Stellar XLM seeks to reimagine the market for currency and asset transfer by creating a distributed network that’s been described as everything from a payment rail to an exchange.
So while answers to the question “What is Stellar?” may change depending on who you ask, that isn’t the fault of the technology. As it did at its 2014 launch, Stellar allows users today to send money and assets in ways that have traditionally been the domain of payment providers.
The difference is that Stellar enables these services by incentivizing a distributed network of computers to run a common software.
The idea is anyone using a service powered by Stellar could transfer everything from traditional currencies to tokens representing new and existing assets. These assets can then be traded between users (across borders) with less friction using its cryptocurrency, lumens (XLM).
In this way, Stellar shares similarities with the XRP Ledger (and its cryptocurrency, XRP), which is also meant to provide a protocol for payment providers and financial institutions.
But Stellar has also sought to position itself as a kind of decentralized exchange, as its ledger has what is effectively a built-in order book that keeps track of the ownership of Stellar assets.
Developers have increasingly sought to make Stellar a marketplace for assets issued on its own protocol, with features that allow users to manage buy and sell orders and set preferred assets when settling trades.
Who created Lumens (XLM)?
Stellar is the name for the distributed computer network on which lumens are the cryptocurrency required to send transactions. Lumens now trade under the ticker symbol XLM on exchanges like Kraken, and as a result, they are often called XLM for short.
The individual credited with creating lumens is Stellar co-creator (and Stellar Development Foundation founder) Jed McCaleb. McCaleb notably founded the first successful bitcoin exchange, Mt Gox, and designed the XRP Ledger.
McCaleb would go on to serve as the chief technology officer (CTO) of Ripple, the company that today sheppards the development of the XRP Ledger, until 2013 when he left to create Stellar.
Other notable contributors to XLM’s technology and ecosystem, include:
- David Mazieres, author of the Stellar consensus protocol
- Denelle Dixon, the SDF’s Executive Director and CEO
- Joyce Kim, founder of Stellar and former Executive Director of the SDF.
More information about the Stellar Development Foundation’s leadership team can be found on the project’s official website.
How does Stellar work?
At the time of its launch, Stellar copied the code used to power the XRP Ledger, meaning it inherited much of its design and features.
However, Stellar has since made technical changes that differentiate its offering.
Stellar is a decentralized network designed for fast and low-cost international payments. Here’s a closer look at how it works:
Core Function:
- Stellar acts as an intermediary platform that enables users to exchange various currencies, including traditional fiat currencies and digital assets like cryptocurrencies.
Underlying Technology:
- Stellar is built on a public, open-source blockchain network. This distributed ledger technology ensures transparency and security of transactions.
- Unlike some blockchains that rely on Proof-of-Work (PoW) for consensus, Stellar utilizes a unique consensus mechanism called the Stellar Consensus Protocol (SCP). SCP is faster and more energy-efficient compared to PoW.
Stellar Lumens (XLM):
- XLM, the native cryptocurrency of Stellar, plays a crucial role in the network’s functionality. It acts as a bridge currency, facilitating the exchange between different assets.
- Transactions on the Stellar network typically involve a small XLM fee, regardless of the currencies being exchanged. This fee helps prevent spam and contributes to network stability.
Key Features:
- Fast Transactions: Stellar boasts rapid transaction processing times, often settling within seconds compared to the potentially longer wait times associated with traditional international payments.
- Low Fees: Stellar transactions incur minimal fees, making it a cost-effective solution for sending and receiving money across borders.
- Multi-Currency Support: Stellar allows users to hold and exchange a wide range of assets, including traditional currencies and digital tokens.
- Anchors: Stellar incorporates a unique concept called anchors. These are trusted institutions, like banks or payment processors, that connect traditional financial systems with the Stellar network. Anchors are responsible for issuing and redeeming digital representations of real-world assets (like USD) on the Stellar network.
Overall, Stellar aims to bridge the gap between traditional finance and the world of cryptocurrencies by facilitating seamless, fast, and affordable cross-border payments. Its focus on low fees, speed, and scalability positions it as a potential game-changer in the realm of international money transfer.
Stellar Consensus Protocol
Stellar’s biggest update occurred in 2015 when it replaced the mechanism it used to keep the computers running its software in agreement about the state of its ledger with a custom-built alternative.
Based on a concept called federated Byzantine agreement, a type of consensus method that predates the one designed for Bitcoin (BTC), the Stellar Consensus Protocol enables nodes to vote on transactions until quorums are reached.
The Stellar Consensus Protocol (SCP) is a critical component of the Stellar network, enabling it to function as a fast and secure platform for international transactions. Here’s a deeper dive into SCP:
What is SCP?
- SCP is a Byzantine Fault Tolerance (BFT) consensus mechanism designed specifically for Stellar.
- Unlike traditional blockchain protocols that rely on all nodes agreeing on every transaction (like Proof-of-Work in Bitcoin), SCP focuses on a smaller set of trusted nodes to achieve consensus.
How Does SCP Work?
- Node Selection:
- Each participating node (computer on the network) chooses a group of other nodes it trusts. These trusted nodes are called a quorum slice.
- Transaction Proposal:
- When a new transaction is submitted, a node broadcasts it to its quorum slice.
- Vote and Validation:
- Nodes within the quorum slice vote on the validity of the transaction.
- If a node believes the transaction is valid and hasn’t been seen before, it votes “yes” and broadcasts its vote to other nodes in its quorum slice.
- Reaching Consensus:
- A transaction is considered successful if it receives enough “yes” votes from validating nodes within its quorum slice.
- This ensures a large enough portion of the network agrees on the transaction’s legitimacy.
Benefits of SCP:
- Faster Transactions: SCP enables faster consensus compared to traditional PoW protocols because it only requires agreement from a smaller group of nodes. This translates to quicker transaction processing times on the Stellar network.
- Scalability: SCP is designed to be scalable, meaning it can efficiently handle an increasing number of transactions on the network as it grows.
- Energy Efficiency: Since SCP doesn’t rely on complex computations like PoW, it’s a more energy-efficient consensus mechanism.
Security Considerations:
- The security of SCP relies on the trustworthiness of the nodes chosen by each participant.
- Malicious actors could attempt to disrupt the network by gaining control of a significant number of nodes.
More details can be found on Stellar’s Medium or in this technical explainer.
Running a Node
The software used to power the Stellar network is called Stellar Core, and it can be run in different ways depending on a user’s needs. Specifically, nodes can be set up to serve as Watchers, Archivers, Basic Validators or Full Validators.
Watchers are only able to submit transactions. Full Validators, by contrast, participate in the Stellar Consensus Protocol, voting on which transactions should be deemed valid and maintaining an archive of this history for other nodes.
More details about the various nodes can be found on Stellar.org.
Issuing Assets
Another important network function is performed by Stellar Anchors (originally called Gateways).
These entities accept deposits of currencies and assets, and issue new representations of these assets on Stellar. Anchors then establish the requirements Stellar users need to meet to hold the assets. They can also revoke user access to assets.
Why does XLM have value?
Stellar has seen a number of changes to its economy over the years.
At launch, a supply of 100 billion lumens (XLM) were created, and for the first five years of the network’s operation, this increased 1% annually until 105 billion were in circulation.
As of late 2019, however, this subsidy is no longer in force, with Stellar users voting to end the programmatic supply increases. That year, the Stellar Development Foundation also took steps to regulate the XLM economy, electing to reduce its share of the XLM supply.
This dropped the number of available lumens from 105 billion to just over 50 billion.
Apart from its finite supply, XLM gains value from its use as fuel for transactions on the network, as a small amount of lumens, 100 stroops (0.00001 XLM), are deducted as fees whenever a transaction is made. This helps prevent bad actors from spamming the blockchain.
Why should I use Lumens (XLM)?
Today, the uses for XLM are varied. For example, you may find XLM to be a valuable addition to your portfolio should you believe financial institutions may seek out crypto networks where they have more control over who can use and access any assets they issue.
To date the largest test of the technology is by software giant IBM, which used Stellar in 2018 to create and launch a cross-border payments solution called World Wire.
Developers may find XLM useful should they want to issue new types of assets, and already entrepreneurs have used the network to launch new cryptocurrencies.
However, as of 2020, whether Stellar will gain traction with any of these more experimental use cases, or win a share of the competitive payments market, remains an open question.
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