Stellar (XLM) tokenomics

The token economics of Stellar (XLM) have evolved significantly since the network's launch in 2014. Originally designed with an inflationary supply, the network transitioned to a fixed-supply model in 2019. The native asset, Lumens (XLM), serves as the foundational utility for network security, transaction processing, and cross-border liquidity.

Issuance Mechanism

Stellar's issuance mechanism has undergone a major structural shift:

• Initial Supply and Inflation: At inception, 100 billion XLM were created. The protocol originally included an annual inflation mechanism of 1.00%. This mechanism minted weekly XLM rewards, which were intended to be donated to projects but were often claimed by individual account holders or the Stellar Development Foundation (SDF).
• Deprecation of Inflation: On October 28, 2019, the 1.00% annual inflation was deprecated following a validator vote.
• Token Burn: On November 4, 2019, the SDF burned approximately 55 billion XLM (roughly 52.38% of the initial supply). This included 50 billion XLM from giveaway programs and 5 billion XLM from the SDF’s operating fund.
• Current Supply Cap: Following the burn and the deprecation of inflation, the total token supply was reduced to approximately 50 billion XLM. As of early 2024, roughly 21.25 billion XLM (42.5% of the total supply) remained out of circulation.

Allocation Mechanism

The distribution of XLM is managed primarily by the Stellar Development Foundation (SDF) under its mandate to grow the ecosystem. The initial 105 billion XLM (including inflation generated before deprecation) was originally structured to favor direct distribution and community support.

Following the 2019 supply reduction, the SDF disclosed control over approximately 29.95 billion XLM (59.90% of the total supply), categorized as follows:

Allocation Details:

• Direct Development: Used for SDF operations, including employee salaries (often paid in XLM grants), rent, and server costs.
• Use-Case Investment: Divided into New Products (2 billion XLM) for grants and the Enterprise Fund (8 billion XLM) for acquiring or investing in businesses building on Stellar.
• User Acquisition: Includes 2 billion XLM for marketing support and PR for the network and its projects.
• Ecosystem Development: Reserved for infrastructure grants, R&D, and the Stellar Community Fund (SCF).

Usage and Incentive Mechanism

XLM is a utility token with several critical functions within the Stellar protocol:

• Transaction Fees: XLM is used to pay for blockchain transaction fees. The average cost per transfer is approximately 0.00005 XLM.
• Minimum Balance Requirements: To prevent ledger spam, every account on the Stellar network must maintain a minimum balance. This is calculated in "base reserves." As of February 2024, the minimum balance is two base reserves (0.50 XLM per reserve, totaling 1.00 XLM), though validators can vote to change this amount.
• Bridge Currency: XLM acts as a universal intermediary for cross-currency transactions. If direct liquidity between two fiat stablecoins (e.g., AUD to EUR) is unavailable, the network converts the source asset to XLM and then to the destination asset.
• Medium of Exchange: XLM is used for sending/receiving value and trading on the Stellar Decentralized Exchange (SDEX).
• Governance Signaling: Through the Stellar Community Fund, verified members can use their reputation-based voting power (Neural Quorum Governance) to signal which projects should receive XLM grants.

Locking Mechanism and Unlocking Time

Unlike Proof-of-Stake (PoS) networks, Stellar’s consensus mechanism (Stellar Consensus Protocol) does not require users to stake or lock XLM to secure the network. Consequently, there are no native protocol-level staking rewards or interest for transaction validation.

• Locking for Assets: While the protocol itself does not require locking for consensus, it provides built-in features for issued assets, such as time-locked escrows. This allows developers to create smart contracts that hold assets until a specific time or condition is met.
• Unlocking Schedule: There is no fixed distribution or unlocking schedule for the remaining 21.25 billion XLM held by the SDF. The foundation releases these tokens at its discretion to fund the categories outlined in its mandate (Development, User Acquisition, etc.).
• Validator Incentives: There are no monetary rewards for being a validator on the Stellar network. Validators are typically motivated by the desire to ensure the stability and integrity of a network they use for their own business operations.