A simple guide to Stellar inflation rewards

In the coming weeks, Poloniex will begin offering Stellar inflation rewards to all eligible Poloniex customers who hold a balance of at least 1 Stellar Lumen. This is part of a broader strategy to enable our customers to benefit from the unique properties of certain crypto networks.

In this post, we’ll provide more details on Stellar, how it’s inflationary mechanism works and how Stellar Lumen holders can participate.

What are Stellar Lumens?

Stellar is an open financial network focused on enabling low cost and near instant global payments. Stellar’s native asset is the Stellar Lumen, which is used to pay transaction fees and can act as a bridge currency within the network to help convert one asset into another.

The Stellar Network was created with 100 Billion Stellar Lumens, with 1% of the total existing supply added to the network yearly. These newly created Stellar Lumens, along with transactions fees, are distributed to certain network participants on a weekly basis.

The slight inflation rate was implemented to create a more stable supply of Lumens and to replace supply that has been lost (hard-drive crashes, theft, etc).

How Stellar inflation rewards work

Most crypto networks have mechanisms that introduce new units into circulation — bitcoin via mining rewards and Cosmos via staking rewards, for example. Stellar has a unique inflationary mechanism that issues new Lumens to existing holders based on a weekly vote.

Lumen holders vote on which addresses the Stellar protocol should distribute inflation rewards to. They do this by voting for a specific destination address. 1 Lumen = 1 vote. Any destination address that receives at least .05% of the weekly votes will receive inflation rewards proportionate to the number of votes submitted. For example, if an address receives 10% of the vote, they will receive 10% of that week’s inflation reward.

While Lumen holders are free to vote for whichever destination address they choose, they typically vote for their own address to receive the reward. Since a minimum of .05% of the vote is needed, you need to hold a relatively substantial amount of Lumens to qualify (roughly 9.6M if the entire 19.26B circulating supply voted). If you can reach that minimum, the more Lumens you hold, the more inflation rewards your destination address will receive.

Stellar Inflation Pools

Due to the .05% voting minimum, it is common for Lumen holders to qualify for Stellar Inflation rewards by coordinating to vote for a single destination address. Where an individual may not have enough to qualify on their own, through “inflation pools”, they can reach the .05% minimum. Once the destination address receives the reward, funds are distributed back to participants based on the amount of votes contributed.

As exchanges like Poloniex custody Stellar Lumens on behalf of customers, the opportunity exists to pool funds on their behalf to allow Stellar Lumen holders to qualify for weekly inflation rewards. This can be accomplished by using Lumens in cold storage addresses to vote for a single destination address and then distribute rewards to customers on a weekly basis proportionate to the amount of Lumens they hold. Through these services, more Lumen holders can actively participate in this unique aspect of the Stellar network, regardless of their individual voting power.

Stay tuned for more specifics on how Stellar Inflation will work on Poloniex within the coming weeks!