Stellar

What is Stellar (XLM)?

Stellar is a peer-to-peer decentralized blockchain aimed at establishing a protocol for financial assets to be moved quickly and at a very low cost.

The Stellar network is open-source and highly decentralized, as it is owned and distributed by the community and thus caters to individuals rather than institutional entities.

XLM, also known as Stellar Lumens, is the native token of the Stellar network. XLM is the basis for how the Stellar protocol works, serving as a medium into which funds are converted at the point of origin and converted out of at the destination.

This sort of system is ideal for cross-border payments. Stellar allows people to send funds faster and at a lower cost than with most competitors.

Not only that, but Stellar also has built-in order books, acts as a decentralized exchange and marketplace, and even allows for the creation of other tokens on its blockchain.

When Was XLM Launched?

The Stellar network was created in 2014 by Stellar.org, a non-profit also referred to as the Stellar Development Foundation. It officially launched a year later, with 100 billion XLM being issued at the time.

Who are the Founders of Stellar?

Stellar was founded by the Ripple co-founder Jed McCaleb together with the lawyer Joyce Kim in 2014.

The stated vision of the Stellar Development Foundation (SDF) is to “unlock the world’s economic potential by making money more fluid, markets more open, and people more empowered.”

McCaleb left Ripple in 2013. His fingerprints are clear in Stellar’s development since it is very similar to XRP Ledger, although many suggest that Stellar is more open source and more decentralized than Ripple.

McCaleb is currently the Chief Architect of SDF, Danielle Dixon is the CEO, and David Mazieres, also credited as a founder, serves as Chief Scientist.

How Does Stellar Work?

Stellar Lumens are central to how Stellar actually works. XLM is required in small amounts for making transactions and initializing accounts, while accounts need to maintain a balance of one token to remain valid.

For every account holder, Stellar’s blockchain tracks two pieces of information: the number of XLM and other tokens held in the account, as well as the instructions for any actions such as selling, sending, swapping, and so on.

Every five seconds, all balances and operation instructions are broadcast to the entire network and resolved. Computers that run the core Stellar software, or nodes, publish and verify all of this publicly broadcasted information. Most importantly, anyone can install the Stellar software and become a node.

This is of course in stark contrast to the traditional banking system where a single corporation can decide, in secret, what the account balances are and which operations to carry out or deny.

What Makes Stellar Unique?

According to the Stellar Development Foundation, one of the primary goals of the project is to enable a future where everyday people can send money anywhere, affordably and quickly.

Among other things, Stellar’s focus on the individual rather than institutional support is a stand-out quality and is a likely contributor to its popularity among users and cryptocurrency smallholders.

Traditional cross-border remittances often take days to settle and are highly inefficient. Moreover, their infrastructure may not encompass the globe, given that a significant percentage of the world’s adults remain unbanked.

Stellar, however, has created a network of fully licensed fiat currency acceptance and distribution partners called anchors. These anchors provide legal on and off-ramps to the local country’s banking system, handle local regulatory processes, and also often provide stablecoins like Circle’s USDC on Stellar.

These many anchors cut intermediaries out of the settlement process by receiving fiat funds from a money sender, tokenizing it, and moving it to the recipient in mere seconds using the Stellar network.

Stellar is also noted for its network effect, with a wide range of partners outside its network of anchors. Among these are the payment processor Stripe, professional services provider Deloitte, and computing giant IBM.

Finally, Stellar is noted for its support for developers, hosting a suite of tools including its API and software development kits to make coding complex applications easy. Development tools are open source, and Stellar.org provides developers with code, documentation, and support.

How is the Stellar Network Secured?

The Stellar network is secured by the Federated Byzantine Agreement consensus protocol. FBA removes the need for mining by creating a quorum.

Each node on the network defines a set of trusted nodes. Each node’s set of trusted nodes is captured in a ‘quorum slice’, which is then used to create a quorum. A quorum is a set of commonly trusted nodes, established via overlaps between sets.

One of the main disadvantages of this FBA algorithm is that it doesn’t incentivize the running of a node and validating transactions, in contrast to proof-of-work blockchains being mined and proof-of-stake blockchains being staked.

As a result, XLM can neither be mined nor staked, and running a node doesn’t yield any sort of block reward.

What is the Use of Stellar?

Stellar’s main use is the facilitation of cross-border payments in a fast, affordable manner. With a fixed fee of just 0.00001 XLM per transaction, the Stellar network is one of the easiest ways to make a payment.

Not just that, making cross-border payments or reaching the far corners of the world is much easier with Stellar than with traditional banking. Stellar enables almost instant settlement at a low cost.

The design of Stellar’s protocol and its use of anchors makes Stellar a popular choice for currency transfers.

Who Controls Stellar?

Stellar is controlled by the Stellar Development Foundation, a non-profit organization. Stellar’s Board of Directors elects executive directors to make decisions.

At the time of writing, the Board of Directors includes:

• Jed McCaleb, founder and Chief Architect
• Keith Rabois, General Partner at Founders Fund
• Lin-Hua Wu, VP Global Communications and Public Affairs at Google
• Ronaldo Lemos, Professor of International and Public Affairs and Partner at PNM Advogados

How Much XLM Is In Circulation?

100 billion XLM tokens were created when the Stellar network went live, and that supply increased by 1% each year until 2019.

This inflation mechanism was ended by a community vote in October of that year. In the following month, almost 55 billion XLM were burned. This included all of the inflationary XLM and half of the original supply.

No more XLM will be created henceforth, leaving a total supply of a fraction over 50 billion XLM. Out of this, 30 billion XLM remain with the Stellar Development Foundation.

How Do You Buy XLM?

A cryptocurrency that has a good reputation and an established history, XLM can be purchased peer-to-peer, on most of the major cryptocurrency exchanges, as well as on many centralized finance (CeFi) platforms.

Given its utility, you can purchase XLM with many of the larger fiat currencies, but it’s commonly purchased using Bitcoin and stablecoins as well.

It’s important to know, however, that you cannot mine or stake XLM.

Unlike PoW cryptocurrencies that you can earn via block rewards in mining and PoS cryptocurrencies that you can earn via staking, XLM doesn’t have a mechanism that allows you to earn it in a similar way.

Is It Possible to Buy XLM Instantly?

XLM transactions are validated in three to five seconds and cost only 0.00001 Lumens. This makes Stellar one of the fastest and cheapest (at an XLM price of $0.11 at the time of writing) cryptocurrencies to buy and use.

This speed is clear to see when making P2P transactions and using Stellar’s DEX. Wallets reflect transactions in seconds, making Stellar much faster than many other blockchains.

The only XLM transaction that may take longer is a withdrawal from a centralized platform like an exchange or lending service to your private wallet.

Most of these entities need to carry out various procedures including KYC (Know Your Customer) and AML (Anti Money Laundering), meaning they won’t initiate a transfer until you’ve been cleared.

How Do You Store XLM?

XLM can be stored in a variety of ways, from centralized exchange accounts to private wallets. There are two main types of wallets:

• Cold wallets. Cold wallets are kept offline to prevent any sort of hacks or other malicious online attacks.
• Hot wallets. These are online wallets that are often used for their convenience. They store a private key on an app, client, or browser extension on your device. According to stellar.org, some of the top hot wallets are Keybase, Solar Wallet, and Lobstr.

Stellar Energy Consumption

Since Stellar doesn’t use a proof-of-work consensus mechanism, it doesn’t consume anywhere near as much electricity as Bitcoin or Ethereum.

In fact, its current level of decentralization sees electricity demand remain low since there are currently less than 50 nodes. According to Stellar.org’s regular blog, a study estimated that Stellar was four times more energy-efficient than Visa on a per transaction basis.

Is Stellar a Good Investment?

First and foremost, Stellar is a payment network that does its job, enabling fast and low-cost cross-border payments arguably better than any of its competitors.

However, several risks remain from various parts of the system’s design. While the Federated Byzantine Agreement is a proven consensus mechanism, the protocol doesn’t incentivize the participants on the network for good behavior.

This lack of incentive limits the potential for decentralization, and the relative centralization it results in may make the network vulnerable to targeted attacks. In fact, a paper in 2019 outlined the risk of network failure if two specific nodes controlled by Stellar.org were to be attacked. David Mazieres, Chief Scientist of the SDF, authored a response underlining that Stellar’s anchors are encouraged to protect themselves by running their own validator nodes.

Given Stellar’s similarities to the XRP Ledger, there is a risk that the Securities and Exchange Commission of the US may target Stellar if its legal procedures against Ripple are successful and certain precedents can be set. However, that case has yet to be concluded.

Finally, the level of centralization of the XLM token is also a cause for concern to investors, as 60% of the XLM supply is in the hands of the SDF.