Source: XLMUSD Chart by TradingView
Stellar is a multi-currency payment backend that tens of thousands of people use every day. It’s decentralized, open-source, and developer-friendly, so anyone can issue assets, settle payments, and trade. Stellar is a blockchain, but it works more like cash—Stellar is much faster and cheaper than bitcoin, for example. And it uses far less electricity.
The lumen, often abbreviated XLM, is the protocol token of the Stellar network. One hundred billion lumens were created the instant Stellar went live, as part of the protocol’s design. These tokens play a unique role in the network’s operation.
What do lumens do?
Anyone that wants to hold or move money on Stellar must also hold lumens. Per the protocol, every account must set aside a small increment of lumens for each type of asset it holds. Similarly, an account must reserve lumens for each open offer against its assets. The total holdback for a typical account is low—a few XLM.
Stellar also imposes a very small fee for each transaction, and that fee can only be paid in lumens. The median fee on the network right now is 0.00001 XLM—about a millionth of a US dollar.
Why does the network require lumens?
- Spam deterrence – Lumen reserve requirements and transaction fees are there to minimize ledger spam. They make it unprofitable to, say, spin up thousands of fake accounts or attempt millions of pointless transactions. You often hear that Stellar helps money move like email, but spam is one part of the analogy we don’t want to live up to.
- Liquidity – Stellar was built for cross-currency payments: you can send USD and your friend will receive MEX, with the USD<>MEX exchange happening automatically through the Stellar order books. Sometimes this exchange requires an intermediate asset—also called a bridge asset—to get the best price. XLM’s role in Stellar’s markets is similar to USD’s role in traditional forex markets. Especially for thinly-traded currencies, XLM provides liquidity.
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