Stellar ICOs – When Do They Make Sense?

It turns out that creating your own token and carrying out an ICO using Stellar is simple, cheap and quick, with added security like the ability to freeze your token. Let’s explore whether Stellar offers a good ICO technology – and how It differs from Ethereum.

Stellar bill their Blockchain and native Lumen token (XLM) as the future of banking, allowing trusted institutions (or Anchors as they term them) to handle deposits and withdrawals to and from the network on behalf of an end user.

Stellar is a fundamentally different Blockchain to Ethereum. With a proof of stake (PoS) consensus algorithm, Stellar will confirm transactions within 5 seconds, and transaction fees are a tiny .00001 XLM per transaction. On top of this, anyone can deploy a node, termed a Stellar Core node, and validate transactions.

These figures sound great, but the differences do not stop there.

Stellar was created such that trusted institutions like banks and payment processors are responsible for processing your fiat funded deposits into digital tokens, and also withdrawing them back into fiat.

These institutions are termed Anchors, and anchors are ultimately responsible for giving you access to the Stellar network.

For example, I would like to send GBP to my friend. I am based in Hong Kong, so I will use Trusted Payment Processor A to deposit 100 HKD into my account. This will be issued as HKDCredit on the Stellar ledger, sitting in my digital wallet. I now have 100 HKDCredit.

I am then able to utilise Stellars’ distributed exchange to convert that HKDCredit into GBPCredit. The network will convert the credit at the lowest rate automatically, and my friend will receive it, quick.

My friend can then use Trusted Payment Processor B to withdraw those GBPCredits into government backed sterling notes.

Perhaps the above use case is the originally intended use of Stellar; trading government backed notes (fiat currencies) and valuable commodities digitally and quickly. However, the built-in decentralised exchange, simplified token creation process and cheap transactions have made it a technically viable solution for ICOs and token creation, for anyone.

Consequently, Stellar have not been letting this opportunity pass by. In the past 12 months they have been focussing more on promoting their platform for the ICO use case.

In June of last year Stellar posted an article on listing tokens on the network and laid out the benefits.

They continued the ICO agenda in August further promoting the platform for the use case. These articles contain great information on the process of setting up your own token, and using the network for your ICO respectively. Follow the Stellar Blog for their updates.

So Stellar offer a simplified process of creating your token. The service has limitations, for example, it does not offer a Turing-complete programming language as Ethereum does; I cannot create complex logic through smart contracts that give my token a customised capability.

You are limited to what Stellar offer you, but what they do offer you are useful features, such as controlling who can buy your token, the option to freeze your token (in the event of fraudulent activity for example), and generation of dividends or awards.

This package of capabilities is coupled with their decentralised exchange, almost feeling like an “all in one” solution for a prospective ICO client.

It is entirely possible to host an ICO, and people have – check out the markets at https://stellarterm.com/#markets to see some of the tokens that exist today.

But like I mentioned at the top of this insight, Stellar is a fundamentally different Blockchain to Ethereum, and the economics behind each are wildly different. In the final part of this insight, let’s explore why Ethereum’s dominance in the ICO / token economy may continue.

Ethereum's Proof of Work protocol means new ETH costs a lot to generate – the huge miner community have vested interests in supporting the token. This property of the Ethereum economy makes it very attractive to host a token on top of the Ethereum network.

If the native token is increasing in value, my token will in turn be more valuable to early adopters - not to mention my ICO revenues that are appreciating as the native value increases. The perceived value of my token will also increase if it is being hosted on top a bullish native token.

Moreover, Etheruem's proposed Proof of Stake algorithm will require holders of Etheruem to be transaction validators – further incentivising users to buy or mine now before the algorithm is introduced and phased into the network.

There is a scarcity of available tokens; no one is giving them away for free.

Stellar on the other hand minted 100 billion Lumens (formally called stellars, created in 2014 and thereafter rebranded to Lumens one year later). Stellar are holding the majority of tokens, and they have vouched to give away 95% of them for free over the next 10 years.

(Keep up with the latest Stellar distribution stats at https://dashboard.stellar.org)

This initiative ties in well with their mission of achieving a more inclusive digital economy, but is a weak link for businesses who want their investments to appreciate.

Furthermore, Stellar's lead on transaction times and low fees may only be temporary in a fast evolving field of technology, and investors understand this.

Stellar outline their roadmap regularly and this year have vouched to bring support for the Lightning Network for more private channel transactions. They also understand the need for more decentralisation, making efforts to provide an easier solution for running a full validator node.

In my opinion Stellar is a great network for its originally intended purpose, but does not offer the economic incentives that ultimately bring for-profit ICO parties on board, where the token does not derive value from tangible assets.

I look forward to see how Stellar and other ICO-capable Blockchains evolve, and which types of entities they will predominantly attract. As we become more aware of the inner workings of Blockchain models, we may see concrete demographic patterns emerging for each model, which will in-turn effect how they will evolve as lessons are learnt on how to more effectively cater for their market.

Which Blockchain would you adopt for your ICO? I am interested to hear your thoughts and opinions.