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XLM or Why Stellar Lumens

Updated: Apr 8, 2019

By Marc Georgijewitsch

Where XRP/Ripple is the to-go-to cryptocurrency for facilitating payments between big (financial) institutions (B2B), XLM/Stellar is the cryptocurrency for facilitating payments between single individuals (P2P).

How does it work, what are the benefits and what differentiates XLM to XRP? You are about to find out.

To get our wording right, Stellar is the name of the network and platform on which the peer-to-peer (P2P) transactions are executed. The Stellar network makes transactions with nearly any currency possible. The main goals are similar to the philosophical ambitions of true crypto-enthusiasts; creating a truly open and decentralized financial system. Lumens (XLM) is the cryptocurrency that is native to the Stellar network. It acts as a bridge currency, similar to XRP. A distinguishing feature of this particular blockchain project is the consensus protocol. It is unique, not belonging to Proof of Work or Proof of Stake, but creating a new solution to the problems that these Consensus Protocols entail. The SCP (Stellar Consensus Protocol) is built on trust of the single nodes, unlike with Bitcoin, where trust is eliminated.

But how does it actually work? When you want to use the Stellar network, you need to transfer funds in the currency of your choosing to an anchor on the network. This anchor then acts as your “bank account” and grants you credit to your virtual wallet. This is a debit-for-credit exchange, where the anchor serves as a bridge for your transaction, facilitating instant payments throughout the network, without the waiting time for uploading funds from your bank-account to, let's say, PayPal. This process helps you to streamline international-cross-border payments. Stellar always uses the lowest exchange rate between two currencies, which is another bonus. The speed of the transaction validations, tied obviously to the use of the Federated Byzantine Agreement (FBA) algorithm, is way quicker than Bitcoin.

A very big supporter of the Stellar network is this firm called IBM, I am sure you have heard about it. Such a huge endorsement can be taken as a major stamp of approval by experienced digital gurus. IBM actually integrated the Stellar network to facilitate payments in its corporate structure and continues to work closely with Stellar’s management team.

Ripple vs. Stellar

These to companies and networks are closely comparable. None of the least because Jed McCaleb the CTO and co-founder of Stellar actually was a founder of Ripple. Both blockchains are very similar to each other, as the code is nearly identical. Both companies run their nodes not completely decentralized with the public, as in a Proof of Work scenario, but the nodes are run by the firms themselves and allow other institutions to run nodes as well. Both transaction fee structures are very cheap by comparison and the supply is controlled by the developers, which opens them up for criticism of being too centralized.

But the main difference between them is there own chosen mandate. Jed McCaleb left his first project Ripple because he wanted to help the people around the world without access to a functioning financial system (e.g. Venezuela). Ripple wants to facilitate the huge amount of transactions that are done by banks and other financial institutions, and doesn’t focus on the needs of the “little man”. Also, the difference in the Consensus Protocol has to be noted. Neither use PoW or PoS but their own version of a Consensus Protocol, respectively Stellar Consensus Protocol and Proof-of-Correctness for Ripple.

The last major difference is how the developers are treating their coin supply. While Stellar is taking inflation into account, by adding 1% every year to their supply, Ripple is driving a deflationary policy by burning transaction fees, artificially decreasing the supply of XRP to drive its price.

Concluding, we can say that Stellar has the right ideas in the eyes of the true crypto-followers, although being a bit less decentralized than Bitcoin. Both Stellar and Ripple through their differences and similarities will prove to be very interesting projects to follow. Let us see what the near future holds for them!

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