Stellar is an open platform for creating financial products that connect banks, people and payment networks everywhere. Founded by an accomplished crypto entrepreneur and backed by an impressive group of advisers, is Stellar capable of changing the way we make international payments?
In this beginner’s guide to Stellar, we’ll cover:
Stellar is a distributed payments network that aims to make sending money internationally as cheap and easy as sending an email. While Stellar offers a native cryptoasset called Lumens (XLM), the currency only plays a complementary role in the design of the network. Stellar’s primary use cases revolve around unbanked remittances and banking, and the network prioritizes accessibility, security, and low transaction fees above all else. The ultimate goal is to create an inclusive financial network for all, including the poor, who are currently underserved by expensive and outdated financial institutions.
Stellar was founded in early 2014 by Jed McCaleb – the same Jed McCaleb responsible for founding the P2P eDonkey file-sharing network, Bitcoin exchange Mt. Gox (which he sold to French developer Mark Karpelès before the infamous security) and Ripple. Notable members of Stellar’s advisory board include Keith Rabois, Matt Mullenweg, Sam Altman, and Naval Ravikant.
The name Stellar is given to two entities:
- The Stellar Network designates the distributed payment network responsible for processing financial transactions. Lumens (XLM) are the native tokens of the Stellar network; serving mainly as a bridging currency.
- Stellar Development Foundation (SDF), also called Stellar.org, is a non-profit organization responsible for the maintenance of the Stellar network. Operational costs are covered by the 5% reduction in the total Lumens supply retained at launch, in addition to tax-deductible public donations.
Stellar started out as a fork of the Ripple protocol after Jed McCaleb left the project citing philosophical differences. McCaleb’s break with Ripple was a complicated affair, ending with an attempt to sell all of its 9 billion ripples, a move that would have had a significant impact on the XRP market. McCaleb then settled with Ripple in a legal settlement that limit the amount of XRP he could sell at the same time.
Although originally based on code borrowed from Ripple, Stellar underwent a full network upgrade in November 2015 after pretend there were flaws in Ripple’s underlying consensus mechanism. Stefan Thomas, Ripple’s CTO, responded with a blog post titled: “Why the stellar fork problem isn’t affecting Ripple“, concluding”there is no threat to the continued operation of the Ripple network. “Stellar is no longer considered a fork of Ripple because it uses a completely different code since the 2015 redesign.
Stellar, like Ripple, is first a payment network and then a cryptocurrency. Stellar uses its native crypto-asset, XLM, as a way to better transfer fiat currencies rather than trying to replace them.
Stellar: PayPal on the Blockchain
On the surface, the Stellar payment network works the same as PayPal. First, users deposit money on Stellar through a trusted intermediary like a bank. Stellar then credits their account with the appropriate amount, and users are then free to send those funds to anyone on the network.
Stellar’s payment network differs from PayPal by its use of blockchain technology. Blockchains offer many advantages to traditional servers, including decentralization, transparency and security. Perhaps the most attractive reason to choose Stellar over PayPal is Stellar’s extremely low transaction fees. Transaction fees exist within Stellar for the sole purpose of preventing network spam, and therefore are very inexpensive. The base fee is currently set at 0.00001 XLM – a fraction of a dime.
Stellar can keep these fees low because all parties to the transaction reside on the same network. This contrasts with transactions through traditional financial systems, which are often subject to a long series of detours, accumulating multiple conversion and processing fees on the way to their destination. Stellar is cheap, even compared to other cryptocurrencies, as there are no miners to pay. The transaction fees collected on Stellar are then redistributed across the network via inflation – more on that later.
Stellar facilitates international payments thanks to its multi-currency transactions. For example, suppose you want to send me Euros using your USD balance. This transaction can be done in different ways:
- Currency conversion. Stellar Ledger has a native order book for each currency / issuer pair to handle foreign trade. In this case, Stellar would look for someone who wants to sell EUR for USD and automatically complete the trade.
- Use lumens. Lumens (XLM) are the native cryptoasset of the Stellar network. XLM can act as a bridge currency in situations where there is no active market between two currencies. If no one wants to sell EUR for USD, Stellar will look for a USD -> XLM offer instead, as they are simultaneously looking for an XLM -> EUR offer. The network then performs these exchanges and completes your USD -> EUR conversion.
- Finally, if the previous options have been exhausted, Stellar searches for the offers available on the network that finally lead to the desired conversion. Here is an example of this process: EUR in AUD, AUD in BTC, BTC in XLM, XLM in USD.
Stellar consensus protocol: how transactions are validated
Stellar may not be rewarding its validators for maintaining the blockchain, but they still have a job to do. Stellar Nodes use a modified form of “Byzantine Federated Agreement” consensus, called the Stellar Consensus Protocol, to determine whether transactions are valid or not. In this system, each node maintains a list of other nodes that it wants to listen to, resulting in a chain of nodes basically saying, “I trust this transaction as long as X number of my friends trust it as well.”
The Stellar Consensus Protocol is seen as an open membership system: anyone is free to become a validator node, and nodes can choose which other nodes they want to track instead of being fed from a list of validators. ‘a central authority. This makes Stellar’s network design more decentralized than similar networks using Byzantine Delegated Fault Tolerance (dBFT) such as Ripple or NEO.
That being said, at present, Stellar only has 20 to 30 nodes feeding its network. This lack of participation is a common side effect of systems that choose to forgo economically motivated consensus mechanisms. Validators exist on Stellar only because they are willing to devote their resources to the good of the network.
Inflation on the star network
New lumens are added to the Stellar network at a rate of 1% every year. The inflation mechanism operates on a weekly basis, distributing the inflation pool to any account in the Stellar network receiving more than 0.05% of the total votes. The size of the inflation pool is determined by the following formula: (number of existing lumens) * (weekly inflation rate) + fee pool. The votes are weighted according to the amount of lumens you have; 1 lumen is equivalent to 1 voice.
Each account has the opportunity to participate in this voting process, but the lucky winners will need to earn a minimum of 0.05% of the total votes, or 9,233,901 votes based on today’s outstanding bid. . The winners get their share of the inflation pool; win 5% of the total votes and you will get 5% of the total pool. Some XLM media have formed groups in which they combine their voting rights on a designated account and distribute the winnings among all the participants.
Stellar’s XLM is available on a variety of different cryptocurrency exchanges, including Binance and Bittrex. These two exchanges handle a combined daily volume of over $ 16 million in XLM alone; placing them behind only the Korean Upbit cryptocurrency exchange.
There is a healthy selection of wallets that can hold your XLM securely. Stellar.org lists a total of 11 compatible wallets, including 4 desktop wallets, 4 mobile wallets and 8 web wallets. The safest place to store your XLM is in a hardware wallet. The Ledger Nano S is a good XLM compatible option.
It is worth highlighting the disclaimer on the Stellar portfolio page: “Stellar.org does not own, maintain or operate any of these portfolios.“
Stellar wants to become the standard method of sending money around the world. The team takes a bottom-up approach, focusing on money transfer and money transfer companies rather than the big risk-averse banks. Stellar believes banks need to see the protocol succeed elsewhere before they start using the network. IBM said they are believers, which is a great start.
In Stellar’s view, the fees associated with transferring money, especially across borders, have a disproportionate impact on the poor. Working families, for example, spend $ 44 billion annually on Western Union or similar middleman fees. Stellar views this massive number as an unnecessary expense taken from people by outdated financial architecture.
Stellar finds himself halfway alone: not quite in the crowd of cryptocurrencies, and not quite in the crowd of legacy payment networks. Stellar is significantly more decentralized than PayPal, but without an incentive mechanism for validator nodes, it’s unclear just how decentralized Stellar will remain. The ultimate success of Stellar will depend on its adoption by traditional financial institutions and how the network can evolve. Assuming he is successful, however, Stellar has the potential to revolutionize the way people transfer money.