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Stellar (Everything You Want to Know) - Financial Services for Everyone

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Updated January 17, 2022

Stellar is a very interesting and also often neglected payment system that runs the cryptocurrency Lumen (XLM). Stellar also provides an environment for several decentralised exchanges where increasingly popular ICOs can be created. How does Stellar work and how does it do compared to Ripple? What is the purpose of the Lumen cryptocurrency on the Stellar network? This and much more, find out in our article!

Stellar (Everything You Want to Know) – CONTENTS
  1. What Is Stellar and What Are Its Goals?
  2. The Origin and Development of Stellar
  3. IBM, SatoshiPay and Keybase: Stellar Enters Into Promising Partnerships
  4. How Does the Stellar Payment System Work?
  5. Stellar Consensus Protocol: The Cornerstone of the Stellar Network
  6. What Is Lumen Cryptocurrency (XLM) and What Is It Used for?
  7. Distribution of Pre-mined Lumen (XLM)
  8. Advanced Functionalities on the Stellar Platform
  9. Stellar vs Ripple
  10. Stellar and Wallets: Where to Hold Lumen (XLM)?
  11. Where to Buy Lumen (XLM) Cryptocurrency?
  12. Conclusion: How Do We See the Future of the Stellar and Lumen?
i Stellar: Highlights in points

What Is Stellar and What Are Its Goals?

Stellar is an open-source payment protocol operating on a similar basis to the better-known Ripple payment system. Stellar's main goal is to make financial services accessible to anyone, including people in less developed areas who do not have access to traditional banking services. Stellar also aims to create a payment system for cheap and fast international and domestic payments.

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The interesting thing is that Stellar is the first cryptocurrency that is Sharia-compliant and therefore can be used in Muslim financial institutions.

The Origin and Development of Stellar

Stellar was founded on July 31, 2014 by Jed McCaleb and his girlfriend Joyce Kim.

Jed McCaleb
Jed McCaleb is no newbie to the world of cryptocurrencies - he previously founded the infamous Mt.Gox exchange and was one of the founders of Ripple, Stellar's biggest competitor.

Stellar is developed by several entities. From the beginning, the non-profit organization Stellar Development Foundation (SDF) has been involved in the development. Over time, Interstellar and IBM have also joined the development effort.

Interstellar

Interstellar is a profit-making company that provides services to companies that want to operate on the Stellar network.

IBM, SatoshiPay and Keybase: Stellar Enters Into Promising Partnerships

Stellar has entered into several partnerships during its existence, but clearly the most important is the partnership with IBM, which actively uses and promotes Stellar.

IBM Stellar partnership
IBM, in collaboration with the Stellar Development Foundation, is working on a Hyperledger Fabric project to make the Stellar Ledger more accessible to large companies, banks and institutions.

Stellar has also partnered with SatoshiPay. All microtransactions that take place in SatoshiPay are processed by Stellar.

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If you use the Keybase secure communication platform, we have good news for you! This company signed a partnership with Stellar in 2018, and now every Keybase client has a built-in Stellar wallet that you can use to send and receive payments directly from the Keybase client!

How Does the Stellar Payment System Work?

Stellar is a payment system that uses the Lumen (XLM) cryptocurrency and tokens, which most often represent real assets (such as dollars). An internal market exists between these tokens where individual tokens can be exchanged. However, tokens do not always have to represent real assets. It is also possible to create your own token and put it into circulation. For example, an Alza token can be created and through a decentralised exchange, a price can be set and published for trading.

There are also anchors in the network, which are most often payment companies or banks that take care of the deposit and withdrawal of assets from the network. Their functioning will be explained in the following example.

Transaction flow on Stellar

John wants to send $20 to Adam, who wants to receive it in pounds. The process is as follows:

  • First, John needs to recharge his wallet. John sends $20 to Stellar's network. The ledger records this payment as a form of credit, which is then issued by one of the trusted anchors (such as a payment company). After this credit is issued, John will have the money in the form of tokens in his account.
  • John then wants to send this money to Adam.
  • If there is sufficient liquidity in Stellar's internal market, then the conversion of dollars to pounds will be done directly and automatically.
  • If there is no direct way to convert dollars to pounds, even then Stellar can automatically find a way to convert currencies using multiple conversions. So the final conversion might look like this: Dollar > Crown > Peso > Pound.
  • If even multiple conversion is not possible, the cryptocurrency Lumen is used as an intermediary. The dollar is first exchanged for Lumen, which is then exchanged for the pound.
  • Once the conversion is done, the money moves to Adam. He can withdraw this money again using anchors.

Stellar Consensus Protocol: The Cornerstone of the Stellar Network

Stellar does not verify transactions by mining such as Bitcoin. Instead, Stellar runs on a protocol called the Stellar Consensus Protocol (SCP), which is a slightly modified form of the Federated Byzantine Agreement system. There are no miners in the Stellar network; their role is taken by verifiers, who look for consensus among confirmed transactions. A new block is created whenever consensus is found (2-5 seconds). The verifiers themselves choose who they want to trust in the network. In this way, the verifiers who trust each other form individual groups that are linked by trust (see the coloured geometric shapes in the figure).

Stellar Consensus Protocol
The Stellar Consensus Protocol works on the principle of verifiers producing their own network of trusted individuals. This network is represented in the figure by coloured areas known as quorum slices.

If there is an attacker in the network (the computers with a dark red dot), then the network can exclude him from its group, thus preventing him from unfairly influencing the consensus. However, even if the verifiers cannot reach a consensus, no new blocks are created until one correct block is identified. Bitcoin, for example, works differently - here, if miners fail to agree on the correctness of a block, a fork can be created - this is surely not possible with Stellar.

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Many of the verifiers in the network are run by IBM, which has a partnership with Stellar, as was already mentioned above.

SCP has a security advantage over Bitcoin's proof-of-work system in that even the world's most powerful computer cannot take over the network. Stellar does not have the hash rate(computing power) that Bitcoin has. Thanks to SCP, Stellar's network can process more transactions faster than other cryptocurrencies such as Ethereum or Bitcoin.

What Is Lumen Cryptocurrency (XLM) and What Is It Used for?

Lumen is a cryptocurrency that operates on the Stellar network. It performs a similar function to XRP at Ripple. Lumen serves as an intermediary for transactions, an antispam or as a means to vote on changes in the network. The total number of pre-loaded Lumen is 100 billion, and each year 1% of the total supply of new Lumen is created by inflation (i.e. just over 1 billion new Lumen each year).

Payment

Not only with tokens, but also with Lumen, transactions can be sent and received on the Stellar network. The advantage of using Lumen is mainly in easier conversion to other currencies and greater speed.

Antispam

Each time a transaction is sent, 0.00001 XLM is deducted from the sender as a transaction fee. With this move, Stellar wants to prevent DDoS attacks, where an attacker would send one transaction after another to overwhelm the network.

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Each Stellar Wallet needs at least 0.5 XLM in the account to be activated.

Liquidity provision

If there is no way to convert two tokens between each other, Lumen is used as an intermediary.

Means of voting

On the Stellar network, it is possible to vote on possible protocol changes or the distribution of free Stellars that have been collected from fees and inflation. The more Lumen, the stronger the vote.

Distribution of Pre-mined Lumen (XLM)

Stellar Build Challenge

SDF rewards interesting projects built on Stellar.

Stellar Community Fund

The user community decides which projects will be rewarded.

Stellar Partnership Grant Program

It reserves a portion of Lumens for partnerships with companies. All 100 billion Lumen were preloaded before the Stellar network was launched. Gradually, 95% of the Lumen is to be distributed to users/partner organizations. The remaining 5% will be retained by the Stellar Development Foundation for development and operations. At the time of writing this article(January 2019), over 70% of all Lumen is still locked up, causing many people to be very distrustful of Stellar.

However, the Stellar Development Foundation has already stated several times via its blog that the remaining Lumens will be gradually released on the stock exchange or given away for free in giveaways or contests, eventually being reserved for partners and support of Stellar development projects.

Distribution of Lumens created by inflation

As for the distribution of inflation generated Lumens, they are automatically distributed to anyone who owns at least 0.05% of the total supply of Lumens in their wallet. Those who don't have that many Lumens can join inflation pools, but they often have a fee.

Stellar and Decentralised Exchange Markets

Stellar has built-in shared order book functionality, which allows any network user to exchange individual assets running on Stellar.

Decentralised StellarX exchange
The UI of the StellarX exchange, which used the functionality of a shared order book. There is no intermediary on StellarX and users exchange assets/tokens directly with each other. StellarX has zero fees.

Smart Contracts on Stellar

Stellar allows you to run smart contracts. However, because Stellar is not Turing complete, it is not possible to program such complex smart contracts as, for example, on Ethereum. On the other hand, Stellar is an ideal platform for regular smart contracts, especially because of the low cost of running smart contracts compared to Ethereum, where you have to pay with GAS.

Initial Coin Offerings (ICOs) on Stellar

The creation of ICO on the Stellar platform has several advantages:

  • You don't pay as much for smart contracts as on Ethereum.
  • There are decentralised exchanges on Stellar, which can be used to start selling the token immediately.
  • Because you can't write overly complex smart contracts on Stellar, there are fewer opportunities for hacking.
  • Stellar's network allows the ICO issuer to set up the token sale to only involve people who have their account verified with KYC/AML standards.

Stablecoin on Stellar

The first stablecoin already exists on Stellar. It is called USD Anchor and is issued jointly by IBM and Stronghold and backed by Prime Trust at a ratio of 1 USD Anchor = 1 dollar in the bank.

USD Anchor
So far, USD Anchor is traded only in pairs with Lumen (XLM).

The question is whether the creation of stablecoin on Stellar reduces the field of use of Lumen. Indeed, it is highly likely that in the event of wider adoption of USD Anchor, banks would use USD Anchor instead of Lumen to protect themselves against volatility.

Stellar vs Ripple

Although Stellar and Ripple share a similar concept, there are also many differences between the two.


Stellar Ripple
Maximum quantity 100 billion XRP
Algorithm Stellar Consensus Algorithm Proof of Correctness
ICO launch
Development Non-profit company For-profit company

As seen from the table, the big advantage with Stellar is the possibility of running ICOs on Stellar. Also interesting are the decentralised exchanges that can run on Stellar thanks to the distributed order book.

Another difference is that Stellar, unlike Ripple, is not run by a for-profit company. Hence, Stellar's philosophy is mainly focused on providing services to the poor ("banking the unbanked"), while Ripple focuses mainly on faster and cheaper interbank and foreign transfers. In general, Ripple targets mainly services for large corporations and banks.

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According to recent surveys, there are more than 1.5 billion people who do not have access to a bank account. So the potential space for Stellar is indeed there.

By not being primarily run by a for-profit company, Stellar is not as centralised as Ripple. It is precisely this over-centralisation that Ripple is often accused of. When it comes to partnerships with large companies, Ripple leads the way, having already managed partnerships with American Express, Australia Bank, Western Union and many more. Stellar can only boast one major partnership so far - with IBM.

Stellar and Wallets: Where to Hold Lumen (XLM)?

You must have at least 0.5 XLM on your Stellar Wallet to activate it. Most exchanges support sending Lumen to inactive wallets, however, there are exceptions such as the CEX.IO exchange. In this case, if you try to send Lumens to an address, you will get the "Invalid address" error.

There are two ways to resolve this error:

  1. Ask someone (on Reddit for example), to send you 0.5 XLM to the address provided.
  2. Create a wallet on Stronghold.co, which has Stellar wallets already pre-activated. Then send your Lumens from the exchange to Stronghold and then forward them to the wallet you want to hold the Lumens on.

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You can find a lot of useful information about cryptocurrencies on Reddit. Plus, if you're interested in something, just create an account and ask. It's that simple!

Trusted wallets include the hardware wallet Ledger Nano S, Foxlet desktop wallet, Stargazer multiplatform wallet and Astral web wallet. The Account Viewer is also suitable for linking to the TREZOR hardware wallet.

Where to Buy Lumen (XLM) Cryptocurrency?

Lumen can be bought for euros on the Kraken and Bitfinex exchanges. Lumen can be bought for bitcoins on Bittrex or Binance. The full range of trading pairs can be found on this link. At the time of writing this article (January 2019), the largest volume in the Lumen/Tether pair is on the Chinese exchange ZB.COM.

Conclusion: How Do We See the Future of the Stellar and Lumen?

Stellar is developing at an impressive pace so far. According to Coinmarketcap.com, it has managed to rise from obscurity to the 5th position of cryptocurrencies by market capitalization.

The most important thing for its future is the establishment of new partnerships and permanent work on the development of the protocol. In terms of development, the Stellar Development Foundation has announced that it would like to implement compatibility with the Lightning Network, which would also open up the possibility of directly converting Stellar for other cryptocurrencies using Atomic Swaps.

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As for the future development of the Lumen rate, the most important thing is how many Lumens (XLM) will be used in reality. There is a possibility that the Stellar network will catch on in a big way, but Lumen will not find practical use and the course will stagnate. It would be interesting to see the competition with Ripple. I think it is very important at the moment that the SDF gradually starts to get rid of frozen Lumen to avoid too much centralisation and risk. It's also important to forge new partnerships and create real-life uses for Stellar.


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