5 Simple Metrics to Evaluate the Stellar Project.
Our second instalment of the Whitepaper Book Club revolved around the Stellar Project, a platform that connects banks, payment systems, and people, Stellar integrates to move money quickly, reliably, and at almost no cost. They describe their service as:
With a team of top technology and finance professionals, the nonprofit Stellar.org expands access to low-cost financial services to fight poverty and maximize individual potential.
This project is working to connect the unbanked through a decentralized network while implementing a unique consensus mechanism, the Federated Byzantine Agreement. Below we will break down the 5 factors that we used to analyze the Stellar whitepaper and follow up with some important project updates. Buckle up folks, this is an interesting project with some complex applications.
Our Review Process
Before we dive in, here's a quick overview of our process. In order to examine whitepapers, we separate our analysis into the following five categories:
It's important to note that this is our template for the book club, not every project will fit nicely into this mold. For example, not every project has a cryptocurrency and some do not list their team members in the whitepaper. We tried to keep our analysis confined to the whitepaper for the purpose of our book club, but from time to time we do draw upon exterior sources.
Stellar, for example, has a myriad of resources available to those looking to gain more information on their project. Start here to get a quick overview of some of the concepts.
We always start with the idea, we want to examine why the developers felt it was necessary to create this project and how they plan on solving the issues they have identified.
We'll begin with the following questions:
What is the Purpose of this Project?
Not only does Stellar look to equip the unbanked with access to the financial world, they are looking to create an open payment system that can be used worldwide. Stellar's decentralized network works to reduce fees, increase speed, and create a trustless and transparent system when compared to traditional banking systems.
What Need is the Project Fulfilling?
There are a few traditional issues that Stellar's blockchain, along with their cryptocurrency, solve for users.
- Decentralized Control: In this network, anyone is able to participate and no central authority is needed in order to dictate which parties are eligible for consensus.
- Low Latency: Nodes can reach consensus as quickly as we experience payment transactions, meaning that international money transfers can be completed in a matter of seconds.
- Flexible Trust: Stellar's unique consensus mechanism means that you do not have to put your faith in the entire network, but instead choose a network which you deem to be trustworthy. We'll go over this model in much more detail in our technology section.
- Asymptotic Security: Digital signatures and hash families create a safety net that protects against adversaries of the network that may contain vast computing power. Asymptotic security creates a situation where the service is affordable to honest parties, but those looking to overtake the system would encounter high costs that may outweigh their assumed gains.
Does the Whitepaper Provide Any Viable Use Cases?
Stellar provides several well laid out use cases. We've provided an outline below:
- Micropayments: Small transfers should not incur big fees, Stellar makes small transactions easier and cheaper by removing intermediaries and centralized cost structures that drive up transfer costs. See the Deloitte Use Case.
- Low Cost Remittances: Use the Stellar network to send money quickly and for a fraction of a cent! See the Tempo Use Case.
- Mobile Money: In many countries, different telecom companies do not maintain any kind of interoperability between themselves. Meaning that you can transfer money to someone on the same network as you, but not to a user of a different network. Stellar bridges this gap by creating a interoperable mobile money platform that allows people to send money to those using different providers. See the Parkway Projects Use Case.
- Currency Exchange: Use Stellar to exchange coins and fiat even when no trading pair exists. Stellar's native cryptocurrency, the Lumen, will act as a bridge between cryptos and even fiat when there is no pair to get the currency you have into the currency you want.
What Competitors Exist in the Space?
Stellar has both traditional and blockchain companies that represent major competitors in the space.
On the traditional side we have Western Union and the companies that provide similar services. Western Union is used for global money transfer but have a hefty fee associated with their service. It is also regularly accompanied by long wait times, paperwork, and middlemen that hold your money in order to gain their own percentage of fees on the transaction. The system is inherently flawed through its lack of transparency and a centralized structure that finds success in high fee structures.
If you've heard of Stellar, you've probably heard of Ripple, the company that Jed McCaleb left to start his own Lumen powered blockchain. There has been some speculation that Stellar is just a fork of Ripple, although originally there may have been some similar code, McCaleb ensures that Stellar is an entirely new piece of code created specifically for the Stellar platform.
So what similarities, and important differences exist between Stellar and Ripple technology?
An overview of the key differences between Stellar and Ripple. [Source](https://www.investinblockchain.com/stellar-lumens-vs-ripple/)
How is the Technology Structured?
The Federated Byzantine Agreement
Stellar's consensus protocol is used to achieve agreement across network validators there is no list of predetermined validators and anyone can become one. In this network, validators do not receive a reward or the fees associated with transactions, and because of this, there are not several thousands of validators, but instead a smaller group of those helping to maintain the system without economic incentive. Validators are usually invested in the success of the platform and therefore partake in order to ensure that it runs smoothly.
Stellar is different than most traditional, decentralized consensus mechanisms because you can choose which validators you trust. This is called your quorum slice, your slice may overlap with someone else's if you have a mutual, trusted validator. This method of reaching consensus also makes it harder for a bad actor to join the system and automatically have power. Imagine if you were standing in a group of friends having a discussion, and a random person shows up and gives their opinion on your discussion, are you going to be inclined to just trust whatever they say? In Stellar's platform, you don't have to trust that random person, on the other hand, if a validator is part of several quorum slices, you can deduce that they would assumably be a trustworthy party.
Some key points regarding the Stellar Consensus Protocol:
- Decentralized Control: No central authority provides predetermined approval for who can reach consensus, so anyone can participate.
- Low Latency: Consensus is reached in a matter of seconds, there is no mining process, instead there is message passing with a voting process.
- Flexible Trust: Choose any combination of validators for your quorum slice.
- Asymptotic Security: No amount of computing power can overtake the network, 66% of validators would have to collude in order to take over consensus, with quorum slices this is an unlikely feat. There is also a fee structure and minimum lumen account balance in place to further discourage bad actors.
The combination of these features leads to an emphasis on safety and flexible trust in their consensus mechanism. In the case of an accidental fork, Stellar halts progress of the network until consensus can be reached
Trust Lines & Anchors
Anchors track, hold, and transfers assets in the Stellar network. When you are an asset holder, you are actually holding credit from a particular issuer, and through the trust line created between you and an account, you establish that when they provide the necessary asset needed in exchange for what you are holding, you will release the held asset to them.
Is the Project Built Transparently?
Stellar was built with a very small team that has always been open and encouraging towards third party developers who want to work with them and contribute to their project. In this way, the project creates quite the decentralized structure, similar to Ethereum, where software development kits and guides are readily available to those interested. As referenced previously, the amount of documentation that is available for the project is astounding. They don't spend a lot of money on marketing or building a massive team, but they do focus a lot of attention on creating a project that anyone can contribute to and learn about. This is just some of their documentation for developers.
Is the Code Readily Available on a Public Network?
Here ya go: Stellar Github.
Sometimes the way that a project collects their funds can tell you a lot about the way they may run their business. This project decided to forego an ICO and instead looked to some equity financing.
Where are the Project funds Coming From?
We were able to breakdown the following investors into a very high level summary:
- $20 million: came from the likes of Global Jet Capital (a leading provider of aircraft financing solutions), Columbia Equity Partners (a boutique investment bank), Expa (a VC whose members include the likes of Uber, Google, LinkedIn and Twitter founders) and a few others.
- $10 million: various investment firms and private investors.
- $3 million: seed funding from Stripe, the payment processor.
What Regulations Does the Project Need to Consider?
It's very important to understand that Stellar is not a financial institution, they are middleware that encourages their users to follow AML, KYC, and money service regulations if it applies to them. However, in order to address these regulations and aid in adoption, they have a federation and compliance server for AML, and their own KYC tool. Stellar also operates as a platform for ICOs, again, like Ethereum. In some cases they are believed to be a better option for those looking to hold more legitimate token sales and follow strict money service regulations, but ultimately, those responsibilities fall on the participating company, not Stellar.
What Barriers Exist for the Project?
There are your typical barriers that any blockchain company faces when creating a revolutionary product, dealing with adoption and trying to convert traditional users into blockchain and crypto enthusiasts. However, a greater barrier may be the sheer amount of power and money that is backing the traditional banking system that Stellar is looking to improve upon. By foregoing the partnerships that Ripple is seeking from major financial institutions, Stellar seems to have an anti establishment attitude that deters users from falling victim to centralized systems. The good news, that's what believers in peer-to-peer networks want.
This. :clap: Coin. :clap:
What Platform Does the Coin/Token Operate On?
Stellar created their own blockchain for their coin, the Lumen, to call home.
Does the Coin/Token Provide Any Kind of Utility?
Before we go into the utility provided by this coin. I want to touch on this article, a must read for those looking to understand "tokenomics".
You don't have to read the whole thing now, but to understand what we're going to outline next, I want to give you a simple breakdown of token roles as explained in the image below.
Token roles, the more the merrier. [Source](https://medium.com/@wmougayar/tokenomics-a-business-guide-to-token-usage-utility-and-value-b19242053416).
So with those basic concepts of token roles in mind, let's analyze the utility provided by the Lumen. Mr Mougayer says that, generally speaking, the more roles a token fulfills, the better it is.
On the Stellar network, each operation in a transaction has a base fee, funds from these fees are added to what's called an inflation pool. Described by Stellar:
As a balancing measure for the ecosystem, anyone who holds lumens can vote on where the funds in this pool go. Each week, the protocol distributes these lumens to any account that gets over .05% of the votes from other accounts on the network.
In this way, not only do Lumens become a method to determine voting rights, they also become earnings for those accounts that are voted for to receive Lumens from the inflation pool.
Lumens pay transaction fees as well as act as a requirement to partake in the system. Each account needs to have a minimum balance of lumens in order to prevent users from overwhelming the system with dormant accounts. Lumens also serve as a security measure that mitigates DoS attacks when bad actors attempt to generate large numbers of transactions or consume large amounts of space in the ledger.
Stellar explained it best when they said:
Lumens sometimes facilitate trades between pairs of currencies between which there is not a large direct market, acting as a bridge. This function is possible when there is a liquid market between the lumen and each currency involved.
These are some of the roles we found the Lumen to fit nicely into, feel free to comment with anymore that you find!
What is the Total Supply of the Coin/Token?
Straight from the horse's mouth:
Lumen supply is determined by fixed, protocol-level rules. The number of lumens created at genesis was 100 billion. Every year, there is a 1% inflation rate. New lumens cannot be generated arbitrarily by anyone, Stellar is not a mining based protocol.
What are the Distribution Parameters for the Coin?
Those 100 billion coin's distribution can be broken down as follows:
- 50%: Given to the people. There was an invite link that some people got from Stellar's partners or going to meetups.
- 25%: Given to the partners. This covers business, governments, institutions, and nonprofits that invested in the project.
- 20%: Given to holders of bitcoin and Ripple. This is kind of funny. Why bitcoin holders? Because Stellar was so inspired by the project and stand proudly behind the belief system touted by Mr. Nakamoto. Why Ripple holders? To make them Lumen holders.
- 5%: Stellar kept it for operational expenses. Salaries, buildings, rent... you know.
For the sake of time, let's just focus on Jed McCaleb. Creator of eDonkey2000, Mt. Gox (he left before the breach), and most recently...Ripple actually. Why did he leave Ripple and start Stellar? Michael Craig, who wrote an article on the dramatic story stated:
It has everything: Sex, huge money, fraud, genius, betrayal, international intrigue, and government raids.
You can read the article here if you want to find out how everything ties together.
So to summarize this pretty long post - the Stellar project is legit (disclaimer - not investment advice :) ). They are trying to provide services for the little guy, those forgotten by the massive banking industry. They don't have all the same major banking partners that Ripple does, and their platform is more of an open sourced, peer-to-peer, decentralized system. Their crypto has a solid standing in the top ten cryptocurrency market caps reported by Coinmarketcap, and closed out July as the top performing crypto with 40% gains. This month the platform had almost 49 billion XLM asset trades after gaining 350,000 new accounts, reaching a new milestone of 1 million active accounts.
Coinaccord is a Canadian Blockchain Venture Studio that strives to create entirely new and decentralized models on a global scale. As a company run by humans, we want to know if we’ve made a mistake. Do we need to make a correction or do you have a different point of view on the topic? Let us know in our Medium comments.