Stellar: Great Protocol, Terrible Investment!

Although we all love the Stellar Network, The Lumen XLM has high speed velocity and thats bad for ultimate, non-speculative, long term token value.

First let’s separate the protocol from the coin. As you might have seen in one of my previous videos, I am a huge fan of Stellar and the genius of the Federated Byzantine Agreement they employed in their consensus mechanism. This video is only about assessing the price of the lumen in the face of some standard economic realities.

Let’s remind ourselves how the Lumen is used on the network with an ideal but simple use case. I’m in the US and I want to see money to my friend in Europe using an app built on Stellar. If the UX is really good, I’ll just decide how much I want to send, or how much I want my friend to receive. I push a button and in 4 seconds my friend has her money.

What happened behind the scenes is that the network simultaneously put out an order to buy my USD for Lumens, credit my friend with the lumens and immediately convert those lumens into Euros. The transaction speed for lumens takes about 4 seconds so the only time we really needed Lumen was during those 4 seconds. Me and my friend don’t really even need to know about lumens. We just know that I send USD and she got EUR in 4 seconds. Awesome!

Now let’s look at the Lumen circulation dynamics. Currently there are 18.5B in circulation. The foundation is sitting on approximately 84.5B. They intend to always keep 5B but give away the rest. I.e. 79.5B over a 10 year period. In addition to this, and not on my chart, they will also increase current annual supply by 1%. So roughly another 1 billion annually.

So the issue is, will demand be able to keep up with this increase in supply at a pace to not negatively affect price. For this we need to assess Stellars potential full capacity. For simpler math, we’ll just assume 100B lumens are out there. Currently the transaction time is 4 seconds and the price of the lumen is at 30c. So the dollar equivalent of transfers that steller could support in that 4 second period is $30B. Doing some basic you can see that translates to $648T in a 24 hour period.

Now put a pin in that and let’s go see what gross transfers look like today. Firstly we look at Fedwire which is the domestic transfer settlement system between all US banks. Fedwire handles about 2.1T per day. Secondly we look at CHIPS which handles all interbank settlement between US and foreign banks. CHIPS handles about 1.4T per day. And finally SWIFT, which is really a messaging system that directs about 5T per day. That totals up to 8.5T and I’m even including some double counting as many transactions touch 2 systems.

Now we can see that in a perfect world at full capacity and at 30c, Lumen can handle 80x of all the US money transfers. If the price of Lumen doubles then less are required to fund a transaction so capacity gets larger and doubles. Similarly if the Lumen price goes down by half, more lumen are required to fund a transaction and capacity goes down by half.

Now of course not every single Lumen is going to be only trading in an out of all transactions in the pipe. Many will be held by individuals and entities and won’t be exposed to the liquid marketplace. However as you can see the potential capacity is so large that the lumen price could fall to 3c, 1c or even .1c and there would still be enough to easily satisfy the utility supply.

Now when the concept of Stellar was born. This was the objective. The whole stellar ledger is built for currency to go into and out of Lumens at high speed. For this they need high liquidity but the price of stellar is insignificant. They never had intention of optimising for investor returns. It’s kind of like would you buy Euros as an investment and hoped they appreciated against the dollar. Some people do but you can’t expect a 10x return.

My conclusion therefore is Stellar is an awesome project with a huge use case, but to look at the lumen as an investment is a terrible idea! Please hit the comments section and let me know your thoughts.

Stellar: Great Protocol, Terrible Investment!

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Kane Dane