by talks_about_stuff
Hi guys, I’ve invested in crypto and been following many blockchain companies since October of last year. There are a few things I’d like to say today more so now than ever; since many newcomers joining the sub will inadvertently see a lot of inadequate explanations or straight up misinformation about Stellar. I rode the highs and lows of Stellar and also did quite a bit of buying and selling; but one thing that stayed consistent is my continued efforts to research the company and its technology. I’ve also started building a project with a friend that will function on the Stellar Network but that’s a topic for another day.
Now on to the main issues I’m here to discuss. There are generally a number of question types that I see come up over and over again about Stellar and many times the answers are very confusing and misleading. I’ve given many individual responses but I thought making a post about it would get more exposure and set some things straight (if only the simple questions I’m capable of answering). Some of these will just be copypastas of my responses to other people’s questions or comments.
Isn’t Stellar a fork of Ripple?
Probably one of the most asked questions, and the answer is a bit more complicated than a simple yes or no. Stellar was based on the Ripple Protocol when Jed Mccaleb first departed from Ripple and founded Stellar. It started out as a fork from Ripple with a few modifications. However after code review by Dr.
David Mazieres of Stanford, many critical flaws were discovered and with his help (and many other contributors), the Protocol was completely redesigned, and became what is known as the Stellar Consensus Protocol. Stellar has been perfecting and growing its codebase of many major programming languages ever since. Stellar or Ripple? Will one wipe out the other?
This is another one I see a lot of discussions about. A lot of people in this sub seem to have the “us or them” mentality, and it’s similar in the Ripple sub. Truth is, if we analyze the historical charts we find that Stellar and Ripple have followed very similar patterns during most price movements, save from a few very big news announcements that affected them individually. This really shows most of the traders (and bots) who drive the price movements associate the two together, if one does well so must the other, and vice versa.
At this point many of us know Stellar and Ripple are indeed very different, whether it’s their consensus protocol or the companies’ missions and target consumers. We are at an early stage of adoption of crypto and the distributed ledger technology, and there will be many casualties along the way as indirect results of newer technologies replacing them and taking their market share. But so far, most of the ones that do fail are due to questionable fundamentals and shady dealings, not so much from the technologies being outdated, since in a sea of open sourced goldmines and talented developers, technological inferiority can be remedied.
The competition between different crypto startups is what propels the technologies forward, this doesn’t just apply to Stellar and Ripple, because many of the cryptocurrencies have a similar end goal, which is becoming the store of value currencies that have the most network utilization. For companies like Stellar and Ripple that go after one of the biggest sectors – financial industry, there is more than enough pie for everyone. Centralization, what it means and how much of it applies to Stellar.
It’s funny how carelessly the word “centralization” gets tossed around to make an argument in crypto these days.
Centralization of trust in the financial world can be either two things – centralized ledger and/or supply. Having a centralized ledger is what traditional banking is all about. A bank will have all your digital records of your savings and investments etc. on their internal ledgers. Although they have redundancies to prevent loss of data, customers are still placing trust in just one institution, hence centralization. Because the ledger is not distributed by banks, they only need to keep a fraction of the total customer savings liquid to accommodate withdrawals. While showing you a full balance on your digital records/online banking, banks will actually double-spend most of your saving and loan/invest it to make interest.
If you ever tried to clean out your savings account in one go, you’d realize how hard banks will try to preserve their liquidity, because they are leveraging their customers’ money to make money for themselves. Even Ripple is better than the traditional banking system in that sense because their ledger for the most part is public. Stellar has a publicly distributed ledger for all assets that move on the stellar ledger, it is as transparent as any other digital currency on DLT. Now about centralized currency supply.
Every fiat currency issued by governing bodies is centralized in terms of its supply, which means monetary policies can directly influence its value and purchasing power. Prime example – The Federal Reserve prints USD when the US government doesn’t have enough money to pay for its treasury bonds that mature, in return for more IOU’s in the form of bonds, and it contributes to the growing debt, while devaluing the US dollar us citizens hold in our hands. They are silently robbing us of our purchasing power and it can’t really be helped until most of us see through this Systemic Violence known as Quantitative Easing. So how is Stellar any different since it also holds and issues all of its XLM right? While Ripple owns all of XRP supply and can sell them to financial institutions for a profit, Stellar does NOT own most of the XLM except for 5% of the total supply.
The rest of the XLM is used as an incentive for adoption and granted to new participants of the network – Developers, Liquidity Anchors and Partners that all contribute to growth of the Stellar Network. The 5% Stellar does own is liquidated gradually to fund Stellar’s continued operations. A lot of critics of Stellar will point out that while all of this is true, participants of the network still has to place trust in the Stellar Foundation in the sense that they will not mismanage the funds and cause a market meltdown whether due to human error or malicious intent. This is not a concern of mine but a valid concern nonetheless for people who know much less about the company. But just remember, being a non-profit organization that’s also in the cryptocurrency space and provides financial service instruments in the US places Stellar under a lot of scrutiny. There are exceptions like the Church of Scientology that blackmails and strong-arms legislators and judicial branch into leaving them alone (clarifying for argument’s sake), but for the most part Stellar welcomes transparency if it’ll help them earn your trust. All of their SDK’s are open source and dev friendly. Stellar is built upon compliance and is in the crypto game for the long haul.
If the Stellar Network is so cheap to use, and SDF is a non-profit, then they don’t really have a good profit model, why should I invest in XLM as it’s been proven time and time again that impact investing doesn’t bode well for investors?
Since Stellar Network only collects a tiny fraction of 1 XLM for each transaction (1/100,000th XLM per TX), some people might suggest that XLM liquidity is not needed to make transactions work, and they are not wrong. For tokenized assets on the Stellar Network, i.e. MOBI, SLT, RMT, TLU, etc. even though they are stored on Stellar addresses, to move those assets you do not need to hold much XLM, since the TX’s are virtually free and the minimum balance requirements to add each trustline is only 0.5 XLM.
But for most people, Stellar will become more than just a bridge currency but rather a store of value since it is the base currency for exchange for all other assets tokenized on the Stellar ledger. As the network use cases expand we will also see more liquidity anchors like SatoshiPay using XLM for transactions directly for their customers instead of creating another Stellar token, because it saves them the hassle of adding trustlines on each account for that new token and raising the base reserve requirements, when it’s easier to just use XLM.
Let’s say a stock brokerage decides to incorporate Stellar’s technology into their back end to enable feeless P2P Stock trading on an open Ledger. Each stock/bond/ETF etc. a customer holds requires 0.5 XLM base reserve. A relatively small stock brokerage with only 1 million customers and 15-20 assets on average per person will need tens of millions of XLM not counting the XLM required to represent each customer’s base balance that they trade with, then we are looking at hundreds of millions of XLM required for liquidity just for this small exchange. Now there’s a valid point that XLM is subject to more volatility from speculative trading and a tokenized Stablecoin on Stellar Network backed by USD or Gold for instance makes more sense for financial institutions that want to protect their customers from volatility swings. This definitely holds true at the early adoption stage of Stellar and crypto in general. As adoption spreads however, the currency with the most utilization becomes the store of value.
At the end of the day, will you trust a currency with fixed total supply and 1% fixed annual inflation, or printed paper that the Federal Reserve can inflate at will at any given time? When will this inevitable paradigm shift occur? On a related side note, Gold or rare metal backed Stablecoin however are safer assets than USD since the supply is virtually fixed and they hold their relative values against the USD quite well. But they also have very saturated market demand, so their potential for growth is much smaller if at all. Lastly let’s address the criticism of impact investing. Stellar IS a nonprofit, while keeping the network use virtually free for anyone that joins the ecosystem, how will the company grow? While Stellar makes nothing from the network processing TX’s, the foundation DOES own 5% of the total XLM supply, or roughly 5 Billion XLM. By spreading adoption of the Ecosystem and increasing network utilization, the value of XLM will increase and therefore the company’s equity will increase with it, giving the SDF more resources to grow and expand. The rest of the XLM will be given out for free as incentives to front-end service builders and liquidity providers that grow the ecosystem and spread adoption. The front-end UI/UX is a huge barrier to adoption of cryptocurrencies in general and Stellar has incentivized developers to build bridges for the common folks by giving XLM for free in grants and being one of the most developer friendly platforms out there today. So really, XLM holders are NOT impact investors.
We are not holding securities issued by a nonprofit (which doesn’t make sense anyway) we are holding a store of value currency that will see more and more organic growth of demand for years to come. Stellar Vs. Ethereum, who will reign supreme in the ICO world?
This has come up time and time again; and while many companies launching ICO’s are eyeing the stellar platform instead of Ethereum, many cryptocurrency enthusiasts are still not convinced of Stellar’s utility as an ICO platform.
So let’s break down the pros and cons of each platform for tokenizing assets. Ethereum is no doubt an ingenious invention by Vitalik, who created a much broader spectrum of blockchain applications by introducing smart contracts and the idea of tokenization of non-fungible assets on the main ledger. It also solved the problem of the diminishing reward system in Proof of Work protocols for selfish mining since the supply is uncapped (granted ASICs are really messing with this reward system but the talented developers will probably find a solution soon). The beauty of Ethereum comes from its Turing complete smart contracts capabilities, which is not being utilized by most of the tokenized assets on the network. While not reaping full benefits of the Ethereum platform, a lot of these ERC20 coins will do nothing but contribute to the network congestion, and miners will choose the transactions that pay the highest fees to process first, no matter how frivolous they are, i.
e. Cryptokitties. DApps on the Eth blockchain are great fun but at the same time take up so much of the network that will inadvertently cause some of the companies that need to scale to develop their own blockchain or move to another platform. Ethereum is a great construct and allows technology focused companies to build complicated backend structures. But what about companies that just want to leverage great technology without having to build too much back-end constructs to improve the Eth blockchain because they are more focused on the front-end goods and services? They shouldn’t want to deal with scaling issues and high TX fees or delays, and that makes Stellar a better fit.
For companies that already have working products and a solid business model, they can leverage Stellar’s technology for free and just tokenize part of their business and move it onto the distributed ledger without having to spend much on R&D to really delve into distributed ledger technology. This is not to say that Stellar’s Tech isn’t at the forefront of DLT like Ethereum, but they are indeed very different platforms. While Ethereum platform drives more creativity, Stellar excels at practical implementation, and I think the future is very bright for both platforms.
Lastly, nothing is without fault and I would be remiss to not mention some of the risks associated with investing in Stellar and Crypto in general. One of the concerns about company issued digital currencies is one that plagues Ripple as well – The foundation controls all the rest of the coins to be distributed and we as investors are placing a lot of trust in the SDF that they won’t mismanage the funds. However, this is a bigger problem for Ripple holders as the company is for profit and they sell their XRP to introduce more into circulation.
There is a monetary incentive for Ripple Labs to sell their xrp. For Stellar, since future lumens will be granted for free, they are extremely selective in the grants, and will legally bind their grantees from dumping their XLM. For any business growth is always a main goal, and we already see many companies that leverage Stellar’s technology become market disruptors in their respective sectors. As these anchors and partners mature, they will only need more and more XLM liquidity to accommodate their growth. As Jed Mccaleb has said before, the value of XLM represents the size of the pipe – how much value is able to move across the network, so naturally it will grow organically as the network grows. The price volatility from speculative trading represents a very small amount of XLM in circulation and for long term investors it should just be background noise. Another concern of mine is the lack of manpower in the SDF to handle the growth it has seen in the last year.
Recent events have shown that many good projects that want to strike a partnership with Stellar have had their requests ignored or put on the side. The Stellar team’s explanation is that there’s an overwhelming number of requests from developers and companies to work with them, which is understandable. But for a company with great scalable technology, the company itself needs to be able to scale too. Having great technology does not directly drive demand, especially for the masses.
Being able to sell that technology is key. Stellar enables the goods and services providers in the front-end to spread adoption of the technology, so really the partners and anchors are Stellar’s bread and butter. Not being able to address all potential partnership queries and satisfy their needs will turn some away and stifle potential growth.
This marks the end of my long post and if you’ve made it this far, thank you for reading! I have tried to be as factual as I am able but if you find discrepancies in my writing please feel free to DM me or comment. I am not associated with the SDF in anyway and I have not been paid by anyone or any organization to write this post. This post is my personal opinion only and does not represent the stance of any members of the SDF or the company.
This is not investment advice and you should always conduct your own due diligence when investing.
Cheers All! .
