On the disclosure at the bottom of this article, I mention that I have a long position on Stellar Lumens (CCC:XLM-USD). However, that doesn’t quite tell the whole story. Several weeks before the cryptocurrency collapse, I sold some of my position in XLM-USD and converted much of the rest to various other crypto coins. As it stands today, I have very few Stellar Lumens remaining.
At first, I was regretful, I must admit. That’s because shortly after I sold, Stellar Lumens went onto to make fresh multi-year highs. Don’t let anyone tell you otherwise — it’s a rotten feeling to be too early. However, looking at the situation now, it’s better to be too early than to be too late.
Sure, I could have sneaked a few extra dollars from crypto land. But at the end of the day, I turned what amounted to Monopoly money into a house that I own free and flipping clear. I hope this is a lesson that others can learn, especially in speculative markets. Knowing when to walk away is just as important, if not more so, than knowing when to walk in.
Which brings me to Stellar Lumens. On the surface, XLM is awfully compelling. A hard fork from the Ripple Labs protocol that sparked the so-called Ripple (CCC:XRP-USD) coin, “Stellar is an open network that allows money to be moved and stored. When it was released in July 2014, one of its goals was boosting financial inclusion by reaching the world’s unbanked — but soon afterwards, its priorities shifted to helping financial firms connect with one another through blockchain technology.”
In plain English, the Stellar Lumens architecture may finally make microtransactions commercially viable. But sometimes, reality has a way of putting a dent into aspirations.
Technology versus Economics of Stellar Lumens
Democratization. It’s a word that you’ll find everywhere these days and particularly in finance. Because of advanced internet communications technology, it’s becoming more feasible to connect developing and frontier markets to capital markets. Previously, such a notion was an impossibility due to the high transaction costs of traditional bank transfers.
Therefore, Stellar Lumens had an organic fundamental argument: its network can eliminate the friction involved when sending money across the world using mainstream financial platforms. Further, Stellar charges only 0.00001 XLM per transaction, ensuring users keep more of their money.
When you examine Stellar Lumens from a technical perspective, it’s difficult not to get excited. Who wouldn’t want to send money across the world with a transactional cost that amounts to fractions of a penny? Naturally, people racked up XLM by the boatload — until they had that wait a minute moment.
While Stellar’s transactional efficiency and prowess is impressive, it’s not anything that can’t be duplicated. In fact, a Wired article from October 2019 poured some perhaps much-needed cold water on the blockchain hype. For many commercial applications, blockchain either brings nothing new to the table or is practically less useful.
Further, transaction fees for microtransactions are necessarily high because there’s no demand for such underlying transactions. I mean, it’s great that I can use the Stellar Lumens network to move money into Mozambique, but it raises the question: why would I want to move money to Mozambique?
It’s the same principle behind the typically extremely high bid-ask spreads in penny stocks. Why do equity units priced in pennies or even fractions of a penny have high “transaction” fees? Simply, there’s no demand for such garbage stocks. Illiquid markets have high costs of participation.
Necessarily, then, microtransactions in traditional payment networks are onerously expensive.
XLM Needs More Time to Go Mainstream
Aha! You might then say that Stellar Lumens upends the traditional financial paradigm through its almost-zero-cost fees. But here’s the reality — there’s no such thing as a free lunch.
As I mentioned, mainstream institutions charge a hefty price for unorthodox transactions due to lack of demand. Stellar Lumens comes into the picture, offering lower transaction fees on a decentralized basis. That is, the free market of nodes and other network contributors verify such transactions, keeping costs low for everyone.
However, at some point, network contributors lose interest if they do not receive financial compensation for their time and effort. But what kind of profitability can these contributors hope to gain by confirming microtransactions to Mozambique?
Indeed, when you look at daily cryptocurrency transaction volume, it’s not that impressive compared to a global audience. Certainly, credit card companies dwarf these volume levels consistently. Put it another way, many alternative blockchain projects are struggling to keep their network contributors.
Perhaps the biggest irony of decentralized blockchain protocols is that the more efficient it is, the less likely it will be commercially viable. Again, you can’t just look at one side of the transaction. If something is cheap to transact as a consumer, it necessarily means that the service provider must accrue profitability through high transaction volume.
That can work out on both ends beautifully during bull markets. But in a bear market, the service provider side loses interest. Thus, Stellar Lumens has a long way to go before achieving mainstream credibility. I’d avoid XLM for now.
On the date of publication, Josh Enomoto held a LONG position in XLM, XRP. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.