Stellar and Ripple. The XLM Token.
Stellar is a decentralized financial platform. It is similar to Bitcoin and Ethereum in that the network uses a decentralized ledger (also known as blockchain) that has a copy of all the balances and transactions on the network.
Another similarity between Stellar, Bitcoin and Ethereum is that all these networks consist of independent nodes (a node is a computer that has a full copy of the ledger), and are open-source, meaning that any person or entity could run a node.
Stellar was founded in 2014 by Jeb McCaleb, the creator of a series of projects that include peer-to-peer exchange platform eDonkey, cryptocurrency exchange Mt. Gox and Ripple protocol. McCaleb created Stellar after leaving Ripple in 2013. Before that, he created Mt. Gox and sold it to Mark Karpeles. The hacks of Mt. Gox have occurred after McCaleb exited the project.
McCaleb has built Stellar by modifying the Ripple protocol.
Differences between Stellar and Ripple
Because Stellar and Ripple have the same founder and are similar in that they both are financial protocols, one of the most common questions is the question about differences between Stellar and Ripple.
The first difference is that Stellar is run by the Stellar Development Foundation (SDF), which is a non-profit organization. The foundation doesn’t derive a profit from the transactions that occur on the Stellar network. It is funded via 5% fund of the originally created Stellar tokens.
In 2014, the foundation has also received a USD$3 million loan from Stripe, a global payment processing company. SDF has repaid the loan with 2 billion Stellar Lumens, which are the native token of the Stellar network. When the network launched in 2014, the token was called Stellar. In 2015, the network went through an upgrade and the token changed its name from Stellar to Lumen (or Stellar Lumen), so that there’s a difference between the name of the network itself, which is Stellar, and the token of the network, which is now Stellar Lumen.
Stellar Lumens XLM
The main role of the token on the network is to serve as a fee for transactions that occur on the network. As of the beginning of 2018, the fee is equal to 0.00001 Stellar Lumens. The presence of the fee serves as an anti-spam tool and protects the network from transaction flooding attacks.
During a transaction flooding attack, hackers would overload a network with spam transactions and delay the processing times of regular good faith transactions. However, when transactions come with fees flooding attacks become expensive and risky for the hackers. To further protect the network, every account on the network needs to have a minimum balance. As of the beginning of 2018, the balance has been equal to one Lumen. In addition to being an anti-spam tool, Stellar Lumens can serve as a bridge between currencies that do not have a big exchange market.
Transaction fees that the network collects go into inflation pool. The members of the network can vote on how the network spends the funds. Voting power is distributed based on stake, meaning that users holding more lumens get more voting power. All accounts get to vote weekly on who gets the inflation addition tokens. For example, if account 1 has 100 lumens in it and votes account 2 as inflation destination, account 2 gets 100 votes in the voting process.
The rate of inflation on the Stellar network is 1% per year. The distribution of new coins on the network occurs once a week. Any member of the network can submit a request for inflation operation to the network, but the request will be rejected if the time that has elapsed since the previous request is less than one week. If the time is more than one week, then nodes on the network compute the number of coins in the inflation pool by multiplying the number of coins in circulation by the weekly inflation rate and adding the fees since the last voting round. They then multiply the number of coins in circulation by 0.0005. Next, members of the network vote for who gets the inflation reward and the winners get their share of the funds from the inflation pool according to the votes they collect.
Stellar Token Distribution
Stellar is different from most other cryptocurrencies in that the founders of the network chose to give away 95% of the total distribution of stellar lumens.
There are several reasons for the giveaways. The first one is that the creator of the Stellar network, Jed McCaleb, had a lot of successful projects in the past and has made a lot of money. The second reason why Stellar distributed most of its tokens for free is that during his previous ventures McCaleb has learned that most of the crypto-currency investors are very suspicious about token creation and distribution. Uncertainty about the intentions of creators of the tokens is one of the reasons that prevent cryptocurrencies from gaining a wider adoption.
The Bitcoin network adds bitcoins to circulation by giving them as rewards to the miners who create new blocks of the Bitcoin blockchain. Ripple, a project that McCaleb has been previously working on, created 100 billion coins during the launch of the platform. A large percentage of those coins went to developers and founders, which made many of the investors and followers very suspicious about the motives of the founders. When McCaleb decided to leave Ripple Labs and sell his entire stake that he kept in XRP, the price of the coin went down dramatically.
McCaleb wanted to protect Stellar from having to deal with the same issues, which is why he built the platform very differently.
Out of 95 billion coins that the network gave away, 50% was allocated to individual applicants. Stellar network creators have called this giveaway Direct Signup Program. Another 50% was allocated to charities and non-profits. This became known as the Partnership Program. Finally, the creators of the Stellar network recognized that Bitcoin holders and users have a lot of influence in the cryptocurrency community, which is why the network also launched Bitcoin Program.
Direct Signup Program
The goal of the program was to incentivize all people, including those new to cryptocurrencies, to start using Stellar Lumens. The program was available worldwide and had a simple distribution mechanism with a very low barrier to entry.
Giving away free Lumens was a way for the network to accomplish its goal of building a global cryptocurrency-based digital economy and invite people and organizations learn more about transactions and infrastructure of the Stellar network.
The network conducted the program in several rounds to increase public awareness and encourage learning about the platform. It has also experimented with the ways of conducting coin distribution to give small amounts of Stellar Lumens for free to as many people as possible.
On January 17, 2018, the Stellar Development Foundation has posted an update about the direct sign-up program on its support website (source: https://stellarorg.zendesk.com/hc/en-us/articles/115002208803-Direct-Signup-Program-2017-Update-Receiving-lumen-invites). In the update, the foundation explained that as of 2018, only a very small number of users receive invites for free lumens at any given time. Even if a person downloads a wallet and starts actively using the Stellar network to send and receive payments, there is no guarantee that he or she will receive an invite for free lumens. Emailing of tweeting the foundation will also not result in getting any invites.
The network has also announced that it is considering launching a referral program in the future that will incentivize current users of the platform to invite their friends to become active users of the network.
The goal of the partnership program of the Stellar network was to encourage the use of Stellar Lumens by non-profits and charitable organizations. The partnership program has been similar to the direct signup program in that one of its goals has been to extend the reach of the Stellar network to financially underserved and excluded regions of the world. In addition to allocating funds to share with non-profits, the Stellar Development Foundation allocated 25% of the initial token supply as grants for businesses, governments and other organizations that contribute to the growth of the Stellar ecosystem.
As a part of the program, the Stellar Network accepts proposal from leading institution, considers the proposals and then approves and distributes grants. As of the beginning of 2018, the reward was up to USD$2 million worth of Stellar Lumen tokens per grant.
Grants on the network have two stages. The first one is the allocation and the second one is the actual award of the grant. The allocation consists of the Stellar Development Foundation setting the funds aside for a specific project. All projects need to have milestones and vesting over a number of years. If and when a project meets the agreed milestones, the network releases the funds from the escrow account. This is the award part of grants on the Stellar network.
Stellar Development Foundation has created several partner categories. They are anchors, exchanges, and NGOs. Anchors are organizations that hold deposits, such as banks, money transfer services businesses, and financial technology companies. The foundation wants these organizations to issue credits and work with deposits on the Stellar Network. It distributes grants to these partners based on the value that the partners bring to the network.
Exchanges are platforms that people and organizations use to buy, sell and trade digital currencies and regular currencies. One of the goals of Stellar Development Foundation is to have more exchanges making Stellar Lumens XLM available to their users.
Finally, Stellar Development Foundation invites NGOs of all kinds to submit “out of the box” proposals that can help the Stellar network grow and become more accessible.
Bitcoin program (no longer available)
While the Stellar Development Foundation was trying to introduce as many new users to cryptocurrencies, it has also recognized the fact that most of current influencers in the cryptocurrency space have invested and transacted in Bitcoin, which is why the Stellar Development Foundation allocated 20% of the initial coin distribution to go to the users of Bitcoin and XRP (19% went to the holders of bitcoins and 1% went to the holders of Ripple).
The goal of this program was to introduce bitcoin users to the Stellar network and have them start transacting in Stellar Lumens.
The program had two rounds. The first one finished in October of 2016 and the second one was completed in August of 2017. Stellar Development Foundation has announced that it does plan to have a similar program in the future.
Lumens that were unclaimed during the duration of the Bitcoin program went to support the Stellar Build Challenge. The Challenge is a project that gives rewards to developers, educators, and users of the Stellar Network.
Introduction to Byzantine Agreement Protocol
Jed McCaleb, the co-creator of Ripple and Stellar, has been able to achieve unprecedented success with his projects in part because the current global financial infrastructure is a mess of fragmented systems that often can’t communicate with each other. One of the reasons for it is different compliance systems and legal systems that financial institutions have to deal with. For example, a bank in the United States operates according to the laws of the US and complies with US financial regulations. The laws and regulations for a bank, say, in China, are completely different.
These differences are also one of the most important reasons as to why banks can’t adopt cryptocurrencies such as Bitcoin and Ether.
Both on the Bitcoin and the Ethereum network, any entity, including an anonymous entity, can become a miner and start participating in the creation of blocks on the blockchain.
Banks all over the world operate in strict regulatory environments and for insurance and compliance reasons they can only deal with verified third parties. They can’t transact in a currency that has no party to be liable for what is happening with the currency.
These facts are also the reasons why Ripple token is one of the largest cryptocurrencies by market capitalization.
Having co-founded Ripple, Jed McCaleb knows from his own experience that the friction between different financial systems, and traditional institutions and cryptocurrencies has been a major roadblock on the path of growth of financial services, resulting in billions of people all over the world being financially underserved.
The Stellar Network solves the issue of trust for financial institutions by using federated Byzantine Agreement to reach consensus on the network.
Introduction to Byzantine Agreement
In computer science and other technology-related disciplines, Byzantine Agreement is the way for members of a network to reach agreement in a way that allows the network withstand complex failures and new attacks.
The factor that makes the failures complex is that there may be no way for the network to determine what exactly is happening to the misbehaving parts of the system.
Also, such failing components of the system may send different error messages to different members of the system. For example, member A may think that the problem with component C has to do with power shortage and member B may thing that component C is experiencing hardware issue.
The problem is complicated not only because there may be insufficient data about malfunctioning elements of the system but also because members of the system need a way to agree with each other when they may be getting conflicting information.
The name of the agreement comes from a 1982 paper by Robert Shostak and Marshall Pease, in which they described the issue and outlined their approach to finding solutions to the issue. The paper was called “The Byzantine Generals Problem.”
In the paper, Shostak and Pease pointed out that the problem they were tackling was not new. It was the same issue that commanding generals of an army have to deal with when they are getting inconsistent data from messengers, traitors and the battlefield. The generals have incomplete information, yet they need to be able to reach consensus and make a decision with the information they have.
Shostak and Pease show that the Byzantine Generals Problem has a solution if over 2/3 of the generals are loyal to their command.
Here’s an example of how this works: let’s say there are three generals and two out of three are loyal. If one general gets confused with erroneous information or becomes a traitor, two loyal generals will still be in agreement. However, if two out of three generals get confused, then there will be no way for the only loyal general to override the decisions of two confused generals. The same principle applies if the number of generals is greater than three. The total number of loyal generals needs to stay under 2/3 or 66.6%.
Byzantine Agreement has several advantages over other consensus algorithms, such as proof of stake and proof of work.
The biggest disadvantage of proof of work that the Bitcoin network uses is that it wastes a lot of energy. According to figures from Morgan Stanley, it takes more energy to mine one Bitcoin than the average American household uses in two years.
Another disadvantage of proof of work is network latency. On the Bitcoin network, it may take an hour or even more for a transaction to receive all the confirmations that it needs to be deemed valid by the network. Finally, the Bitcoin network can fork when a large enough group of users decides that it wants to take the network in a different direction.
With proof of stake, parties make decisions based on the collateral that they have. When a network runs based on a proof of stake algorithm, it may be vulnerable to “nothing at stake” attacks, during which parties that have previously owned a stake and then spent it try to rewrite history as if they still have stake on the network. To prevent such attacks, most networks that use proof of stake algorithms essentially combine proof of stake with proof of work, but scale down the required amount of work in proof of work accordingly to the stake that a party owns. Another way to protect a network from “nothing at stake” attacks is to delay the refund of the stake long enough for the network to create some kind of irreversible checkpoint.
The first advantage of Byzantine Agreement over proof of stake and proof of work is that a network can reach consensus without latency, quickly and efficiently. The second advantage is that trust on Byzantine Agreement networks is disconnected from collateral ownership. For financial networks this means that non-profits could help keep banks and other large financial institutions honest because the financial advantages of the financial institutions do not matter.
In real life, banks can influence regulations by lobbying politicians and making donations to all kinds of campaigns and causes, but on a Byzantine Agreement decentralized network such actions won’t be nearly as much effective because there is no central authority that makes the decisions.