Most recent update: [July 22, 2022]
No securities regulatory authority has expressed an opinion about the Crypto Contracts or Stellar Lumens, made available on the VirgoCX Platform, including an opinion that Stellar Lumens is not itself a security and/or derivative.
What Is Stellar?
The network is called Stellar, while the actual digital token is called the Lumen. Lumens are intended to be used by traders on the Stellar network. Since it was realized in 2014, XLM is one of the top-performing altcoins of the last half-decade, boasting a market cap of over US$6.9 billion as of July 2021.
What Does It Do?
The Lumens are the driving force behind activity on the Stellar network. The network is designed to be a quick and cost-efficient system to aid payments and transactions across borders than traditional financial networks.
One example of how this might work: a person in Japan uses Stellar to send money to another person in the UK. Stellar would automatically convert yen to XLM, send the payment via the blockchain, and reconvert XLM to pounds at the best current exchange rate. This makes XLM particularly useful in developing markets, as it aims to serve as a low-cost option for cross-border transactions, allowing individual users to send money in the currency of their choice.
History Behind the Stellar Network and Its Team
The Stellar network was launched in 2014 by programmer Jed McCaleb, founder of the early Bitcoin exchange Mt. Gox and the co-founder of XLM’s parent cryptocurrency, Ripple (XRP). It is worthy to note that McCaleb was plagued with a number of controversies in his former years. The Mt. Gox exchange was the target of one of the most significant Bitcoin hacks in history, costing users over US$460 million in Bitcoin. At the time, the exchange was the largest in the world and accounted for 70% of Bitcoin transactions. While it is debated whether or not this debacle was the reason that McCaleb had started his own project, he eventually left the Ripple team after the Mt. Gox hack.
Whilst Stellar shares similarities with Ripple with their cross-border intentions, XLM is meant to mainly service individuals rather than institutions. The Stellar project had initially received a breakthrough with US$3 million of funding through a partnership with payments processor Stripe, as well as with donations from organizations like Google, BlackRock, and FastForward. Where Ripple operated as a for-profit organization, Stellar intends to use a portion of the circulating lumens to cover operational costs, along with taking tax-deductible donations.
The Stellar Network and Its Unique Characteristics
Although it was based on the same blockchain technology as Ripple with similar goals, the two differ in their usage. Originally based on the same protocol, a fork in the Stellar network in 2014 resulted in the creation of the Stellar Consensus Protocol (SCP).
The SCP runs as a network of decentralized servers with a distributed ledger that is updated every 2 to 5 seconds among every node. It does not rely on the entire network to approve transactions, instead using the Federated Byzantine Agreement (FBA) algorithm to aid in the processing of transactions. Because of this, Stellar is not as decentralized as a proof-of-work system like Bitcoin, however it achieves greater speed and efficiency thanks to this trade-off. To further increase the speed and efficiency of the network, each node in the Stellar network has another set of “trustworthy” nodes. Once this set of nodes has approved a transaction, then it is considered completed. This process expedites Stellar transactions, and it is said that the network processes as many as a thousand network operations per second.
What Is the Supply of Stellar Lumens?
The key differentiator between lumens and other cryptocurrencies is that lumens cannot be mined. There is no block reward as the supply of lumens is controlled by Stellar. Initially, there were 100 billion lumens available for transactions, and the supply was to be inflated by 1% every year. Due to negative backlash from the community, Stellar had burned half of the lumens in existence, to where it currently sits at around 50 billion.
Of the 50 billion lumens, only 20 billion are currently in circulation. The remaining lumens are held by the Stellar Development Foundation to use for development and promotional purposes. Because there is no mining, the network relies on the SCP to confirm transactions.
How Secure Is the Stellar Network?
The fee charged in Stellar transactions, as well as a requirement of having at least 1 XLM in a lumens wallet any one time, are deterrents used to prevent DDoS attacks. When a hacker tries to flood the system during a DDoS attack, the large number of microtransactions would make it exorbitantly expensive for any hackers to achieve any kind of reasonable gain. Because of this, the Stellar network has never experienced any real sort of attack.
There was one instance, however, where a wallet was compromised; a hacker injected code into user accounts with over 20 XLM. This resulted in around $400,000 being taken – relatively small compared to the breaches that other cryptocurrencies have experienced. It should be stressed that this was a flaw in the wallet (BlackWallet.co, specifically), not the Stellar network.
While XLM has an intriguing premise with a philanthropic vision, there are some inherent risks involved with the Stellar network. From the outset, and what most investors will take note of, is that the lion’s share of XLM tokens in existence is in the possession of the Stellar Foundation. Although it may be used for R&D purposes, this potentially creates a central point of failure and could point towards centralization in the future.
Even though the network is protected from DDoS attacks thanks to their wallet requirements, the network itself runs on a small number of validators; this is heavily centralized around the SDF nodes and could itself introduce yet another vulnerability. Furthermore, the development team is comparatively small when we look at other cryptocurrencies, meaning that, in the long term, there might be less of a potential for growth.
Finally, there is no real financial incentive for becoming a node, which could lead to a dearth of nodes or node centralization.
Prior to listing Lumen on the VirgoCX Platform, VirgoCX performed due diligence on Lumen and determined that Lumen is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:
- The creation, governance, and location of Lumen and/or its primary development team;
- The supply, demand, maturity and liquidity of Lumen; and
- Legal and regulatory risks associated with Lumen.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.
For more information on Stellar Lumens, check out the articles below:
Stellar Lumens on Investopedia: https://www.investopedia.com/terms/s/stellar-cryptocurrency.asp
The Stellar Network on Investopedia: https://www.investopedia.com/news/what-stellar/
Stellar Lumens on CoinMarketCap: https://coinmarketcap.com/currencies/stellar/
Stellar Lumens on Abra: https://www.abra.com/cryptocurrency/stellar/
Stellar Lumens on CoinJournal: https://coinjournal.net/stellar-lumens/
Stellar Lumens on BitDegree: https://www.bitdegree.org/crypto/stellar-lumens