Stellar Inflation Pool Explained
Last Updated: 1st November 2018
The Stellar protocol has a built-in inflation mechanism wherein Lumens (XLM), the native digital currency of the Stellar network, are created and distributed at a rate of 1% each year through an inflation pool.
Inflation pools can be thought of as something akin to ICO pools or mining pools. The 0.00001 XLM transaction fee on every transaction conducted on the Stellar network is collected and put into the inflation pool. Therefore, transaction fees are being redistributed back to XLM holders. This distribution of XLM from inflation pools is permitted to occur only once every week by the Stellar protocol.
The rationale behind Stellar’s inflation mechanism and its inflation pools take on two distinct forms:
- Prevent loss of value
- Replace lost Lumens
Prevent loss of value – By having a fixed inflation rate and returning the value back to XLM holders, the value of their holdings is prevented from being eroded away due to inflation. This allows the value of an individual’s XLM holding to remain relatively stable, and thus, allows the digital currency to better function as a medium of exchange.
Replace lost Lumens – The loss of a digital currency can occur in numerous ways. Ways such as: sending a digital currency to an incompatible address, loss of private keys and machine failure. Overtime, such losses would compound and result in a net decrease in the circulating supply of XLM. A net decrease in the circulating supply begets issues such as hoarding and a decrease in liquidity. This is in antithesis with the Stellar’s reported goal for XLM to function as a medium of exchange, and as such, its inflation mechanism and inflation pools combat both these issues.
How it Works
Every account participating in an inflation pool is required to select another account as its inflation destination. An Inflation destination is simply the account being nominated to receive the inflation pool reward. Setting an account as your inflation destination will count as a vote for that account.
The larger the number of XLM held by an account when voting, the larger the weight that that account’s vote will carry. For example, if Alice has 100 XLM in her account and sets her inflation destination for Bob’s account, i.e. she is nominating Bob’s account to receive the pool reward, then the network will count that as 100 votes for Bob.
An account is required to receive over 0.05% of all existing XLM in votes in order to be considered a winner and receive part of the inflation pool reward. The pool reward is distributed in proportion to the amount of votes an account received. For example, if an account gets 10% of the votes, it will get 10% of the inflation pool reward.
A maintenance fee is typically imposed by the pool developers.
Stellar inflation pools are a medium through which newly created XLM can be distributed to XLM holders. They serve the important function of preventing loss of a value, as well as replacing any lost XLM.