Table of Contents

🤔 What is Stellar ?

Stellar is a  blockchain platform for minting and transferring tokenized assets that are one to one backed by the underlying assets.

💡 What role does Lumens(XLM) token play ?

  • Medium of exchange: Users can transact  XLM tokens to send value from one account to other. There are many merchants that accept XLM tokens in exchange for providing their services.
  • Bridge currency: XLM token acts as a bridge currency if the buyer and seller want to transact in different currencies.
  • Transaction fee: Users have to pay XLM tokens to include their transactions on the Stellar blockchain. Although this amount is very small, it stops spammers from clogging the network.
  • Account balance: Every account in the Stellar network must hold a minimum of 1 XLM to ensure authenticity.

📝 Origin of Stellar

  • In 2014:
    • After leaving Ripple in 2013, Jed McCaleb, along with partner Joyce Kim, forked the Ripple protocol and launched the Stellar project in 2014.
    • Stellar Development Foundation was created in collaboration with Stripe CEO Patrick Collison.
    • Stellar received $3 million in seed funding from Stripe.In return, Stripe received 2 percent or 2 billion of the initial stellars in return for its seed investment.
  • In 2015, Stellar redesigned its consensus protocol following a ledger fork in 2014 that rolled back hours of transactions. It’s new and current consensus protocol called “Stellar Consensus Protocol” was developed by Stanford professor David Mazières, chief scientist of the SDF.
  • In 2017, Jed McCaleb and Brit Yonge launched Lightyear, a for-profit entity of Stellar, that would build a universal payment network on Stellar. In 2017, Stellar announced a grants program that would award partners up to $2 million worth of Lumens for project development.

👴🏻 Jed McCaleb - Founder

  • McCaleb was born in Fayetteville, Arkansas, and briefly attended the University of California, Berkeley. He eventually dropped out and moved to New York City.
  • In 2000, McCaleb founded MetaMachine Inc. and released  eDonkey2000(peer-to-peer file sharing application).
  • In September 2006, the company had to cease distributing eDonckey2000 and pay $30 million to RIAA to avoid copyright infringement lawsuits.
  • In 2007, Jed McCaleb purchased the domain with the intent to create a trading site for Magic: The Gathering cards. However he repurposed the site in late 2010 as a Bitcoin exchange that could process Bitcoin-to-dollar trades. The website grew in popularity within months. McCaleb sold the company to Mark Karpelès in February 2011 and remained a minority owner in the company until its collapse in 2014.
  • In 2011, McCaleb began developing Ripple. He recruited David Schwartz and secured an investment from Jesse Powell before adding Arthur Britto as the chief strategist. McCaleb left Ripple in 2014 because of internal conflicts of vision with other team members.
  • In 2014, he co-founded Stellar Development Foundation with Joyce Kim to develop the Stellar open-source protocol to allow cross-border monetary transactions.

How traditional international remittances work ?

Traditional remittances can take days to confirm and rely on local agents to pay out in cash. Settlements between agents and Money Transfer Operators (MTOs) are not in ‘real-time’.

Instead, the owed balances are settled periodically on a schedule through a commercial bank. MTOs have to keep significant capital in destination countries to fund days’ worth of transactions and repay agents.

Some digital banks and wallets may be able to settle more stable currencies such as USD and EUR in ‘real-time’ but are rarely able to move money to or from emerging economies.

With legacy systems, new entrants and growing fintech companies must establish in-country accounts and local bank relationships for every geography they wish to serve. Correspondent banks charge fees and make profit on the foreign exchange (FX) across currencies, which increases operating costs.

To cover these additional costs, remittance service providers charge fees or build costs into the FX transaction thereby passing the cost to their customers. The end result is remittance recipients receiving less money.

How Stellar work ?

Businesses using Stellar can connect directly to a network of fully licensed fiat (traditional currency) acceptance and distribution partners called anchors.

Anchors are licensed and regulated financial institutions, money service businesses, or fintech companies that provide fiat on/off ramps to the anchor country’s banking system.

Anchors often also provide ‘stablecoins’, one-to-one fiat-backed tokens, that users can redeem for fiat at any time.

Anchors handle local regulatory processes such as KYC/AML.

Anchors take care of deposits, redemptions, and compliance, so businesses building on Stellar can focus on their customers’ experience. The typical Stellar-powered remittance experience is simple:

  •  A sender funds the transaction in their country.
  • The funds are received by an anchor and represented on Stellar in the form of fiat tokens.
  • Fiat tokens are converted over the Stellar network into the recipient’s currency via a path payment operation, using either the exchange rates on the Stellar Decentralized Exchange (DEX) or facilitated through a market maker.
  • Funds arrive in the destination country. They can be transmitted to either the end recipient’s wallet, bank account, or another local rail.

🤖 Stellar protocol


To facilitate moving value from the traditional banking system into Stellar and vice-versa, the network relies on anchors, which are regulated financial institutions, money service businesses, or fintech companies that offer one — or both — of the following component services:

  • Issue fiat tokens: Issue one-to-one fiat-backed tokens (also known as stablecoins) and maintain fiat reserves equivalent to the value of the issued tokens, so users can redeem them back to fiat at any time.
  • Provide a fiat on/off-ramp: Connect the Stellar network to the anchor country’s banking system by maintaining a service that handles regulatory processes such as KYC/AML and allows users to make seamless deposits and withdrawals.


These two components can be provided by a single entity, or by multiple entities, in which case the fiat on/off-ramp becomes a reseller of the fiat token issued by the token issuer.‍

Stellar Decentralized Exchange (DEX)

Stellar Consensus Protocol


Accounts & Transactions

⚙️ Projects built on Stellar

🏛️ Governance model

Stellar is an open-source protocol whereby anyone can review and contribute to the development of Stellar’s core code.

New changes or standards start as proposals divided into two categories:

  • Core Advancement Proposals (CAPs) are suggested changes to the core protocol of Stellar.
  • Stellar Ecosystem Proposals (SEPs) deal with changes to the standards, protocols, and methods used in the ecosystem built on top of the Stellar network.

Ultimately protocol changes are “ratified” on-chain when they are accepted by a majority of the network validators.

Stellar development foundation (SDF)

Nevertheless, despite independent contribution to the project through CAPs and SEPs, a full-time team at the SDF(Stellar development foundation) performs the majority of protocol and ecosystem development.

SDF sets the project roadmap, acts as a steward of the Stellar network, and builds constructive relationships with governments and financial institutions worldwide.

The Stellar Development Foundation (SDF) is a non-profit dedicated to supporting the growth and development of Stellar.

SDF was created in collaboration with Stripe, which provided $3 million in seed funding, and is financed by Stellar Lumens.

SDF has three boards:

  • Board of Directors, responsible for governance decisions and XLM distribution.
  • Architecture Board, responsible for technical initiatives.
  • Expansion Board, responsible for ecosystem growth and regulatory issues.

🤑 How much money does the project have for future development ?

  • The project raised $3 million in seed round from Stripe in exchange for 2 billion XLM tokens in 2014.
  • Around 28% of the total token supply was allocated to Stellar development foundation to fund future development and encourage adoption.
  • Stellar development foundation does not have any other ongoing source of revenue.

🐱‍💻 Controversies and hacks

2019: Hacker mints 2.25 billion Stellar Lumens

  • The exploit was found in the “MergeOPFrame::doApply” function which allowed hacker to mint 2.25 billion Stellar Lumens (XLM).
  • The Stellar Development Fund knew of the hack early on and while they claim to have made several press releases, it is hard to imagine that these were more than back-page footnotes. If they had done a better job of publicizing the exploit it’s likely it would have been widely reported by all major cryptocurrency outlets.

2021: Stellar network halted

  • On Apr 6, 2021 Horizon instance stopped ingesting transactions, which meant that for a brief period of time, it was unable to serve requests or submit transactions to the network.
  • Nodes using Horizon came to a standstill including Stellar Development Foundation’s validator nodes.
  • As a result complete network came to a standstill. However, no assets in any account were compromised.
  • On April 10, 2021, Stellar network validators voted to upgrade the network to Protocol 16, which contained the fix that resolved the issue.

😨 Risks and challenges

  • Custody risk:
    • Stellar allows anyone to spin up an anchor. Anchors are supposed to keep the underlying asset in safe custody and issue a tokenized version of the underlying asset to the depositor.
    • There is no guarantee that Anchors will be able to keep the assets safe or even worse not run away with it.
  • Scalability: Stellar blockchain can only support up to 1000 transactions per second. The team will have to update its protocol to handle hundreds of thousands of transactions if they want to become means for global medium of exchange.
  • A core team and limited nodes present a standing target to governments. However, the team seems to have already bent their knee to government regulations:
    • Anchors require KYC.
    • Codebase allows accounts to be seized.
    • Helping governments to build CBDCs with surveillance features. (Read their vi9ews on CBDCs here).
  • Competition: Any blockchain platform with smart contract functionality can be used to mint tokens.
  • Stellar raised seed capital and received 28% of total XLM supply. However, they do not have any ongoing source of revenue. This results in:
    • Their incentives are not aligned with XLM holders. The team is selling XLM(reducing their exposure) and retail is buying XLM(increasing their exposure).
    • Stellar is a long-term project, which requires an ongoing source of revenue to fund development.

💰 Tokenomics

Stellar foundation initially minted 100 billion XLM tokens in 2015. They were distributed as follows:

  • 50% would be reserved for the Direct Sign-up Program. The goal of the Direct Sign-up Program was “to make lumens easily accessible to millions of individuals and communities across the globe” through airdrops.
  • 20% would be allocated to the Bitcoin Program. The goal of the Bitcoin Program was “to encourage bitcoin holders to explore and use Stellar” by airdropping tokens to Bitcoin addresses.
  • 25% would be distributed as part of the Partnership Program. The goal of the Partnership Program was “to encourage adoption and growth of Stellar through the institutional distribution of lumens” by distributing grants to businesses, governments, institutions, or nonprofit organizations.
  • 2% would be allocated to Stripe for its seed investment and locked until June 2019.
  • 3% would be retained by the Stellar Development Foundation for its operational budget

However Stellar foundation was not able to airdrop XLM tokens effectively:

  • Out of the 20 billion XLM to be distributed to Bitcoin holders (19 billion) and XRP holders (1 billion), only 2.037 billion were distributed in two rounds, in October 2016 and August 2017. The rest (17.963 billion) was re-allocated to the SDF operational budget in 2017.
  • Out of the 50 billion XLM to be distributed through the Direct Sign-up program, the SDF only managed to effectively distribute 4.2 billion XLM, less than 10% of what was originally planned
  • Out of the 25 billion XLM to be distributed through the Partnership program, the SDF only managed to effectively distribute 1.138 billion XLM, less than 5% of what was originally planned. It’s also interesting to note that the address that received this 1.138 billion XLM sent them back to the SDF-managed address in November 2019.

Globally, the SDF only managed to distribute 7.375 billion XLM through these three programs, instead of the 95 billion initially scheduled. Stellar gave up on distributing XLM tokens and finally burnt more than 55 billion XLM in November 2019, reducing the supply of XLM tokens.

XLM supply schedule


Until October 2019, the Stellar ledger also featured a built-in, fixed, nominal inflation mechanism. New Lumens were added to the network at a rate of 1% each year.

Each week, the protocol would distribute these Lumens to any account that receives over 0.05% of the “votes” from other accounts in the network.

In October 2019 Stellar removed the 1% annual issuance rate from the Stellar protocol stating that it was not benefiting the project’s building on Stellar.

Demand pressure

Token’s price increases due to demand pressure.

Demand pressure on XLM will come from:

  • Transaction fees: Users will acquire and pay XLM tokens to include their transactions on Stellar blockchain.
  • Speculators: They will acquire XLM tokens for future price appreciation.

🧐 Indicators to watch out for

  • New assets and trust lines are growing:
  • Daily active account is declining:
  • Payments and trades:
  • Circulating XLM supply and fee pool:
  • Number of transactions is growing:
  • YouTube channel is growing:
  • Twitter account is growing

👋Final remarks

I will not be investing in Stellar because:

  • I do not resonate with their views on CBDCs(their views).
  • I am not fond of regulations and KYC.
  • They partnered with Elliptic, a blockchain analysis company to track transactions.
  • There is no check on anchors if they are backing the tokenized assets(the team never even mentioned custody risk).
  • They do not bring anything unique to the table, any blockchain with smart contract functionality can do a better job tokenizing real-world assets and sending transactions from one place to another.
  • Token issuer can revoke access to token(Team never mentioned it, however you can read about it here).

😊 Do further research