Custodial Staking: Centralized third-party providers mostly utilize strategies where assets from each plan and type are consolidated and allocated for yield in various on-chain opportunities. Some of the avenues for yield generation are mining, staking, liquid staking, proprietary market-neutral algorithmic trading, and collateralized on-platform lending.

Custodial staking, while offering opportunities for passive income, also comes with certain risks that users should consider before participating:

Platform Security: It's important to choose a reputable and secure platform for custodial staking to mitigate the risk of potential security breaches or hacks. Consider the platform's track record and reputation within the cryptocurrency community to gauge its reliability.

Counterparty Risk: When staking funds with a custodial provider, users are essentially lending their assets to the platform. This introduces counterparty risk, where there is a possibility that the custodial provider may default on their obligations or become insolvent.

Regulatory Risk: Regulatory uncertainty and evolving legal frameworks surrounding cryptocurrency lending and staking can pose risks to participants. Before engaging in custodial staking, users should familiarize themselves with the regulatory environment in their jurisdiction and any potential legal implications.

Transparency and Accountability: Lack of transparency regarding the custodial provider's operations, financial status, and risk management practices can increase the risk for stakers. Look for platforms that prioritize transparency and regularly provide updates on their activities, financial performance, and risk management strategies.

Liquidity Risks: Depending on the terms and conditions of the custodial staking arrangement, users may face liquidity risks, especially if there are lockups or restrictions on withdrawing staked funds. Evaluate the platform's withdrawal policies and lock-up periods to assess the potential liquidity risks.

Lumens (XLM) are the native currency of the Stellar network and serve several key functions:

Transaction Fees: Lumens are used to pay small fees for all transactions on the Stellar network, helping to prevent ledger spam and prioritize transactions during times of high demand.

Base Reserves: XLM tokens are used as a unit of measurement to calculate an account's minimum balance, known as the base reserve. Currently set at 0.5 XLM per base reserve, accounts must maintain a minimum balance to exist, with additional lumens required for each subentry, such as trustlines, offers, signers, and data entries.

Minimum Balance: Lumens are required to maintain the minimum balance for Stellar accounts, with each account needing at least two base reserves (currently 1 XLM). Additional lumens are needed for each subentry, and accounts cannot exceed 1,000 subentries.

Rent: For smart contract data stored on the ledger, XLM tokens are used to pay rent instead of base reserves. The amount of rent charged depends on the size of the entry and how long it should remain on the ledger before being archived.

The Stellar network reaches consensus using the Stellar Consensus Protocol (SCP), which is a construction of the Federated Byzantine Agreement (FBA). FBA differs from other well-known consensus mechanisms like Proof of Work (which relies on a node’s computational power) and Proof of Stake (which relies on a node’s staking power) by instead relying on the agreement of trusted nodes.

In SCP, each participating Stellar Core node (also called a validator or validator node) decides what set of other nodes they want to trust. The flexibility of user-defined trust allows for open network membership (meaning anyone can become a Core node) and decentralized control (meaning no central authority dictates whose vote is required for consensus).

There are no monetary rewards for being a validator on the Stellar network. Instead, users are encouraged to become a validator because they are then contributing to the security and resiliency of the network, which benefits the products and services built on Stellar.

There are three desired properties of consensus mechanisms:

• Fault tolerance – the system can continue operating despite node failures or malfunctions
• Safety – no two nodes ever agree on different values, guarantees nodes will produce the same block
• Liveness – a node can output a value without the participation of any misbehaving nodes

Consensus mechanisms can typically only prioritize two out of three of these properties. SCP prioritizes fault tolerance and safety over liveness. Because of prioritizing safety, blocks can sometimes get stuck while waiting for nodes to agree.

100B XLM were created when the Stellar network went live, and for the first 5 or so years of Stellar’s existence, the supply of lumens also increased by 1% annually, by design. That inflation mechanism was ended by community vote in October 2019. And in November 2019, the overall lumen supply was reduced. Now there are about 50 billion lumens, total, in existence, and no more lumens will be created.

Initial token distribution:

The Initial token distribution of XLM is as follows:

• 50% was allocated to the Direct Sing-up Program
• 20% was allocated to the Bitcoin Program.
• 25% was allocated to the Partnership Program
• 2% was allocated to Stripe for its seed investment
• 3% was allocated to the Stellar Development Foundation

The Direct Sign-up, Bitcoin and Partnership Program featured an initial distribution plan over a period of 10 years. The tokens were never distributed as expected; the SDF conducted several changes to its distribution plan and treasury management over the years. 

Funding Rounds:

• $3M was raised in a Seed round in May 2014