Why XLM is a Smart Long-Term Investment (Opinion)

Stellar is a platform that “connects banks, payments systems, and people.” The Stellar Protocol is best suited for completing cross-border transactions quickly and efficiently. Stellar can also be used to issue tokens via ICOs, power decentralized exchanges (DEXs), and host decentralized applications (dapps).

Stellar was founded in 2014 by Jed McCaleb, Stanford CS professor David Mazieres, and Rust language author Graydon Hoare. McCaleb famously owned the Mt. Gox Bitcoin exchange and previously founded Ripple before leaving to start Stellar.

Stellar boasts an impressive list of investors, advisors, and board members, including: Naval Ravikant (AngleList), Sam Altman (YCombinator), and Patrick Collison (Stripe).

Besides building enterprise payment infrastructure, Stellar also aims to better the world by improving access to financial services in developing countries.

I’m very optimistic about the Stellar Network and believe it will maintain its status as a top 10 project into 2020.

Let’s take a look at a few reasons why I believe XLM is a smart long-term investment.

1. Ongoing Synergy with IBM

The partnership between Stella Lumens and IBM runs deep. They’ve announced steady progress on a wide range of shared initiatives. Before explaining the IBM-Stellar partnership, let’s examine the state of crypto partnerships today.

All Partnerships Are Not Created Equal

Oftentimes the value of partnerships in the crypto space is exaggerated. Just because 2 companies announce a “partnership” doesn’t mean any real value will result.

It’s in the best interest for corporations to demonstrate how progressive they are by “partnering” with a hot, new blockchain project. However, these partnerships are often nothing more than a PR stunt. Some projects (cough, Tron!) even go so far as to “announce the announcement” of a new partnership.

Drunk on blockchain? I think so…

On the other hand, in October 2017 IBM and Stellar announced a partnership that continues to demonstrate tremendous value. IBM Vice President Jesse Lund confirmed that Stellar Lumens (XLM) is being used in a real-world environment for the company’s blockchain solutions. The partnership focuses on improving both cross-border payments and remittances.

IBM has confirmed they’re not planning to create their own blockchain token. This increases the chances that IBM will be using XLM as their primary bridge asset in the Universal Payment Solution, a joint venture between IBM and Stellar. Huge news for the Stellar Network.

IBM provides the Stellar Network with 8 validating nodes, and they are pitching Stellar technology to their own banking customers. Not to mention how the dynamic pair continue to announce new joint projects, such as the new “stablecoin” USD Anchor (more on that below).

Stellar Universal Payment Solution

The Stellar Universal Payment Solution aims to improve how institutions move value around the world by decreasing friction as much as possible. IBM has banking relationships around the globe, and so far more than 30 have agreed to leverage Stellar technology.

In a recent live panel, Bridget van Kralingen, IBM’s Senior Vice President for global industries confirmed that Stellar and its native asset Lumens (XLM) are currently being used by “a couple of the largest banks” in financial exchange (FX) corridors. Confirmation of institutions using the native asset (XLM) is a really big deal and something competitor Ripple continues to struggle with.

IBM to Launch Its First Token (Verde) on a Public Blockchain (Stellar)

Veridium Labs, through a partnership with IBM, is launching the Verde Token on the Stellar Network. By leveraging blockchain technology, the Verde Network seeks to improve on the existing carbon credits model.

Blockchain technology offers transparency, efficiency gains, and auditability, while enabling “carbon credit tokens” to be priced, bought, sold, and traded on a global market.

In practice, these Verde tokens are designed to give enterprises with high pollution rates the opportunity to offset environmental damage by supporting the Indonesian rainforest.

2. Stablecoins Launched on Stellar

Among many things, stablecoins seek to address the concern of how “cryptocurrencies are too volatile to be used as a bridge asset.” This is achieved by pegging tokens to real-world assets, or by other economic incentive mechanisms. The most well-known and highly controversial stablecoin is USD Tether.

A startup called Stronghold is launching “USD Anchor,” a stablecoin pegged to the US dollar, on the Stellar Network. While the financial backing of USD Tether is unknown, USD Anchor will be fully backed by US dollars held with a company called Prime Trust, who will deposit cash in FDIC-insured banks in the United States.

IBM is involved in the partnership and will be exploring various use cases for the stablecoin with their financial institution clients. Meanwhile, IBM is in a good position to bring them to market due to their massive customer ecosystem.

IBM envisions the USD Anchor being used by financial institutions for a host of more mainstream use cases, starting with payments but moving into areas like food tracking, global trade and supply chain, and so on.

Central Bank Digitally Issued Currency (CBDC) on Stellar?

Here’s the reddit discussion resulting from this tweet.

If the USD Anchor or future stablecoins are successfully implemented on the Stellar Network, it’s entirely possible that we could see a CBDC issued on Stellar as well. This would likely increase the Stellar Network value tremendously.

However, Stellar is “decentralized,” which leads me to believe central banks would not launch their own CBDC on the stellar network. Instead, I imagine central banks will leverage technology they 100% control.  

I’m not supportive of the fiat central banking system, however it’s highly likely we will see central banks issuing digital “crypto” currencies in the near future. These “Fed Coins” will be nothing more than a digital version of the current fiat system.

In other words, the central bank can still seize your assets, debase the currency through inflation, fund wars through inflation, or make other changes to the monetary policy so as to fit the current administration’s narrative.

Don’t Stablecoins Hurt the “Bridge Asset” Use Case for Stellar?

While it’s not completely clear, it appears that these stablecoins must be purchased with XLM in the first place. This is because Stellar tokens (USD Anchor, etc.) are only being offered with XLM pairs. Ideally, banks can minimize price volatility risk of XLM by performing the cross-border trade with the price-stable USD Anchor token.

Assuming this project is successful, there will still be a huge demand for XLM in order to acquire USD Anchor tokens.

3. Coinbase Is Considering Adding XLM

Coinbase makes money on fees from trading. Thus, it’s logical to assume it’s in their best interest to continue adding tokens with high trading volumes.

When Coinbase launches new tokens they often hint at the possibility months prior to opening trading on a new asset. On July 13, Coinbase announced they were exploring the addition of several new tokens, including XLM.

Assets that get added to Coinbase gain access to new customers and receive a boost in “legitimacy” from the traditional finance industry and the new crypto investor. In the future we will probably see ETFs that track the “Coinbase assets.”

4. Stellar is Targeting a Massive Addressable Market

When you combine the markets Stellar is targeting (remittance payments, international settlement, cross-border payments, etc.), the total addressable market is in the tens of trillions of dollars. The Stellar Network only needs to capture a tiny fracture of this total market in order to see increased prices of the XLM token.

Stellar competes with some other blockchain projects (Ripple, OmiseGo, etc.), but the real competition comes from the legacy finance system, i.e., the SWIFT network, Western Union, and banks.

The legacy system is deeply entrenched in the fabric of our modern life. Those in charge have a vested interest and the resources required to defend their rigged game. However projects like Stellar offer such dramatic improvements to the global financial system eventually forcing traditional finance is to evolve or die.

Will children born today accept a financial system that takes 7 days to wire transfer money abroad? Or one where users are forced to visit a physical bank location during the narrow window of Monday to Friday during “business hours?” I think not.

The writing is on the wall. Over time, the legacy finance system will be replaced with a more sound financial system. One probably built on top of blockchains or other DLT.

How much value can Stellar’s native asset (XLM) capture in the process?

I have no idea. What I do know is Stellar has laid a strong foundation required to become a massive player in the financial transfers space.

5. Stellar is Implementing the Lightning Network

Lightning Network is a blockchain agnostic “layer 2 scaling solution” that also provides an increase in privacy. If privacy coins and other currency coins don’t integrate with a slowly maturing lightning network, they may become obsolete.

By the end of 2018, Stellar hopes to have a live implementation on the Lightning Network (get the technical details here).

The main technology underlying the Lightning Network (payment channels), opens up new use cases for the Stellar Network. Currently, the Stellar Network can handle somewhere near 1,000 transactions per second. By leveraging the Lightning Network, Stellar could process millions of transactions per second.

Increased throughput will open the door for mainstream usage of blockchain applications, such as the Kik messaging service which migrated to Stellar.

Lightning Network integration also opens the door for near-instant and near-free atomic swaps between XLM, XLM tokens such as USD Anchor, and other cryptocurrencies such as BTC and LTC.

Minimizing the friction required to use your payment network leads to increases in your network effect. Over time, this leads to value accumulation.  

6. Stellar as a Platform to Launch ICOs

Source: https://ico-listed.com/stellar-ico-list

We’ve seen massive increases in value of the Ethereum network, largely due to its success as a platform for raising funds by issuing tokens (ICOs).  

The Stellar network can issue tokens via an ICO in the same way Ethereum does.

Stellar does not require gas to execute programs and only charges a tiny transaction fee, which makes it highly attractive for developers. On the other hand, gas prices for transactions on other blockchains (especially Ethereum) are currently expensive and very volatile.

Stellar also has built a decentralized exchange allowing new tokens to be immediately tradable to the public. This is an improvement over waiting until third-party exchanges decide to offer trading pairs for new tokens.

Cheap transactions and embedded DEX capability, combined with massive increases in throughput, make Stellar a potential major ICO platform. In fact, we’ve already seen several projects move from Ethereum over to Stellar, such as Mobius, Kin, and Smartland.

Risk Versus Reward: How Does XLM Stack Up?

When evaluating any investment, it’s smart to evaluate the chance of failing (risk) versus the potential upside (reward).

The Stellar Network is currently one of blockchain’s largest projects. At the time of writing, XLM is ranked 6th according to Coinmarketcap.com, with a total market cap of over $4 billion. The question then becomes: how much room does XLM have to grow?

The Stellar team is targeting a massive addressable market, the technology has proven use cases, institutions are starting to use XLM as a base pair, ICOs are starting to choose Stellar, Coinbase will likely add XLM, and stablecoins are being launched on Stellar. Not many projects can boast such a promising future.

Also, I personally believe the crypto space as a whole is just getting started. Using the tired internet analogy, I’d say we’re somewhere around 1996. If this is true, then good projects will most likely increase in value.

Based on these points, it’s clear to me that Stellar has a very attractive risk-versus-reward profile.  

If they can capitalize on even a tiny fraction of their potential market, the XLM token should see a dramatic increase in value.

Disclaimer: this is not intended to be financial advice. As always, do your own research. Author currently holds a long-term position in XLM.

Related: 12 Projects on Stellar to Get Excited About