple Labs. The fundamental change that lead to the differences of XLM and XRP was his changes of PBFT to Stellar Consensus Protocol (SCP) which increased the decentralization of PBFT by utilizing open node formation. Ripple has a closed node system for validating transactions that only supports validators approved by Ripple Labs. XLM allows node formation where “clans” known as quorum slices form to validate transactions. Any holder of XLM can form a node and a quorum slice to become unpaid validators of the cryptocurrency. With the development of SCP to validate transactions XLM became a fully independent cryptocurrency that was more than a fork of XRP but a unique currency.
SCP is designed to support the Ferderated Byzantine Agreement System (FBAS). It is a new approach to consensus. A Federated Byzantine Agreement (FBA) allows the formation of clans of validators called a Federation. A quorum slice is a set of voluntarily associated nodes large enough to satisfy the Byzantine agreement. FBA provides decentralization by supporting open membership to validators of the Byzantine Agreement. The ledger consensus, Quorum, is formed from individual trusted quorum slice decisions as they are validated by all trusted nodes. The various quorum slices update the ledger forming consensus every 2 to 5 seconds. Additionally, each node may have different trusted nodes forming an overlap of separate quorum slices that validate transactions. The other nodes validating transaction will also have an array of trusted nodes including different quorum slices. In this manner consensus is formed across the network. The two hop rule applied to crypto validation.
This differentiation was more than a change in the code, it was a change in philosophical methods to dominate the market of transactional use of cryptocurrency by consumers. While Ripple Labs is attempting to develop a replacement for the SWIFT system to resolve international / national banking transactions XLM is attempting to bring banking solutions to under represented markets. Bank the Unbanked. Ideally XLM hopes to provide a currency for markets that require banking services in emerging or disparate economies. Such economies are exemplified by areas with undeveloped financial infrastructure. It is important to understand Ripple and XRP are not the same thing. Ripple the company and the currency banks are using to resolve transactions between banks is not XRP. The success of Ripple as a banking system with X-Rapid and X-Current are not tied to the success of XRP. They are separate products offered by the same company. XRP rather than Ripple’s other products is competing with XLM for consumer use as a currency. The chief difference is XRP is deflationary decreasing in circulation, but providing profit for validators. This contrasts the circulation of XLM which is inflationary, but provides no incentive to validators. Nodes can validate their own transactions much like running a full node on Bitcoin, Litecoin, or Monero, but without mining. The ability to form nodes to satisfy the Byzantine Agreement anywhere is the incentive to form or join quorum slices. The Federated Byzantine Agreement and the SCP protocol are discussed in more detail later in this piece.
The philosophical differences that McCaleb had with David Schwartz was ultimately view of who the customer is. McCaleb’s vision was a nonprofit that provided financial services to underrepresented markets. This is exemplified by the formation of Stellar as a nonprofit organization. McCaleb is motivated by the utility of cryptocurrency over a profit motive to create a transactional currency. Let’s not paint McCaleb as the Mother Teresa of crypto, he left Ripple Labs with over 9 Billion XRP and was also the founder of Mt. Gox. Anyone familiar with the Mt. Gox fiasco is aware of the huge damage that it continues to reign down on the crypto market because of the largest crypto hack to date. McCaleb, however, has produced a top 10 currency that is apparently altruistic in its goals. He has the money now to live well beyond comfortably and still produce this project. I don’t want make him out as the crypto boogy man, but truthfully the Mt. Gox Hack was devastating to the market, and McCaleb was left well off after his work with Ripple Labs.
Despite being developed for consumer banking major corporations including IBM are adopting the use of XLM and supporting the infrastructure to resolve transactions. While XLM is far behind XRP in adoption by financial institutions it is gaining traction and support.
The following list are some of the supporters of XLM:
- Shift Markets
- Partnership with stripe
- Australian government
- Partnership with Deloitte for affordable payments
- Smartlands partners with Colliers International
- The Pioneer.app partnership
This information is all to support the use case for XLM. Taking the consensus model from XRP and allowing anyone to become a node is something that a lot of other cryptocurrencies could take a harder look at. It allows for decentralization while providing the speed and efficiency to realistically process transactions. Alternatively anyone who can support the hardware requirements and run EOSIO can become a BP, but only the top twenty resolve blocks with one random BP. EOS or Telos have also produced robust systems of Byzantine Fault Tolerance with their own critical views and arguments against dPoS. That is what it really comes down to in crypto, in a worse case scenario what will continue the network’s viability and allow transactions to continue processing. Rather than getting paid for processing transactions Stellar nodes support the network to ensure transactions can be processed through the system of overlapping trust regardless of the available nodes. The only requirement is a ⅔ consensus of available trusted nodes is reached. The most impressive aspect of the SCP protocol is the fault tolerance. Let’s say the great firewall of China isolates the XLM holders in China from the rest of the world. Two separate chains would grow causing a fork, but transactions would continue. The available nodes would continue to achieve ⅔ consensus and validate transactions from available nodes. Each fork would obtain ⅔ consensus from the remaining nodes. If the forks recover once the chains regain communication transactions would pause as Quorum is restored or a fork of the chains may occur. This is impressive fault tolerance.
I have written a number of pieces where I challenge the future of mined currencies because they are just not efficient enough to support the transaction rates required to be widely used currencies for commerce. Let’s consider, for the sake of argument,mined currencies are M2, semi transactable instruments, due to the slow transaction rates. XML, XRP, EOS, TRX, ect are all competing for their place as M1, fully transactable currencies. The speed of transaction resolution makes FBA a realistic alternative to mined currencies for general transactions. These currencies are all battling for dominance as a replacement for fiat in the digital domain. It is difficult to compare SCP and dPoS because they really accomplish different tasks with Byzantine Fault Tolerance, but the idea of a system that would allow nodes to join to become block producers is intriguing. Dan Larimer contends that voting for BPs is essentially the same, but that’s not entirely true. This agreement comes down to the nuts and bolts of the technology. Stellar was designed as a payment system while EOS and Tron are application platforms that enable transactions across a decentralized network. The dPoS protocol supports the construction of intellectual properties that can be monetized. SCP can have dApps written in python but it is currently not the primary use of the protocol.
So it really comes down to transactions per second (tps).
XLM stands at 1,000 tps but 4,000 tps has been achieved. Honestly, a very respectable transaction rate, but not the best by any means. XRP stands at 1,500 tps with a similar logical ceiling. TRX is currently processing 1,200 tps but has hit 2,000 tps and claims 10,000 tps is possible. It’s ceiling is currently similar to EOS’ current rate at 2,000 tps with the ceiling currently unknown for EOS. The number to beat is Visa at 20,000 tps which seems theoretically possible for EOS, but the current use rates don’t support the investment in infrastructure. Amazon currently supports about 650 tps so any currency attempting to corner that market or a similar market would have to support the available overhead of those transactions over the trading levels. Incidentally, the trading levels would probably increase precipitously if an organization like Amazon were to begin accepting cryptocurrency. These are realistic considerations if crypto is to break the next glass ceiling, commerce.
Dan Larimer pointed out that diversity in ideas is the power of cryptocurrency he also found that people couldn’t vote for 100 BPs reliably with Steem. I’ve considered one of the barriers to widespread adoption is the fact that people have too many choices. Some catalyst will have to consolidate efforts to decouple the market from Bitcoin. Some coin will have to gain dominance in circulation and transactions to beat Bitcoin. There is a need to reduce the volatility or at least the uniformity of the volatility of the crypto market as well. Additionally, one currency will have to become transnational with a low barrier to entry for widespread use to occur. More people have to have spending cash in their wallets rather than investments in cryptocurrency to create commerce. I tend to envision a market where Bitcoin is more like a CD or savings account while one of these BFA currencies are used as a digital currency.
This brings me to the last point I wanted to cover in this piece about Stellar.
Transaction Type: Payment
Amount: 40,987,588.71 XRP
Fee: 12 drops (0.000012 XRP)
Sender Balance: 131,004,258.994122
Receiver Balance: 69,689,385.871455
This followed a transfer in August of 2.1 billion XRP transferred to the same address…
STATUS: This transaction was successful, and validated in ledger 41128558 on August 28, 2018 8:17 PM UTC.
DESCRIPTION: This is a Payment transaction.
The payment is from rHYTJDFrbCU1i2yCENTg9yjUrHHGaYTB4D to r93oSNBKuFjuKt8GxhF8VYaGzzwsNDPaX5
It was instructed to deliver 2,139,999,979 XRP.
The actual amount delivered was 2,139,999,979 XRP
The transaction’s sequence number is 5
It is currently unknown why the payments occurred. They could have been part of McCaleb’s severance package or some OTC trade of Mt Gox assets that don’t crash the crypto market, but it could be something more. It is known that McCaleb is heavily invested in XRP from his prior work as CTO of Ripple Labs, and possibly some consolidation of ideas is occurring, but I doubt it. In any case, the transactions are curious and unknown data points.
I wrote about a transaction in a previous piece where $2.3 billion USD moved in two transactions that occurred less than 3 minutes apart to an unknown address. The transactions took less than 3 seconds apiece to validate.
Any cryptocurrency could complete OTC transactions like these making almost any crypto an immensely powerful financial tool. The last piece is mass adoption where people are not HODLERS but those that are actually engaging in commerce with cryptocurrency. Transactions on gaming sites are just not going to cut it, people have got to buy goods and services with crypto to really mainstream the technology. The community needs an “Amazon” for crypto. Really any of these currencies would work, but one currency will have to dominate the market before others will enter the market. I like aspects of any of the currencies mentioned in this piece. Any cryptocurrency would work better than what we have now, but a sizable user base will have to form around an accepted currency for general use to begin.
I would like to finish this piece with a glowing support for XLM, but it’s a good crypto idea needing a use case. I like many aspects of the currency without any issues. It’s selling the transaction speed, but EOS and TRX are faster. Banking the unbanked is what crypto does but an easy portal to XLM from fiat is needed. Possibly a wallet that accepts ATM Visa cards directly. The real barrier to accomplishing these goals are Governments and KYC regulations. Governments will have to accept crypto as currencies rather that bending regulations to make them securities are investment instruments. I see some gains in this arena but they absolutely do not want to give up control on the monopoly of money. Low cost transactions are available from EOS, TRX, and XRP as well. The most interesting aspect of the currency is the SCP protocol. I quite like how SCP handles transactions with nodes. The open node is perhaps the most important aspect of XLM. The philanthropic idea of providing currency for the unbanked is also quite interesting. It is a true philanthropy that provides a means for people to gain banking services in under developed financial environments and a framework for a community to support the currency without a large capital investment. It is only lacking a cash to XLM portal. It remains to be seen how the currency finds utility, and that will remain until a cash to crypto to cash portal exists.
I can easily see XLM becoming a successful currency in wide use, but a use case or financial partnership is required to build a market for any currency as spending money. Additionally the price is attractive to me and relatively stable. XLM is in the top 10 currencies with a good reputation and a small but solid development team. XLM could be a store of value over time especially at the current price. Overall XLM is a sound project with good fundamentals. I will, however, qualify this statement with the fact that I’m not a financial expert and any reader should consult a professional or do their own research before investing in any of currencies mentioned in this piece.
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How to buy, sell or trade Stellar Lumens (XLM)
If you live in the US, you won’t find a cryptocurrency exchange offering Stellar Lumens for direct purchase.