Forget Bitcoins: grab your Lumens

Will Stellar Lumens be the next cryptocurrency star?

The cryptocurrency hype is on. And it does not signal to slow down anytime soon. While Bitcoin is the first and by far the most popular digital currency the landscape in 2021 offers a lot more.

In this post I am comparing Bitcoins (BTC) with Stellar Lumens (XLM), the native digital currency of the Stellar protocol. Stellar’s mission is to setup an open and distributed digital payment infrastructure that can scale globally, supporting various currencies and avoiding high unnecessary fees.

The Concept

Bitcoin in 2009 was forged” without any other model to compare to. The initial view was to offer a secure and reliable peer-to-peer payment network. No central authority should control the system neither establish the rules and fees. BTC is the cryptocurrency.

Stellar Lumen came to life in 2014 when the ecosystem included already a variety of alternatives fulfilling different use cases (payments, smart contracts, digital assets). The vision behind was to create a decentralised financial network where payments could be executed in different currencies at a very high speed and low cost. Stellar is an infrastructure and the Lumen is its native digital currency.

Their Mission

Bitcoin mission was to start a revolution and this has been accomplished with full marks. From Satoshi Nakamoto white paper:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.

Stellar Lumens undertaking is not less ambitious: the amount of money transferred globally for personal remittance reaches $500 billion per year. The average transaction fee can be as high as 8%, which doubles when the recipient is in developing countries.

Stellar is defining the tools which will allow financial institutions, FinTech companies, traditional banks and payment applications to simplify the transfers of money.

Creators

Bitcoin mythical inventor is known as Satoshi Nakamoto. His vision and whitepaper have initiated a fundamental change in the financial and payment world. He has never been seen (despite several attempts to identify him and few self-proclamations) and the legend says he handed over the control of the project after mining 1 million bitcoins. The Bitcoin Foundation was created several years later to coordinate the efforts of the community and ensure a long term roadmap.

Stellar Lumen is backed by a non-profit organisation (Stellar Development Foundation) founded by Jed McCaleb, previously founder of Ripple, a global payment solution. He is well known in the cryptocurrency world.

Infrastructure

Bitcoin network is vast, relying on 10K nodes according to Bitnodes, a Bitcoin network tracker. There are different types of nodes and anyone can decide to run one, but typically this is left to users who want to invest directly (not via Cryptocurrency Exchange platforms) and miners.

Stellar network is smaller and counting approximately 60 nodes (again different types are available), which are presently run by 20 organisations, including the Stellar Development Foundation . There is no direct benefit of running your own Stellar node (given that there is no mining reward involved) rather than contributing to the extension and security of the ledger.

Transaction Cost

The cost of transferring BTC is not pre-established and can vary: it is called the “mining fee” and it is associated with the transaction. Latest figures indicate a fee between $14 and $20, take a look at the Bitcoin Average Transaction Fee Chart on YCharts.

On the other hand the cost of a transaction in the Stellar network is always 0.00001 lumens, a tiny amount but enough to discourage malicious attempts to flood the system with fake transactions (DoS).

Transaction Speed

Bitcoin transactions are reasonably fast and the amount is transferred in (near) realtime. However each transaction must be verified by the network before those BTCs can be spent.

Mining a BTC block, which is what miners do in order to confirm transactions, takes on average 10 min, however the network can experience surges of requests (like in 2017 when hundreds of transactions waited for hours). It is not entirely predictable.

Stellar Lumens transactions perform in the magnitude of seconds (transfer and confirmation in 5.5 sec) and work great at scale: 1000 to 5000 transactions per second (depending who you are asking ;-) *), 200x-500x faster than the Bitcoin network.

(*) I wasn’t able to find the data and calculate myself, still searching

Supply Limits

Bitcoin maximum supply is 21 million (Why Did Satoshi Nakamoto Limit Bitcoin’s Supply to 21 Million?): no more BTCs will be released once the very last bitcoin is mined (expected in 2140 anyway). As per March 2021 the circulating supply is over 18.5 million.

Lumens maximum supply is 50 billion (the original design planned for 100, decision later revised in 2019) but at the moment only around 22 are in circulation. XLM tokens are not mined and instead released (gradually) by the Stellar Development Foundation in an open and transparent way.

Investors and Initiatives

Stellar Foundation had the support of investors (Stripe during the seed funding round) as well as the likely financial involvement of the founders.

Stellar has invested in few companies (Wyre, SatoshiPay) in the FinTech domain and it has developed significant partnerships like IBM World Wire (game-changing move?) and the Ukraine’s central bank digital currency initiative.

Bitcoin did not have (and never needed it) a similar support, but over the years it has gained global recognition proven by significant investments from private companies (Tesla, Microstrategy) and a sort-of acceptance by institutions and lawmakers.

Mining and the environment

Mining is one of the most fascinating terms introduced by Bitcoin. And it is no yet fully understood by most.

Mining is the process of verifying the BTC transactions that take place within the network: I send 1 BTC to Maria, the network ensures I cannot send the same BTC to Agata (a.k.a. “Double Spending”). In simple terms it means solving a very difficult mathematical problem: computing (“hashing”) a numeric value which unlocks a new block of the blockchain, that will permanently and immutably store a set of transactions (including Maria’s new BTC).

This high computational process is performed by users called “miners” who employ dedicated hardware and software. Given the reward (6.25 bitcoin for every new block mined as well as the fee attached to each transaction) the competition is fierce (users join Mining Pools, companies deploy dedicated infrastructure) and the demand of energy is significant.

The impact of Bitcoin mining on the environment has become recently a hot topic given the correlation between the sharp rise of its value and the increasing consumption of electricity. Looking at Cambridge Bitcoin Electricity Consumption Index the “annualised” electricity consumption (in TWh) of the mining network can be compared to Ireland’s primary energy consumption.

Stellar Lumens are not mined: the entire supply is created at inception (even if not fully released to the public) and the transaction verification process operates with a different algorithm, called Stellar Consensus Protocol. A list of trusted servers communicate (quickly and efficiently) to agree the transaction is legitimate. This protects Lumens from popular and understandable environmental concerns.

Development

Both projects are open-source and using GitHub.

Bitcoin repository is obviously larger in terms of the size and number of contributors. It is mainly developed in C++ with some Python code for testing purposes.

Stellar is developed in C and C++, has a smaller number of contributions (75) where (looking at the repository available metrics) only a small part (7) has been actively working in the last 24 months.

Price charts

Over the last few years Bitcoin has claimed all headlines in the financial world with its incredible and persistent growth. Yes, there have been setbacks but its course looks like is set to reach higher peaks.

In the last 12 months the BTC value has grown by 40.711EUR, an astonishing 673% increase (when comparing with 2013 data this is 61.200%!).

Stellar Lumen is a lot younger and its base unit a lot cheaper. But when looking back 12 months its growth is still remarkable from 0,03EUR to today’s 0.34EUR (811%)

Lumens or not Lumens?

Bitcoin is, without doubts, today’s winner in the cryptocurrency arena. It has brought a new concept of FinTech, excited small and large investors, convinced business leaders and proven detractors wrong (anyone left?).

Is it the new gold? Possibly. Can it keep growing? Likely. Will it thrive at the pace of the last few years? To be confirmed….

Stellar Lumen joins the party later but with the great advantage of solid ideas (evolution from Ripple), competent leadership and a clear goal, that is solving the global payment challenges. If and when the cryptocurrency hype fades rest assured the Stellar concepts will still be financially sound and technically valid.

There are challenges ahead (incentivise running of nodes, expand developer community, increase visibility) and many competitors, but the journey has started.

It is now time to watch.

Conclusion

I hope you have enjoyed the article as much as I did when researching the facts and writing down my thoughts. Next post will look at Stellar Lumens applications and integrations.

I am on Twitter for questions and suggestions.

Stay safe ✌️

Disclaimer

I am an investor, follow cryptocurrency trends, share thoughts and news, but this is not a financial advice. Before investing you should understand the volatility of the digital assets and the risks involved. Invest responsibly.

References

Software Engineering, Data Engineering, Coder. And other hobbies too.

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