In this guide, we will be analysing what is Stellar (XLM), how it works, which are its features and who is behind this interesting project in the cryptocurrency market. For those that do not know, Stellar is among the top 10 cryptocurrency networks in the market and it has been operating for around three years as of August 2019.
What Is Stellar?
Stellar is a cryptocurrency blockchain created by Jed McCaleb and Joyce Kim back in 2014. The project was born after McCaleb co-founded Ripple and the cryptocurrency exchange Mt. Gox.
Stellar is a platform that connects banks, payments systems and people. The main intention is to be able to offer cheap and fast transfers for both individual users and companies using blockchain technology.
Technology allowed information to be shared around the world in a fast and easy way, helping companies improve their outcomes, and making society much more efficient. But funds became difficult to be moved from one country to another, indeed, it is expensive and slow.
McCaleb has been working to improve the access that users have to the cryptocurrency world and how they can deal with digital assets. He created Mt. Gox, the first massive crypto exchange in the world, he co-founded Ripple, Stellar’s main competitor, and co-founded Stellar.
Stellar is a project that has a decentralized and open database that allows parties to send and receive funds with a confirmation time of 3 to 5 seconds. The network is also able to support thousands of transactions per second, much more than other crypto networks such as Bitcoin (BTC) or Ethereum (ETH).
To move funds across borders, the Stellar network is powered by Lumens, the 10th largest cryptocurrency in the market that is represented as XLM. Banks get connected through this network allowing users to send funds in a fast and easy way integrating cryptocurrencies and blockchain technology to the traditional banking system.
If a bank wants to send funds from one country to another, it is possible to do it with local fiat currency and receiving local currency in the other country. Everything can be performed using the XLM digital asset or any other coin based on the Stellar network.
As mentioned before, Stellar is a decentralized system, meaning it does not have a central authority controlling the transactions. Using blockchain technology, all the information about XLMs sent and received can be stored safely. These transactions in the network are verified using the Stellar Consensus Protocol.
Anchors in the Stellar network allow participants to have credits as soon as they need it. These anchors hold the deposit the company or individual makes and issues credit for them. With these anchors is also possible to send a transaction using one currency and another party receiving the funds in different fiat currency.
The network has a mechanism called conversion chain that makes possible the transaction between two illiquid currencies. For example, a transaction between MXN and INR. The MXN funds can be exchanged for USD, then the USD can be exchanged for BTC, the BTC for XLM and the XLM for INR.
Stellar Consensus Algorithm
Stellar worked with a consensus algorithm known as Byzantine Fault Tolerant (PBFT). With it, it is possible to help the network operate even when actors are acting maliciously. Nonetheless, this consensus algorithm has been replaced for another one.
In the Stellar network, there was a predefined set of validators that were selected by a central authority. This is completely different from how PoW (Proof-of-Work) where validators are miners that provide the necessary processing power and are not selected by any central authority.
The validators that were operating in the Stellar network agreed on different things, including transaction verification. For the PBFT systems to work, it is necessary to have 66% of the validators reaching a consensus. That means that malicious participants shouldn’t reach more than 33% of the consensus for the network to keep working.
Stellar moved forward and adopted a new version of a consensus algorithm that is based on Federated Byzantine Agreement (FBA) and that is also known as “Stellar Consensus Protocol.”
According to London Blockchain Labs, the Stellar Consensus Protocol is the first implementation of the FBA, created in 2015 by Professor David Mazières of Stanford. This system describes a way for nodes in a network to reach an agreement that can be used for blockchains.
The system has three main characteristics:
- Decentralized control: everyone can be a validator in the network.
- Low latency: Consensus can be reached in just a few seconds.
- Flexible trust: Participants are free to decide what other nodes they trust, without restrictions.
- Asymptotic security: Digital signatures and hash families are used in a way to protect the network.
The system works through quorums, quorum slices and also intersections. Quorum is a set of nodes that is enough to reach an agreement. A quorum slice is a set of nodes sufficient to convince another node of a statement’s validity, which is called “slices.”
A quorum intersection takes place when two quorums share a node essential to agreement. Interfering and interfere in each other’s internal agreement. London Blockchain Labs explains that this is important for a strong consensus protocol since otherwise, the network could reach separate agreements. This is why every single quorum needs at least one intersection with another for consensus to work.
Slots are updates to the ledger that all nodes must agree to.
London Blockchain Lab wrote about slots:
“Slots are, in fact, blocks. All participants in a blockchain network must agree on the validity of a block and update their personal ledgers to include it once it is published. Once that is done, consensus is achieved.”
Nodes can be ill-behaved and well-behaved. Ill-behaved nodes are those that do not follow protocol rules and do not act in the network’s best interests. They do not choose sensible quorum slices and may have crashed. These are just failed nodes that cannot be trusted in this consensus.
Well-behaved nodes follow protocol and best practices. They are also well-intentioned and ensure the safety of the network through different measures.
Through federating voting, it is possible to assure network consensus remains unharmed despite node failure, SCP introduces Federating Voting that is also used with quorums and slices allowing the network to achieve consensus without the need for all the nodes in the network.
This system has some limitations. It does not provide a system for minting digital coins or an incentive scheme to encourage good behaviour from nodes. In many cases, nodes can also select bad quorum slices and harm consensus.
Although the protocol is very useful for the Stellar network, it can be used for applications that go beyond blockchain technology.
What is Lumens?
Lumens or XLM is the digital currency that powers the Stellar blockchain network. According to the Stellar official site, lumens are built into the network and it can be considered a unit of digital currency, like a Bitcoin.
The virtual currency was launched in 2014 with the Stellar network and 100 billion lumens were issued. At that time, XLM was known as stellars but the name changed to lumens in 2015.
Lumens have two different purposes. The first one is that they can play a small anti-spam role since lumens are used for paying transaction fees and holding minimum balances on accounts on the Stellar network. This would prevent people from overwhelming the network and aid in prioritization.
The transaction fees on the Stellar network are equal to 0.00001 lumens. With this fee, it is possible to reduce malicious intentions from users to flood the network, something that is known as a DoS attack, also known as Denial-of-Service attack.
The second purpose is for lumens to facilitate multi-currency transactions. Lumens facilitates trades between pairs of currencies between there is not a large direct market that acts as a bridge. It is worth pointing out that there must be a liquid market between the lumen and each of the currencies involved.
As mentioned before, there were 100 billion lumens created when the network was released. As Stellar informs, there is a 1% inflation rate each year and new lumens cannot be generated arbitrarily by anyone.
The nodes that work in a decentralized manner are unlikely to accept and ratify a change to the rules around lumen creation. At the same time, if they decide to change this feature, people would certainly lose trust in Stellar.org and the whole project would be severely affected.
To understand the fee scheme, there are two special values to take into account: the base fee that is 0.00001 XLM and the base reserve close to 0.5 XLM.
The transaction fee is calculated as follows:
- Transaction Fee = (# of operations x base fee)
This ends up being very affordable for making transactions around the world. With just $1 it would be possible to cover around 400,000 transactions. The data provided by Stellar is from April 2018, which means that things could have changed during that time.
Different cryptocurrency exchanges would allow investors to purchase XLM coins. Many different trading pairs would help users acquire this digital currency. If you want to know more, you can read our guide about how to buy Stellar Lumens (XLM) from Binance.
The official Stellar site advises users to consult the Consumer Advisory brief by the Consumer Protection Finance Board (CPFB) on the potential risks associated with digital currencies.
Lumens experienced a very volatile price action, like many other digital assets in the world. The virtual currency had a price of under $0.002 early in 2017 and it skyrocketed to $0.93 per coin in January 2019 with the massive altcoin run. Since that moment, the virtual currency behaved very similarly to Bitcoin during the bear trend and it reached the lowest point in more than a year just a few hours ago when it is being traded under $0.069 per coin, according to data provided by CoinMarketCap.
As mentioned before, the Stellar network has a 1% inflation each year. The fees paid by users are redistributed in the process of inflation. The network is also collecting a base fee for each operation in a transaction. The funds from base fees are then added to the inflation pool. Those holding lumens can vote on where the funds go. The lumens go to accounts that receive 0.05% of the votes from other accounts on the network.
The 100 billion lumens are going to be distributed in the following way:
- 50% to individuals
- 25% to partners
- 20% to bitcoin and XRP holders
- 5% reserved for Stellar.org operational expenses
The decision to give these Lumens away is due to the goal they have of achieving a “more inclusive digital economy.” Their mission is to offer users the possibility to connect people to low-cost financial services compared to expensive traditional financial services.
Stellar Lumens Competitors
Different cryptocurrencies in the market are currently competing against Stellar. For example, one of them is XRP and the Ripple company that McCaleb co-founded in the past.
The main differences between Stellar and Ripple are related to their goals, the size of each of these organizations, the inflationary (and deflationary) networks they have, the consensus protocols and how they work in the cryptocurrency market.
XRP and XLM can be used by both companies and users to send transactions around the world in a fast and easy way. However, XRP is a much more valuable virtual currency compared to XLM and the numbers of firms working with Ripple is much larger than the firms using the Stellar network.
As these two have different consensus algorithms, firms in the market will find on each of these cryptocurrencies and networks different solutions that would fit their needs.
Ripple has already partnered with over 200 financial companies around the world that are already using the products and services they created. They are a company that has offices around the world and that sell XRP to the market to fund their operations. Instead, Stellar has a smaller organization and they do own just 5% of the XLM coins ever created. Ripple owns around 60% of the total supply of XRP.
Regarding inflation, a small amount of XRP is burned on each transaction. Although these XRP burned are not significant to increase XRP’s price in the long term, they help prevent spam attacks on the network. XLM has a 1% inflation per year rather than a burning of coins. This inflation replaces the lost XLM and it helps redistribute funds across the network.
You can read our full comparison between Ripple and Stellar.
Ethereum (ETH) is also a recognized cryptocurrency in the market that could eventually be considered a Stellar competitor. Why? Because it also offers the possibility to send and receive fast transfers, cheaper than Bitcoin but with higher liquidity as well.
Ethereum is the second-largest cryptocurrency in the market after Bitcoin, while Stellar is currently in the tenth position. Nevertheless, Stellar is faster and cheaper to use than Ethereum, which is focusing on allowing firms, Initial Coin Offerings (ICOs) and companies to release their digital currencies on top of its blockchain network.
The consensus protocol that powers Ethereum is completely different from the one that is currently being used by Stellar. Indeed, Ethereum uses a Proof-of-Work consensus algorithm and it wants to move to a Proof-of-Stake that would allow it to scale.
Although many enthusiasts would consider that these digital currencies cannot coexist in the market, they have been operating in the market for a long period.
Stellar Lumens Partnerships
Stellar is also growing in the market with very important partnerships it signed with other companies in the world.
One of the most important projects in which Stellar is currently working on is related to the technology giant IBM. The tech company partnered with a large number of banks and other financial entities in the world, specifically in the Asia Pacific region. With this partnership, the goal is to move paper money onto the Stellar blockchain network.
Another partnership that the Stellar signed is with Veridium, that is also working with IBM. Veridium is a global carbon credit market. The goal is to work to incorporate the VERDE token with the trading platforms that deal with oil and gas.
There are other partnerships in which Stellar is involved, including Stellar X, Open Garden, TillBilly, Slice, Sure Remit and SmartLands. If you want to know more about it, you can read which are 8 exciting projects on the stellar (XLM) platform.
Other Stellar partners include Deloitte, Stripe, and Le.com, among others.
Stellar is one of the most popular digital currencies in the market. Although there are many competitors, it offers many different characteristics that allow it to be among the top 10 virtual currency projects in the space.
This network allows companies and individuals alike to send and receive funds in a fast and cheap way. Through the Stellar network, it is also possible to help firms improve their services and products.
Regarding the consensus algorithm, Stellar has implemented a successful solution that helps the virtual currency and blockchain network remain one of the most competitive in the space.