I’ve recently noticed a strain of poster that cares more about Stellar the Technology than Stellar the Investment or Stellar the Decentralized Marketing Frenzy. This person might own no XLM, and in fact might vehemently disagree that XLM is a good investment for the average Tom, while maintaining great enthusiasm about Stellar’s mission of banking the underbanked and disrupting the remissions industry.
I respect this position a lot, and must admit that my purposes aren’t nearly as altruistic. A Stellar fanatic who owns no Stellar almost certainly has a much more objective outlook on the project’s direction than the rest of us, and to that end, his or her views are worth orders of magnitude more.
Why wouldn’t someone invest in an idea they believed in? You may ask. One possible reason is that the person isn’t in a financial position to take on the volatility of investing in a cryptocurrency. They may be nearing retirement, they may have limited access to savings, or they might simply have a lot of their net worth tied up in correlated investments (Dash masternodes come to mind).
Another possible reason I could think of is altruism. The Stellar Foundation has set aside a fixed percentage of its tokens for distribution to ordinary people, presumably (given its mission) much of it to the Third World. The greater the value of an XLM, the more likely this distribution will be sockpuppeted, scammed, or otherwise centralized into the hands of whoever is most adept at gaming their way into lots of tokens. Problems such as these were seen in the case of the airdrop to Bitcoin holders, which the Foundation aborted after distributing 10% of what they had initially planned. Preempting these issues only serve to increase the Foundation’s distribution costs and potential liability from other stakeholders, taking time and energy away from development.
The final reason is a bit less obvious: XLM is not the Stellar project. The Stellar project may succeed, even as the new global remittance currency, without ordinary XLM holders benefiting from it in any way. How is this so? Well, Stellar is a very new project, and inventing the next global financial system is not easy. Parameters such as base fee and base reserve are expected to change; the latter has already been modified by a vote of the validators. Is it so hard to imagine that a similar vote could increase the total supply of XLM should mass adoption commence? Of course, such increases would need to be accompanied by distributions to validators representing a majority vote, to compensate for the ensuing market devaluation. Many of these would be delegates of anchors and other ‘DEX’ market makers that necessarily have enormous amounts of XLM on their books for their core business and would happily vote for a protocol change that increased their share of the pie.
I’d like to spend the remainder of this post analyzing some of the incentives for such key protocol influencers to protect the value of everyone else’s XLM holdings and vote against supply cap increases that don’t distribute newly minted XLM commensurately with value creation. I imagine this will be key to getting the smallest market makers to sign up for FairX. Essentially this is a referendum on whether XLM can possibly be a medium of exchange without being a long-term store of value.
Arguments in Favour:
– As noted above, it is in the near-term interests of the largest market makers to vote for changes that benefit only their financial holdings. This is the fundamental governance issue with any proof of stake system.
– These market makers could also request legal guarantees against price swings which the Foundation would be obliged to satisfy in their distribution of newly minted coins. Other, smaller investors would not have the clout or the justification to request this.
– Market makers could take advantage of volatility by hedging the underlying asset assuming a reliable XLM derivatives market came to fruition. This could be done on a closed platform where all participants enjoy a certain level of trust.
– Securities law could prevent the Stellar Foundation from selective dilution. Then again, could securities laws hamper the Foundation from making any distributions?