What is Stellar?
Stellar is an open-source network for cross-border transactions between currencies. Stellar makes it possible to issue, send and trade any assets, including stocks, currencies, cryptoassets at a low cost. Assets on Stellar are issued and redeemed by anchors, who are trusted entities that issue digital credits on the Stellar network in exchange for deposits of the asset with the trusted entity. Anchors enable real world assets to be exchanged on Stellar by leveraging a distributed exchange that maintains an order book for every asset pair.
Stellar was launched in 2014 by Jed McCaleb and Joyce Kim Stellar. The Stellar Development Foundation (SDF) is a non-profit organization founded in 2014 to support the development and growth of the Stellar network. Although the community can make independent proposals to the protocol and vote, the SDF team ultimately decides which proposals are accepted, thus performing an important role in the development of the network.
100 billion lumens were initially created and its supply increased by 1% annually for the first 5 or so years. That inflation mechanism was ended by community vote in October 2019 and in November 2019, the overall lumen supply was reduced through burning. There are currently around 50 billion lumens in existence, and no more lumens will be created.
What is XLM?
The Lumen (XLM) is Stellar’s cryptocurrency and is used a medium of exchange within Stellar network. XLM is used to pay transaction fees. Every account in the Stellar network most hold a minimum of 1 XLM to ensure authenticity. XLM also acts as a bridge currency within the Stellar Distributed Exchange, as the only asset in the network that does not require an anchor, allowing it to pair with any other asset to provide liquidity.
How does XLM compare to Bitcoin?
XLM differs from Bitcoin in a few key ways.
First, XLM is not mined—not by proof-of work, or proof-of stake, or at all. Instead, the full supply of XLM was minted at once and is now being distributed by the Stellar Consensum Protocol (SCP). The only intention of creating XLM was for denominating Stellar network requirements.
Secondly, while Bitcoin and Stellar are both payments networks, XLM has a different purpose within that process than BTC. XLM is used to pay transaction fees, but the protocol has more control over these fees that standard gas fees, which can vary significantly. The transaction itself does not produce XLM, in contrast to how BTC is mined.
However, it should be noted that although XLM is different from Bitcoin, it is far from independent from it. Bitcoin, the coin with a larger market (by a long shot), can influence the price of all other cryptocurrencies. If Bitcoin crashes, there’s a good chance that XLM will feel the burn too (not directly as they operate entirely distinctly, but through overall market sentiment.) It is not clear, but unlikely, that a significant drop in XLM’s value would have a material impact on Bitcoin.
Before trading any crypto assets it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset. First and foremost:
No Canadian securities regulatory authority has expressed an opinion about XLM, including an opinion that XLM is not itself a security and/or derivative.
Wealthsimple has performed a legal assessment of XLM prior to making it available on Wealthsimple Crypto and has concluded that XLM is not and is unlikely to be deemed a security or derivative. However, there is a risk that this conclusion could change in the future and the impact of this on an asset’s value is outlined in our Product Disclosure.
We evaluated XLM based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of XLM, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that first created Stellar;
- The supply, demand, maturity, utility and liquidity of XLM;
- Material technical risks associated with XLM, including any code defects, security breaches and other threats concerning XLM and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them; and
- Legal and regulatory risks associated with XLM, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of XLM.
Like all other crypto assets, there are some general risks to investing in XLM. These include short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk and cyber security risk. Each of these risks are described in more detail in our in-app Product Disclosure. Further, the Stellar community is not under any legal or regulatory obligation to disclose material information to the public regarding its activities. Holders of XLM have no recourse to Stellar or Wealthsimple if XLM declines in value for any reason.
We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading XLM. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
WDA is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Digital Assets Inc. dated June 18, 2021. Please be aware that the statutory rights of action for damages and the right of rescission in the securities legislation of each province and territory of Canada would not apply to a misrepresentation in this Statement.
Last updated: September 28, 2021