What is Stellar?
May 12, 2022
7 min read
XLM was designed to make cross-border and cross-currency transfers as fast, convenient and as affordable as possible for ordinary people as well as for businesses. Compared to conventional remittance methods, sending money with XLM via the Stellar network is instantaneous with negligible fees and does not require a user to even hold a bank account. Stellar’s vision is one of universal access for all, aiming to lay the foundation for a unified network for the global remittance sector.
What is Stellar (XLM)?
With traditional banks, transferring money abroad can be a relatively slow and tedious affair and at times quite expensive. While in this day and age we already enjoy superfast internet, allowing us to communicate with our loved ones instantaneously from anywhere in the world, the same cannot be said for overseas remittances which may possibly take a few banking days to process at the least.
This is what Stellar, the company behind the cryptocurrency Stellar Lumens (XLM) had in mind with their open-source payment network that allows for instantaneous money transfers with almost little to no cost.
When we also consider that around 31% of the global adult population still remains unbanked, the need for a more accessible financial system becomes urgent. And it’s not just families who are dependent on relatives abroad who can benefit from such a system. Merchants who have cross-border business operations are also in need of a faster, cheaper and more flexible channel for conducting cross-currency transactions.
Such is the convenience and low entry barrier offered by Stellar, that it is already being used not just by ordinary people, but also by many high profile companies and institutions for their backend payments processing.
What is XLM used for?
Stellar Lumens or XLM is the cryptocurrency that facilitates the use of the Stellar network for the following purposes:
- XLM is used for payment for transaction fees for transferring money, using tokenized versions of any currency on the Stellar network. Stellar charges only a minimum fee—at only 0.00001 XLM (or around $0.00001) as long as the network is not operating at full capacity. This makes it ideal for transferring even very small amounts of money.
- XLM is an intermediary currency for cross-border payments. XLM does this by effectively providing liquidity between different currencies instead of what traditional banks do which is to maintain multiple accounts of different currencies, whose balances they have to then reconcile at all times. XLM thus eliminates the complexity of exchanging one currency for another and manages transfers seamlessly in a matter of seconds.
- XLM can be used to trade for cryptocurrencies and other assets including forex and securities on Stellar’s decentralized exchange.
How does XLM work?
Unlike other blockchains that rely on proof-of-work (PoW) or proof-of-stake (PoS) consensus algorithms, Stellar uses the Stellar Consensus Protocol (SCP) which has a number of advertised advantages over these conventional consensus models, allegedly offering more decentralized control, low latency, and greater security.
PoW blockchains require “miners” who are essentially in competition with each other for who gets to solve the next block in the chain and earn the network rewards. Though this healthy competition makes for a foolproof system, it also uses up a lot of computing power, resulting in high energy costs and congested bandwidth.
PoS systems on the other hand, use up less power since validator nodes are only required to have a “stake” to be able to participate in the network. However, since the amount of tokens staked correlates to a users’ amount of network participation, PoS blockchains often lead to centralization, with only a few nodes in charge of validating most of the transactions.
SCP instead employs a system of “flexible trust”. Rather than utilizing all the nodes in the network for validating transactions, the network aims to arrive only at a “quorum”—or to have a set of trusted validators which is deemed large enough to arrive at a consensus at any particular time.
But this does not mean to say that SCP is simply taking a shortcut approach. Consensus is not reached by majority vote alone within a quorum, but the system also waits for specific nodes which it considers “important” before the transaction is settled.
How the nodes are deemed “important” within a quorum is also a user feature of the Stellar protocol. Users have the freedom to choose any combination of validators that they see fit to approve their transactions. This has huge application when it comes to ensuring that different parties and institutions are kept “honest” since they have signaled their vested interest in each others’ reputation. With all these, Stellar qualifies as a federated network, wherein its individual components manage to remain autonomous and at the same time act harmoniously towards their common design.
So if it's not PoW or PoS, what is it exactly?
A common question asked about Stellar is how they get people to support the network when there are no apparent incentives in place unlike the rewards for miners or stakers in PoW and PoS blockchains. Why then would anyone set up a node?
A potential answer to that is that from a business perspective, Stellar is just incredibly useful.
Running a Stellar node is a very economical way of running one’s own payment services. The incentive is simply having the network itself to use—a relatively fast, cheap, secure and decentralized financial tool.
How is XLM different from XRP?
Anyone who has been around in the crypto-space for a while would have noticed that XLM bears a strong resemblance to another cryptocurrency used for cross-border transactions, that is—Ripple (XRP).
This is by no means a coincidence. Jed McCaleb, who founded Stellar in 2014, also happened to have co-founded Ripple two years earlier.
Though similar in purpose, Ripple is a cryptocurrency designed specifically for use by banks and other financial institutions. Ripple in fact is often compared to the SWIFT system, alluding to the established global standard for communication and money transfers between banks, placing XRP among one of the valuable cryptocurrencies for its utility, consistently ranking among the top token according to market capitalization.
Stellar on the other hand, was designed for universal accessibility and ease of use even for ordinary people. One does not even need to hold a bank account in order to send or receive money, or make use of the other features of the Stellar platform.
XLM has a current maximum supply of 50 billion, all of which have been already pre-minted during its launch (from an initial supply of 100 billion, the rest having been burned already). All the tokens were issued then since there really was no intention for any mining to take place in the Stellar network.
XLM was initially meant to be inflationary at a fixed rate of 1% every year. A community vote in 2019 put a stop to the annual inflation, meaning that there will no longer be any new XLM created, unless the community decides to in the future.
Stellar’s strength lies in the openness of its network, empowering anyone who connects to it— whether it be an individual or a business—with an alternative means for transferring assets. With its negligible fees and impressive network speed, Stellar is able to retain value, or even add more to whatever assets are being transferred using it.
The vision for Stellar actually is to provide a model for integration, linking the world’s financial systems together in one seamless network. Fitting the thematic implications of its name, we can probably say that Stellar draws the lines linking distant stars together, so we can see a bigger picture of what our financial system could be.
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