What Is Stellar?

Defining Stellar

Launched in 2014 by Jed McCaleb of Ripple, Stellar is a decentralized and open-source blockchain network that specializes in payments and currencies. Interestingly, the protocol distinguishes itself from other cryptocurrency projects as being meant to optimize, rather than supplant, the existing financial system. As a result, Stellar maintains a connection to traditional financial institutions and FinTech companies that serve as ‘Anchors.’

With this goal in mind, Stellar aims to provide better access to financial services across borders. Its native token, Lumens, or XLM, is used as a medium of exchange and implemented as a deterrent against bad actors. Featuring high transaction speeds and low costs (an average of 0.00001 XLM per transaction), Stellar’s accessibility and relative sustainability make it a highly attractive candidate in the space. 

Stellar Architecture

Stellar is a fork of the Ripple protocol and therefore shares quite a few similarities with it. It has since made a few important updates, namely with the introduction of its Stellar Consensus Protocol (SCP) in 2015 as well as changes to its token issuance. 

Stellar Consensus Protocol

In a distributed network, nodes must be able to reach consensus, even if some of them provide incorrect data. This is known as Byzantine Fault Tolerance (BFT). The minimum set of nodes required for the network to achieve consensus is called a quorum. SCP uses a new consensus model called the Federated Byzantine Agreement (FBA), which was first introduced by the Ripple network. 

In a traditional Byzantine system, all nodes must be unanimously accepted by all system participants and are therefore weighted equally in terms of trustworthiness. FBA brings in the concept of a quorum slice, which is the customizable subset of a quorum that a given node chooses to trust. Why does this matter?

By allowing nodes to select which other nodes they trust, the network invites open membership and better decentralization. FBA also adds an additional layer of security, as it makes it harder for a malicious actor to successfully control a majority of the network. 

As a result, SCP successfully delivers on four promises: decentralization, efficiency, flexible trust, and asymptotic security. Flexible trust refers to the ability of users to choose whom to trust, while asymptotic security refers to the specific usage of digital signatures and hash families to safeguard the network. 

Lumens Token (XLM)

Stellar’s native token was initially introduced as a ‘nominal barrier,’ keeping the network highly accessible all the while hindering large-scale dishonest behavior. As mentioned earlier, the minimum fee per transaction is 0.00001 lumen. A minimum account balance of 1 lumen is another prerequisite. 

The team chose to set these network costs in a new currency in order not to prioritize a specific fiat currency. It also promotes liquidity between assets by functioning as a medium of exchange. 

Stellar launched with an initial supply of 100 billion lumens, which increased by 1% for the following five years. In November 2019, this inflation model was abandoned and the token supply decreased to around 50 billion lumens - 20B of which are in the open market, and 30B of which are held by the Stellar Development Foundation to further build Stellar. 

You can find XLM on many exchanges, including CEXs like Coinbase and Binance, or Stellar’s own exchange Lobstr. 

How Does Stellar Work?

At its core, Stellar offers a secure platform for users both to track ownership of their tokens and where they plan to send them. This provides a service crucial to the unbanked - around two billion people worldwide that cannot access traditional financial services for various reasons. With Stellar, anyone with internet access can essentially buy lumens and start transacting, using one of the many Stellar wallets on offer.  

Issuing and redeeming assets are also key functionalities on the Stellar Network. This wide-ranging feature allows pretty much anyone - banks, nonprofits, communities, individuals - to issue an asset on Stellar’s network. These assets can also be exchanged through Stellar’s inbuilt DEX (Stellar Decentralized Exchange), and converted to another asset in a single transaction. Let’s take a closer look at how this works!

Issuing Assets 

Stellar enables users to create their own tokens, which are tied to an asset of their choosing. This is most commonly a currency, but can also take the shape of shares in a company, or gold - not unlike stablecoins. The largest use case for this service is currently in cross-border payments, which importantly allows users to circumvent latency and expense.

Each Stellar token has both a code and a unique issuer, which are used to identify the specific asset. This is helpful because more than one entity can issue a token tied to the same asset; there are therefore multiple USD tokens on the network, but each can be identified via its singular code and issuer combination. Stellar also supports the implementation of compliance requirements, like KYC or multisig access.  

Creating an asset is as simple as making an initial payment using said asset, which requires you to first create an issuing account, distribution account, and trustline. Stellar recommends the use of these two separate accounts for security and auditing purposes. 

Path Payment

Stellar’s path payment system allows users to send one currency, say Euros, while the recipient receives another, like the Naira. The path with the best prices is found via order books on Stellar’s DEX, and then locked in for the sender to confirm. When the transaction is executed, the sender’s Euro tokens are instantly exchanged to Naira tokens. A single path can contain up to six 'hops,' or trades between assets.

This system is what makes Stellar a leading solution for cross-border remittances. What can usually take days to execute, as well as needless costs to finance, Stellar achieves seamlessly and securely. Key to this operation are Anchors, the trusted and regulated financial institutions, FinTech companies, or money service businesses that act as on/ off ramps for the network. 

Anchors

Anchors connect the Stellar network to traditional financial systems by issuing fiat-pegged stablecoins, and/ or supplying a fiat on/ off-ramp. In the first case, they are responsible for maintaining a 1:1 fiat reserve to token ratio, and enlisting a third party auditor.

Supplying a fiat on/off ramp requires adhering to Stellar ecosystem standards, and maintaining an AML program with KYC checks on new users. They must also comply with a number of regulatory obligations regarding licensing, AML, data privacy and cybersecurity among others. Currently active and established Stellar anchors include AnchorUSD, SatoshiPay, Cowrie, and Tempo.

Stellar Use Cases

So how is Stellar actually being used in the field? Here are some examples.

Cowrie is a UK-based FinTech company that issues NGNT tokens on Stellar. NGNT maintains a 1:1 ratio with the Nigerian Naira, and is neatly integrated into the Nigerian interbank payment network NIBSS. Cowrie works with Tempo, a Paris-based electronic payment institution that serves as Stellar’s primary EU anchor. Together they set up a bidirectional NGNT-EURT corridor, which has resulted in €500k being sent to Europe from Cowrie per week with an average transaction time of 10s.

Another recent project to be powered by Stellar is Akoin, the currency of Uganda’s forthcoming ‘Akon City.’ Led by American singer Akon, this innovative city chose the Stellar network because of its speed, scalability, liquidity and global network of anchors. 

Stellar’s outreach also extends to Southeast Asia, like Coins.ph in the Philippines, a mobile financial services provider. This FinTech company allows consumers to access an array of services simply through its Stellar-integrated mobile app. The impact of this can be better understood when comparing how many Filipino adults in 2020 had bank accounts (34.5%) versus mobile phone connections (159% - 1.59 mobile phones per person) and internet access (67%). 

A Stellar Impact

Stellar supports a borderless payment system that importantly prioritizes accessibility and financial inclusion. With exceptionally low barriers to entry for users, and a host of SDKs and documents for developers, Stellar embodies values central to DeFi as a whole.