What is Stellar ($XLM)?

Stellar is an open, permissionless, decentralized ledger - or blockchain network that is optimized for payments. The network and technology is open source - there is no single entity, including the Stellar Development Foundation, that controls the codebase of the network or its growth. Using Stellar makes it possible to create, send and trade digital assets backed by nearly any form of value – and to do so in a compliant manner. The network interoperates with the traditional financial system to leverage the benefits of blockchain technology to enhance, not supplant existing infrastructure.

The basis of the network is its native digital currency - $XLM or Lumens. $XLM acts as an intermediate currency for operations and is also used to pay transaction fees. It serves as a bridge that makes it less expensive to trade assets across borders. All of this aims to challenge existing payment providers, who often charge high fees for a similar service. By design, Stellar requires that each account hold a small number of $XLM at all times. It is a network running on a decentralized server with a decentralized ledger that is updated once every 2-5 seconds through all nodes.

Stellar's consensus agreement does not rely on mining to verify support transactions. Instead, Stellar uses the unique algorithm, called the Stellar Consensus Protocol (SCP), which keeps everything in sync. In the Stellar network, each node chooses another set of nodes as trusted nodes. Once all the nodes in this group support a transaction, the transaction takes effect. This approach makes Stellar's network extremely fast, capable of handling 1,000 transactions per second.

What is Stellar Consensus Protocol (SCP)?

The Stellar network reaches consensus using the Stellar Consensus Protocol (SCP), which is a construction of the Federated Byzantine Agreement (FBA). FBA differs from other well-known consensus mechanisms like Proof of Work (which relies on a node’s computational power) and Proof of Stake (which relies on a node’s staking power) by instead relying on the agreement of trusted nodes.

In SCP, each participating Stellar Core node (also called a validator or validator node) decides what set of other nodes they want to trust. The flexibility of user-defined trust allows for open network membership (meaning anyone can become a Core node) and decentralized control (meaning no central authority dictates whose vote is required for consensus).

There are no monetary rewards for being a validator on the Stellar network. Instead, users are encouraged to become a validator because they are then contributing to the security and resiliency of the network, which benefits the products and services built on Stellar.

There are three desired properties of consensus mechanisms: fault tolerance, safety, and liveness.

Fault tolerance - the system can continue operating despite node failures or malfunctions
Safety - no two nodes ever agree on different values, guarantees nodes will produce the same block
Liveness - a node can output a value without the participation of any misbehaving nodes

Consensus mechanisms can typically only prioritize two out of three of these properties. SCP prioritizes fault tolerance and safety over liveness. Because of prioritizing safety, blocks can sometimes get stuck while waiting for nodes to agree.

Why Stellar unique?

The Stellar payment protocol is based on distributed ledger technology -- an open-source development, community-owned and distributed by the community. The crypto asset of the Stellar platform helps with cross-border transactions, overcoming the problems of high fees and slow procedures. $XLM is more focused on assisting individuals to transfer money than they are on institutions. Thus, Stellar offers access to financial systems, and people can send money at low cost and promptly around the world.

Moreover, Stellar serves as a decentralized exchange and marketplace, with a built-in order book that tracks ownership of Stellar assets. Platform users can manage buy/sell orders, as well as select and set their preferred assets in settlements. $XLM is a built-in coin that helps reduce transaction fees.

The network maintains a high level of security. $XLM holders must have at least one token in order to remain active on the network. This nuance performs a global goal - the execution of network transactions efficiently and with minimal time costs. Plus, $XLM offers protection against flood attacks by making microtransactions too expensive for hackers with no chance of profit, which keeps Stellar Network safe from serious threats.

The target audience of Stellar is the inhabitants of developing countries, ordinary users who are provided access to the global economy through fast, simple and inexpensive transactions. Stellar Network makes extensive use of Lumens to produce live convection as well as to send cash in multiple currencies; currency is sent from one peer, and the recipient can receive the amount in another currency. This feature is beneficial when a transaction is made between currencies without widely traded pairs.

Support for multi-currency transactions is another competitive advantage of Stellar, and the ability for cross-currency transactions has only enhanced processes with foreign operations. Moreover, stable speed and low transaction costs are a privilege that users receive. This functionality is powered by a development called Anchors (a bridge between different currencies and the network), which simplifies the exchange within the network and helps speed up the whole process.

The history of Stellar

After leaving Ripple in 2013 due to internal conflicts over vision, Jed McCaleb, along with partner Joyce Kim, forked the Ripple protocol and launched the Stellar project in 2014. With the creation of the non-for profit Stellar Development Foundation (SDF), the team aimed to "promote global financial access, literacy, and inclusion...and create an open and affordable financial system where people of all income levels can access simple-to-use, secure, and low cost financial services." The Stellar Development Foundation was created in collaboration with Stripe CEO Patrick Collison. Stripe invested $3 million in seed funding and received 2 billion Stellar Lumens (XLM) in exchange. At launch the network generated 100 billion XLM and featured a 1% annual issuance rate.

In 2015, Stellar redesigned its consensus protocol following a ledger fork in 2014 that rolled back hours of transactions. It's new and current consensus protocol called "Stellar Consensus Protocol" was developed by Stanford professor David Mazières, chief scientist of the SDF. In 2017, Jed McCaleb and Brit Yonge launched Lightyear as a for-profit entity of Stellar, that would build a universal payment network on Stellar. In 2017, Stellar announced a grants program that would award partners up to $2 million worth of Lumens for project development.

In November 2019, the Stellar Development Foundation announced it burned more than 55 billion XLM (~55%) tokens as it moves away from airdrop programs. Previously the foundation had retained 68 billion XLM earmarked for giveaways in order to grow the community. Citing a declining utility from airdrops, the SDF burned 50 billion of those tokens along with 5 billion of the 17 billion previously held in its operating fund. The burn reduced the total supply to 50 billion XLM of which SDF's ownership of the total dropped from XLM supply from 85% to 60%.

On August 2, 2022, Stellar announced the launch of the preview version of Soroban, a smart contract platform developed by the Stellar Development Foundation. With this preview, developers can write and test contracts on their local machine without depending on a running network.