Stellar Price Analysis – Increasing on-chain use

Stellar (XLM) is a payments protocol that aims to connect banks, payments systems, and people. The networks native token is currently ranked 8th on the BraveNewCoin market cap table. The XLM spot price is down 87% from an all time high of US$0.72, set in January 2018. The market cap currently stands at US$2.4 billion with US$347 million in exchange volume over the past 24 hours.

Stellar and the Stellar Development Foundation (SDF) was created by Jed McCaleb and Joyce Kim in 2014. The genesis block minted 100 billion tokens. The project is analogous to Ripple (XRP) in many ways, where McCaleb previously worked.

The SDF was created to promote global financial access, literacy, and inclusion by expanding worldwide access to low-cost financial services through the development and maintenance of technology and partnerships. The SDF was incorporated in 2014 as a non-stock nonprofit corporation in the U.S. State of Delaware. The SDF is not currently an independently operated 501(c)(3), or non-profit, but did apply for this distinction in 2015. The SDF is currently run by McCaleb and Stellar’s chief scientist, David Mazières.

Source: https://dashboard.stellar.org/

XLM originally used the Federated Byzantine Agreement (FBA) for consensus. FBA was pioneered by XRP and was later changed to the Stellar Consensus Protocol (SCP) on XLM by Mazières in 2016, after the chain was unable to maintain reliable consensus.

Neither XRP nor XLM uses Proof of Work or Proof of Stake, but instead use validators to confirm transactions on the network. Validators do not receive a block reward. Anyone in the XLM network can be a validator, so the user must decide which validators to trust. Ideally, each trust group, or quorum slice, has overlapping transactions with other groups, and thus can collectively achieve consensus.

SCP quorum intersections ensure that each quorum slice is always linked by one node with consensus agreement, based on a large pool of individuals or validators. The XLM network currently has 135 active public nodes and 67 active validators over the past two days, with most of these nodes residing in the United States and Europe.

A team of South Korean researchers recently analyzed the SCP consensus algorithm and nodes on the XLM network. Their findings revealed that all of the XLM nodes are unable to run SCP if only two nodes fail, leading to a security risk. These critical nodes are controlled by the SDF. A response from Mazières admitted that the centralization of validators is currently a weakness in the XLM ecosystem and added, “downtime does happen, so what if a set of important nodes goes down and the network halts?”

On May 15th, the XLM network stalled for 67 minutes due to an inability to reach consensus. As opposed to most other chains, which can temporarily fork when consensus is not reached, the XLM network halts completely. The reason for the halt was revealed in a Stellar developers blog post, “Stellar has added many new nodes recently. In retrospect, some new nodes took on too much consensus responsibility too soon.” The SDF nodes were not the reason for the network failure.

The XLM supply grows at a fixed rate of 1% per year. The coins created to satisfy the yearly inflation rate are distributed through an inflation pool. The network transaction fees are also collected and placed in the inflation pool. Every account in the inflation pool votes for another account to receive the reward, which is deposited once a week. To receive rewards from the inflation pool, an account is required to obtain at least 0.05% of the total votes. Voting is weighted according to the number of lumens the voting account holds, essentially acting as a staking reward.

According to the Stellar Dashboard, there are currently 105 billion XLM in existence with 8.65 billion XLM in circulation and just over three million accounts on the XLM ledger. About 8.65 billion XLM have been distributed through airdrops or to promote partnerships and user growth. Of the current total supply, 19.26 billion XLM tokens are not held by the SDF. Based on available inflation pool statistics, 4.77% of the total XLM circulating supply is currently being staked.

Unlike XRP, there have been no announcements of programmed or controlled escrow plans regarding the large non-circulating supply held by the SDF. There has been some concern that the holdings of the SDF are being used to perpetually collect the inflation pool reward.

Source: https://stellar.expert/explorer/public/asset/XLM?filter=asset-holders

In late 2018, the SDF announced an up-to-500 million XLM distribution, or airdrop, through blockchain.com, which added wallet support for XLM. The airdrop is ongoing and is touted as encouraging first-time crypto users, and the crypto-curious. Each user can receive US$25 in XLM, after KYC verification in the form of an email address and identity documentation. In March, Stellar partnered with Coinbase to giveaway one billion XLM through a learning exercise and referrals.

The Stellar team has also announced partnerships with remittance agencies Tempo and ZED, ICOs Smartlands and Mobius, at least 10 stable coins, including Stronghold and Novatti, and Hyperledger. Smartlands is a platform for security token offerings. Mobius raised US$39 million in January 2018 and compares itself to the Stripe payment gateway. Stronghold is an FDIC-insured USD stablecoin backed by IBM. Novatti is a 1:1 backed Australian dollar (AUD) stable coin, with funds held in trust, which is similar to Tether. Hyperledger is an open source collaborative effort created to advance cross-industry blockchain technologies and includes almost 300 companies.

Earlier this year, IBM announced the launch of World Wire, which is a payments system built on the XLM network. Six international banks have signed letters of intent, indicating that they will either use XLM or issue stable coins on IBM’s service, pending regulatory review. IBM also has several validators on the XLM chain.

The XLM ecosystem also includes Interstellar which allows enterprises and institutions to use and build on the XLM network. The product combines the Chain and Lightyear brands. Chain’s products included Sequence and Chain Core. Sequence was a cloud-based ledger service for managing balances in financial and commerce applications like wallet apps, lending platforms, marketplaces, and exchanges. The Chain Core software was designed to operate and participate in permissioned blockchain networks.

The XLM network uses a default transaction fee of 0.00001 lumens to prevent spam or Denial of Service attacks. In USD terms, average transaction fees on XLM rose substantially from February to May but have since returned to the previous range (orange line, chart below). Average transaction fees on the XLM chain still remain much lower than most other chains, but are about 3x more expensive than XRP (grey fill, chart below).

The current number of transactions per day on the network (line, chart below) stands at ~6,760, following a rising trend since August 2018. The record high in transactions per day correlates with record high prices around December and January 2017. The average transaction value (fill, chart below) is currently US$489, down from a July high of US$3,000. Average transaction values have ranged around US$500 since June 2017.

Source: coinmetrics.io

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) has fallen significantly since April and is at the lowest level since October 2017. A clear downtrend in NVT suggests a coin is undervalued based on its economic activity and utility, which should be seen as a bullish price indicator. Inflection points in NVT can also be leading indicators of a reversal in asset value. XLM’s NVT is currently nine times higher than the XRP NVT.

The number of daily active addresses (fill, chart below) continued to rise from September 2018 to April 2019, but have recently been falling over the past two months and are currently around 6,500. Active and unique addresses are important to consider when determining the fundamental value of the network based on Metcalfe’s law. Grassroots interest in the project includes nearly 8,500 members in 27 Stellar groups on meetup.com.

Turning to developer activity, the Stellar project has 94 repos on GitHub. In total, over 300 developers have contributed to the XLM project, with over 500 commits on the main repo in the past year (shown below). Stellar Core v11.1.0 was released this week with minor stability improvements.

Most coins use the developer community of GitHub where files are saved in folders called "repositories," or "repos," and changes to these files are recorded with "commits," which save a record of what changes were made, when, and by who. Although commits represent quantity and not necessarily quality, a higher number of commits can signify higher dev activity and interest.

Source: https://github.com/stellar/stellar-core/

Last year, XLM had several exchange-related announcements including OKCoin listing XLM/USD, XLM/BTC, and XLM/ETH trading pairs. XLM was also added to the Circle Invest, BitGo, and Coinbase platforms. Stellar also released StellarX, a third-party client built on top of Stellar’s open marketplace. StellarX is not the custodian of any assets, but the client is also not a DEX, and there are no fees. The platform includes a fiat on-ramp through ACH transactions from a U.S. bank account. XLM exchange traded volume over the past 24 hours has predominantly been led by Bitcoin (BTC) and Tether (USDT).

Google Trends data for the term "Stellar" has remained low throughout most of 2018 and early 2019, with the exception of a small uptick recently. A slow rise in searches for "Stellar" preceded the bull run in Q4 2017, likely signaling a large swath of new market participants at that time. A 2015 study found a strong correlation between the google trends data and BTC price whereas a 2017 study concluded that when the U.S. Google "Bitcoin" searches increased dramatically, BTC price dropped.

Technical Analysis

Throughout late 2018, XLM followed the rest of the crypto market with a significant downward decline. The spot price has since stabilized near December 2018 levels. The strength of any potential trend reversal can be mapped using** **exponential moving averages (EMAs), Volume Profile of the Visible Range (VPVR), Pitchforks (PFs), Ichimoku Cloud, and chart patterns. Further background information on the technical indicators discussed below can be found here.

On the daily chart, the 50-day and 200-day EMAs have been bearishly crossed since June 21st, 2018. Price has mostly remained below the 200-day EMA since that cross. Over the next few weeks, a bullish 50/200EMA cross is likely to occur suggestive of increasing bullish momentum. Price recently invalidated a bearish PF with anchor points in January, June, and November 2018. There are no active volume or RSI divergences currently (not shown). For upside potential, VPVR also shows support near US$0.20-US$0.23

Turning to the Ichimoku Cloud, there are four key metrics; the current price in relation to the Cloud, the color of the Cloud (red for bearish, green for bullish), the Tenkan (T) and Kijun (K) cross, and the Lagging Span. Trades are typically opened when most of the signals flip from bearish to bullish, or vice versa.

Cloud metrics on the daily time frame with doubled settings (20/60/120/30), for more accurate signals, are bullish: price is above Cloud, the Cloud is bullish, the TK lines are overlapping, and the Lagging Span is in Cloud and above price. The most prudent long entry will take place once the TK lines cross bullish and the Lagging Span is above the Cloud.

There is also an Inverted Head and Shoulders reversal chart pattern, with a 1.618 fib extension and measured move of US$0.16 and US$0.20 respectively. The Inverted Head and Shoulders would be validated by either the shape of market structure, descending volume profile, a break through the neckline resistance with notable volume, and a throwback to the resistance which confirmed as support. The most conservative long entries will trigger above US$0.13 with stop losses below US$0.09.

Lastly, the XLM/BTC pair shows a sustained bearish trend. Price has been below the Cloud since early December and the 50-day and 200-day EMAs have been bearishly crossed since December 22nd. A flat Kumo is forming near the 2100 sat level, suggestive of a potential magnet for price if the current low holds. The 200-day EMA sits at 2,500 sats with price 35% below this level and suggests a growing potential for a mean reversion attempt to that level. There are no active volume or RSI divergences currently.

Conclusion

Fundamental network metrics for XLM show rising on-chain use over the past few months. The recent concern around network centralization followed by the brief network outage suggests the chain remains in the nascent stages of maturity. Based on the recent XLM partnerships, the network wants to directly compete with XRP in the remittance realm, and ETH in the ICO and STO realm. Initially, the low transactional cost on XLM was more attractive than its peers for ICOs, dApps, and general value transfer, but that competitive advantage will disappear if fees rise again.

Technicals for the XLM/USD pair reveal a bullish trend with price above the Cloud and nearly above the 200-day EMA. Price has also formed a bullish reversal pattern with a target near US$0.20. Technicals for the XLM/BTC pair remain bearish with price below the Cloud and below the 200-day EMA. However, based on the distance from the 200-day EMA, mean reversion to 2,000-2,500 sats in the near term is likely.