Stellar Lumens: A Rocket Fueled by Hype, Encumbered by Dilution and Lack of Transparency

Disclaimer: Lighthouse Research and its employees reserve the right to, at any point in time, hold either a long or short position in any securities or tokens mentioned. The reader should assume that Lighthouse Research has a short position in Stellar Lumens. None of the below should be construed as investment advice. Lighthouse Research has attempted to present the facts as it believes them to be true, but does not guarantee their accuracy in any way, shape, or form.

Ticker: STR/XLM

Price: $0.023789 / 0.00000546 BTC

24hr Volume: $39M

Supply Outstanding: 16.59B

Total Supply: 103.31B

Current Capitalization: $394.6M

Total Network Capitalization: $2.46B

Stellar Lumens (STR/XLM) has more than doubled in price from $0.011 (0.0000026BTC) to a high of $0.024 (0.0000057 BTC) in the last 3 days. Rather than any material news or announcements by the company, the move has been spearheaded by speculation. We believe the cause of this pump is three-fold: first, Stellar is whip-sawing after a prolonged hemorrhage from the previous speculative bubble that saw it lose more than 80% of its value from highs of $0.063 in May; second, a sympathy play on the back of Ripple’s (XRP) rally going into the Swell conference on October 16th;¹ and third, an email alert by paid stock/crypto-picking newsletter group Palm Beach Confidential.² We view none of these reasons as sustainable or justified and expect a sharp return to previous levels.

The History of Stellar And Ripple

We believe recent speculators who have entered STR/XLM may be likely to be unaware of Stellar’s history. We feel it unnecessary to rehash the excellent work of Michael Craig in “The Race to Replace Bitcoin,”³ except to note that Stellar and its founder, Jed McCaleb, have had a troubled past. Given Stellar’s consensus system failure and subsequent emergency fork in late 2014,⁴ as well as the first mover and scale advantages of Ripple, it is naive to equate the two networks. We would like to draw readers’ attention to the following passage:

“So why the sudden reliance on the phrase “Ripple/Stellar consensus system”? According to one source who knows Mr. McCaleb and Ms. Kim well, he in particular will try to blame Ripple: “Jed is not a very good chess player. I’ve seen it time and time again he makes these bold moves, very aggressive. Like the whole Jed bringing Joyce into Ripple Labs thing was very aggressive. To do that you have to be super-confident. And somehow, between Joyce and Jed, they convinced like the Collisons to come along, right? So that’s their M.O., they do these bold things that have no chance to succeed. I think that bringing this up as a ‘Ripple-Stellar failure’ is strategically a huge mistake because Ripple is 50 times the size of Stellar but has never had a consensus error. And now Jed’s getting publicly called out. And I’m sure the Ripple guys are loving it because they never comment and are just going to let him [Jed] hang himself.”

The Observer asked the source to explain, in layman’s terms, why Stellar would be vulnerable and Ripple would not, since Stellar does in fact originate from the Ripple code.

“I think Jed is overconfident,” the source said. ”He thinks he is the inventor of the technology. The truth is the stuff he forked and the stuff that Ripple uses today are very different. Ripple Labs has a big team and are perfecting all day long, while at Stellar it’s Jed and one other guy. And the models are different and may very much benefit Ripple Labs.’”

We believe that given this, as well as McCaleb’s history of washing his hands of past projects, it is difficult to imagine a world in which Stellar has any material chance of succeeding as a network.

The Transparency Trap

When Stellar was created and the code forked from Ripple, the new entity created a non-profit foundation (the Stellar Development Foundation in part justified its status by claiming to provide education about cryptocurrency). It promised to bring transparency and integrity to the cryptocurrency space. Three years later, this promise has been left unfulfilled. Below we have obtained an archived version of the site as of April 2017. In this web page, the Stellar team promised token holders to make available “permanently and publicly” the “sum of salaries + lumen grants of all employees” and Stellar’s “quarterly budget.”

Upon our inquiry, a Stellar team member informed us in mid-2017 that they were a “bit behind” schedule on these transparency reports. This promise has since been scrubbed from the site:⁵

As a result, token holders lack any information on these critical issues to assess the project and the manner in which it is spending funds.

Airdropping Lumens to the Stellar Foundation

There is a unique reason as to why this lack of transparency is so troubling. As part of Stellar’s original mandate, the company promised to airdrop Stellar Lumens to as wide of a user base as possible — it offered two such airdrops to Bitcoin holders and one to Ripple holders at certain snapshot dates. The second round began on June 27th of this year, with an aim to distribute 16 billion STR/XLM. This program concluded on August 27th.

What many do not know is what happened to any unclaimed Stellar tokens upon the air drop’s conclusion. Such tokens went directly to the Stellar Development Foundation:⁶

Because of this clause, with only 2.04 billion tokens actually claimed of the 20 billion reserved,⁷ the foundation airdropped nearly 18 billion of its own tokens to itself to use as it sees fit. This represents a staggering $407 million. We believe these in-effect free tokens will be sold for operating costs, salaries, and bonuses. They represent an enormous supply overhang and will have an immense dilutive effect to current token holders.

And, this foundation has removed its promises of issuing transparency reports covering how much it spends and how it compensates its employees. We believe these funds are also not bound by the promise to “not sell any of the lumens” in the same way that “Lumens initially received” were.

We believe Stellar Lumens’ recent surge in price has been caused by unsustainable and irrational catalysts. Simultaneously, we have significant concerns about Stellar’s history and what that history says about Stellar’s potential future. Given these concerns, we find it hard to justify owning a cryptoasset issued by an organization that has reneged on its promises of transparency and simultaneously benefited itself through the issuance of billions of free tokens at the expense and dilution of existing token holders.

¹ http://invezz.com/news/crypto/27539-Ripple-price-XRPUSD-surges-as-Swell-conference-approaches

² http://veekyforums.com/thread/3767458/business/palm-beach-confidential-september-issue-came-out.html

³ http://observer.com/2015/02/the-race-to-replace-bitcoin/

https://bitcoinist.com/stellar-forks-decides-create-new-consensus-system/

https://www.stellar.org/about/governance/#Transparency

https://www.stellar.org/blog/bitcoin-claim-lumens-2/

https://dashboard.stellar.org/