Stellar Foundation aims to eliminate XLM inflation

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The Stellar Development Foundation has made a proposal to abolish the inflation mechanism in the Stellar Lumens (XLM) protocol. The foundation posted a blog post announcing the proposal to the community and stating that the mechanism was not serving its intended purpose.

The proposal to eliminate XLM inflation is now being voted on by the validation nodes in the Stellar network.

What is stellar inflation and why is it not working?

Inflation was designed as an incentive for the continued growth of the stellar ecosystem. Currently, the initial equipment of 100 billion XLM is increasing annually by one percent, which, together with transaction fees, is distributed to network participants every week.

The voting determines the recipient addresses of the distribution, with each XLM token representing one vote. Addresses must receive 0.05% of the total votes to receive an inflation premium calculated in proportion to the number of votes cast. So if a given address gets 5 percent of the vote, it will get 5 percent of the total inflation reward for that week.

The founders of Stellar had a rosy vision that token holders would route their XLM inflation rewards to their favorite projects to drive adoption as more developers would join in hopes of receiving their share of the rewards. Instead, XLM owners found that if they pooled, they could help themselves to the rewards.

In addition, each pool then has to distribute the weekly rewards to all of its members, which puts a load on the validation nodes on the network to meet the demand for micro-payouts. Because the XLM inflation premiums are effectively redistributed among a broad base of HODLers, they do not offer any economic benefits.

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Make the change

At the technical level, the inflation operation remains, but it is modified so that it does nothing. The change will be made as part of the normal protocol upgrade cycle scheduled for October. Since this is a protocol change, the Stellar Development Foundation (SDF) cannot enforce it.

Therefore, if the validation network chooses not to accept the change by refusing to implement the upgrade, the SDF creates a new protocol that maintains the inflation function and submits it to the network again.

Interestingly, the blog post openly admits that the SDF was one of the biggest beneficiaries of the XLM inflation premiums. It also acknowledges the community’s concerns about the lack of transparency in the overall XLM distribution that the current version of the project roadmap seeks to address.

The SDF currently holds over 80 percent of the 105 billion available XLM tokens. This could be worrying for those investing in XLM, although the SDF clearly has a legitimate interest in acting responsibly when releasing these tokens.

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