Stellar Cryptocurrency Review
Welcome to the Stellar Cryptocurrency Review. New to crypto? Access our Blockchain 101 material before you dive in!
Curious about how we came up with our score for Stellar? To learn more about our scoring methodologies please click here.
Profile Snapshot of Stellar
Blockchain Use Case (1.7/2.0)
Stellar uses a consensus mechanism that is different from the Proof of Work that platforms like Bitcoin and Litecoin use. Instead it introduces a brand new consensus mechanism called federated Byzantine agreement (or FBA for short).
In an FBA model each participant in the network knows of others participants that it considers reliable. Approval must be reached by a vast majority of others in the network to agree that a particular transaction is valid before the transaction is settled.
For example, if you, Tom, and Mike are approvers on the network it would work something like this. You trust Tom and Tom trusts me. First you would analyze a transaction and try to prove a transaction. If you proved that it was valid you would wait until Tom (the participant you considered trustworthy) also approved the same transaction. In turn, Tom would wait for Mike to approve the transaction before considering the transaction completely valid, and so on and so on.
In practice, you, as an approver, might not even know that Mike exists in the network but indirectly Mike has approved a transaction you also approved via Tom. This consensus mechanism offers similar security as a Proof of Work mechanism without wasting as much energy.
This is in contrast to a similar consensus mechanism utilized by Ripple. Ripple publishes a starter membership list of approvers that participants can edit. In this system all participants know of all other participants. Original participants are hesitant to edit the list because it can create a network that is not as secure (what if one of the participants added to the list is deviant?). In this way growth is not as organic as in the system that the Stellar whitepaper suggests.
Development and Management Team (1.8/2.0)
Jed has been part of the cryptocurrency and blockchain communities for over seven years now and has an impressive track record. In 2010 he created the Mt. Gox exchange using a domain name he originally intended to use for a Magic the Gathering card game exchange. He sold the site a year later. The exchange was a huge success and within four years was handling close to 70% of all BTC transactions.
After selling the exchange he moved on to help develop the Ripple Protocol. He was a key driver in recruiting lead cryptographer David Schwartz and securing investment in the project. He continued until 2013 when he left the company.
In 2014 he co-founded the Stellar Development Foundation. Originally the project used a protocol similar to the one used at Ripple but switched over to the Stellar Consensus Protocol a year later.
Joyce Kim made her name as an attorney before going on to creating simplehoney, a mobile commerce startup, in 2011. The company was acquired by OpenCoin (aka Ripple) in 2013.
After the acquisition she moved on to Freestyle Capital which is a venture capital firm that specialized in seed investment and advisory services for software start ups. She currently still works at the shop as an advisor and is also the managing partner at Sparkchain Capital.
To learn more about the other team members click here.
Partnerships and Other Influences
The Stellar project has developed partnerships with a variety of large corporations and financial institutions, including IBM and Deloitte. You can access a full list of of the project’s partnerships by clicking here.
Competition and Risks (1.7/2.0)
The following can be considered competitors to the Stellar project:
- Bitcoin (after Lightning Network implementation)
- Visa, Amex, and other payment processors
The following can be considered competitive advantages that the Stellar project has compared to competitors:
- Uses a consensus mechanism that promotes more organic growth than competitors that rely on PoW or approver lists.
- Consensus mechanism is more energy efficient than Proof of Work.
- It’s partnerships with established technology and financial institutions can easily rival or surpass those that we are considering their competitors (in the crypto space).
- Network and platform are up and running (compared to Lightning Network which is still in test phases).
The following should be considered when analyzing this project’s chances of succeding:
- Larger financial institutions and other money transmitters might be wary of working with the Stellar platform because transaction approvers are not monitored closely (as compared to the Ripple netowrk).
- Cannot process as many transactions as already established payment processors such as Ripple, Visa, and American Express.
Network and User Trends (1.7/2.0)
It should be noted that Network Hashrate and Mining Distribution are not relevant to our review of Stellar because it uses a federated Byzantine agreement consensus mechanism.
Information concerning daily transactions were not readily available. In order to analyze the transactional capabilities of the platform we relied on information distributed by the team.
Please keep this in mind when forming your own conclusions.
It is estimated that the network can process 1,000 transactions per second while also supporting approximately 1 billion accounts. Obviously, the network has not been put to the test as we will see when we analyze user account growth later in this section.
It’s main competitor Ripple can do one better. Ripple can process close to 1,500 transactions per second. To put this into perspective, Visa averages about 2,000 transactions per second. These projects are doing great when compared to other blockchain platforms but still fall short of centralized payment processors.
The base transaction fee on the network is .00001 XLM, which comes out to about $0.000002981 at current prices. This is incredibly cheap and should help Stellar in it’s journey to become the payment processor of the future.
If you want to learn more about how transaction fees are calculated on the network click here.
New user accounts have been growing steadily. Over the last year total users on the platform have increased by 1,101% (55K to 661K). This may have been increased artificially by token giveaways and it is not certain how many users out of the 661K are active users. This should be monitored closely.
On July 13th Coinbase announced that it is considering adding new assets to its platform and Stellar was in the running. This should be a big boost to not only the price of XLM but the platform itself. The more widely available the token becomes the easier it will be to understand the limitations of the platform in its current state.
Today we are announcing that we’re exploring the addition of the following assets to Coinbase: Cardano (ADA), Basic Attention Token (BAT), Stellar Lumens (XLM), Zcash (ZEC) and 0x (ZRX). https://t.co/qoECyR0V1f
— Coinbase (@coinbase) July 13, 2018
Financial Considerations (1.6/2.0)
Overall Stellar is a very impressive project. We really like the federated Byzantine agreement consensus mechanism and how it promotes a network effect as it concerns organic growth. This is in stark contrast to what Ripple is doing and we like this model better.
You can’t argue with the transaction throughput, transaction speeds, and transaction fees (or lack there of) the the platform promotes. Granted the system has not seen the capacity to really test the bounds of the network. We will be monitoring platform capabilities as XLM becomes more widely adopted.
The founders, especially Jed McCaleb, are rockstars in the space and have a good knowledge base and network to pull from. This should drive the project towards success and we are excited to see what can come from the Stellar platform in the future.
Our only question is how projects like Stellar and Ripple will overcome the monopoly on payment processing that institutions like Visa and American Express currently have. The ecosystems and the applications that can be built on top of them might have something to say about that.