Stellar, or Stellar Lumens, is an open-source blockchain-based protocol that emerged onto the scene in July of 2014, founded by the co-founder of Ripple, Jed McCaleb. The founders dubbed the platform as a revolutionary idea in the global finance system that was designed for digital currency to fiat currency low-cost transfers that allow cross-border transactions between any pairs of currency.
At its core, Stellar aims to provide a solution for fast, secure, and affordable cross-border transactions. The project is maintained and supported by the Stellar Development Foundation, a non-profit organization that oversees the network’s development and growth.
What is Stellar (XLM)?
Stellar operates as both a decentralized network and a cryptocurrency, with Lumens, now called XLM, as its native crypto token. Stellar differentiates itself from other blockchain networks in a very unique way. The difference we are talking about is their consensus protocol, which doesn’t revolve around a proof-of-work (POW) or (proof-of-stake) POS protocol; instead, they have their protocol for verifying transactions called The Stellar Consensus Protocol (SCP).
SCP doesn’t rely on a closed system or a central authority to record financial transactions accurately. Instead, a group of trusted nodes called “validators” works together to reach a consensus. Stellar uses the Federated Byzantine Agreement (FBA) algorithm, which allows for quicker transaction processing. Stellar is said to process up to 1,000 network operations per second.
Overview of Stellar’s Objectives
The Stellar Development Foundation has said that today’s financial system doesn’t give a fair chance for everybody to have access to it, and it is their mission to make that possible for everyone using blockchain technology. Stellar has also expressed that it aims to facilitate the movement of money across borders by bridging the gap between currencies and financial systems.
Brief History and Evolution
According to Stellar, the company began its journey by addressing the flaws in the traditional financial system but, over time, evolved into a platform that now has a significant potential to streamline cross-border payments and offer solutions beyond finance like asset tokenization and smart contracts.
The company announced the establishment of Lightyaer.io, which is a for-profit organization that handles the commercial aspects of the company. Stellar introduced a benefits program as part of its Stellar Partnership Grant Program in September 2017. The program offered partners the chance to receive up to $2 million worth of Lumens (XLM) for their project development.
In September 2018, Lightyear Corporation acquired Chain, Inc., and the newly combined company was named “Interstellar .”In 2021, Franklin Templeton initiated the first “tokenized” US mutual fund using the Stellar network.
Stellar Technology and Architecture
This section provides just a brief overview of the technology employed by Stellar, which highlights how the Blockchain works. We have already stated in the previous section how the Blockchain varies from other blockchains after we mentioned their SCP (Stellar Consensus Protocol) mechanism, which makes the working of the network unique from different blockchain networks.
Decentralization and Security Measures
While we have already mentioned the benefits Stellar reaps from using their protocol, the other advantage that the network enjoys using this protocol is the enhanced security through a decentralized structure where control is not concentrated to a single point.
The consensus method that Stellar uses ensures that the network collectively determines its state, which not only makes it secure but also reliable as they don’t have to rely on information from one central authority. The benefit of having information relayed from several nodes also makes sure that the transactions are completed quickly and efficiently.
Interoperability and Scalability
Stellar’s architecture allows for interoperability, meaning it can integrate with various systems, making the transfer of assets and funds between different networks more seamless. The other salient feature of the network is the potential to handle a large number of transactions without compromising the speed or security of the network.
Lumens (XLM) and Their Role in the Ecosystem
Lumens (XLM) is the native cryptocurrency of the Stellar network. According to CoinMarketCap, the price of the XLM token at the time of writing this article stands at $0.1287, and the total market cap of XLM is at $3,591,920,266. XLM plays a vital role in the Stellar Blockchain as it facilitates transactions and maintains the overall functionality of the platform.
Understanding Lumens (XLM) and its utility
Lumens (XLM) serves multiple purposes in the Stellar ecosystem. First and foremost, Lumens acts as a bridge currency as it facilitates multi-currency transactions by connecting different pairs of currencies on the network. Also, Lumens helps in the prevention of spam activities on the network and maintains network security by imposing a base fee on each transaction.
Suppose you wonder how a small base fee helps keep the network secure. In that case, the simple explanation is that having a small base fee deters malicious actors from spending money on transactions so that they could congest the network by carrying out a large number of frivolous transactions.
The utility of Lumens goes beyond mere transaction fees. Their quick settlement times and low transaction costs make them an attractive option for cross-border transactions. Whether for remittances or peer-to-peer transactions, Lumens offers an efficient and cost-effective means of value transfer.
Stellar’s Use Cases and Applications
Stellar’s use cases don’t just end up only on being a payment network. It has diverse applications in various sectors that offer solutions for not only cross-border transactions but also ensure financial inclusion for multiple individuals.
Settling Global Payments
Using Stellar Network, you can send money to any part of the world very quickly, at any time of the day. The network also allows you to handle various kinds of payment activities like sending remittances, paying your employees, or settling the bills with your suppliers very efficiently.
The network’s fast and affordable transaction system, not to mention its access to about 300,000 locations where you can easily convert from cash to cryptocurrency, enables you to move money around the world with low fees.
Financial Inclusion and Empowering the Unbanked
Unbanked or underbanked refers to someone who doesn’t have access to the services of traditional financial mediums like owning a bank account or using its complete range of services. Stellar has reiterated in its mission statement that it wants to promote financial inclusivity, meaning it wants to provide financial assistance to those who don’t have access to such traditional banking facilities by offering a low-cost and easily accessible network.
Digitize Real-World Assets
Stellar has claimed that its network allows you to turn real-world assets like currencies, stocks, or other valuable items into digital versions that can be managed or traded online. The Stellar network will enable you to turn real-world assets, like currencies, stocks, or other valuable items, into digital versions that can be managed and traded online.
Whether it’s central bank digital currencies (CBDCs), stablecoins, securities (like stocks or bonds), or other valuable things, the network’s features and tools help in creating digital tokens representing these assets. This process is known as tokenization, and it makes these assets easier to trade and manage securely using the Stellar network.
Partnerships and Collaborations
Stellar has formed partnerships with various financial institutions, payment processors, and blockchain projects. These collaborations aim to leverage the platform’s technology for improved cross-border payments and other financial services. Notable partnerships include those with IBM and various NGOs working on financial inclusion initiatives.
Comparative Analysis with Other Blockchain Platforms
We all know we are spoiled for choices when it comes to utilizing the services of a blockchain. However, each Blockchain has some unique use cases that can only be carried out efficiently inside that Blockchain, which makes it distinctive from others.
Stellar competes in a space where various blockchain platforms offer similar services. Comparative analysis with competitors such as Ripple (XRP) and Ethereum (ETH) can provide us with some semblance of comparison between the features offered by different blockchains.
Stellar vs. Ripple
Objective: Ripple and XRP both hold the same similarity of providing financial services in terms of connecting different financial institutions and facilitating cross-border payments while effectively reducing the cost and time required to complete the transaction. However, they still differ concerning what their target audience is. Stellar primarily focuses on providing services for individuals and small businesses, emphasizing financial inclusivity. Ripple, on the other hand, primarily targets larger financial institutions.
Consensus Mechanism: Here again, Stellar and Ripple share one similarity regarding the consensus protocol they use for verifying transactions. Both blockchains have protocols that were devised from the same codebase. Stellar uses the Stellar Consensus Protocol (SCP), a federated Byzantine agreement, while Ripple employs the Ripple Protocol Consensus Algorithm (RPCA). SCP emphasizes open participation, while RPCA is more centralized, needing validation from select nodes.
Stellar vs. Ethereum
Objective: Ethereum provides solutions to a wide array of problems. You can not only use the Ethereum blockchain for the creation and monitoring of digital currencies, but you can use it to keep track of information regarding different fields like medical, corporate, financial, etc.
The Ethereum blockchain also serves as a decentralized platform for smart contracts and dApps. Stellar, on the other hand, focuses primarily on the aforementioned cross-border payments. Also, Stellar’s native currency, XLM, isn’t designed to hold any value in itself as such; rather, it is used as a medium of exchange.
Consensus Mechanism: Stellar employs SCP, emphasizing speed and efficiency for transactions. Ethereum used a Proof-of-Work (PoW) mechanism in the past. Still, since the upgrade of Ethereum 2.0, it is now using the Proof-of-Stake consensus mechanism that allows the Blockchain to become more scalable and more energy efficient as well.
Community and Ecosystem: Ethereum has a larger and more diverse ecosystem due to its capability for DApps and smart contracts. Stellar has a focused approach to cross-border payments and financial inclusivity.
So, this is just a brief overview of how Stellar Blockchain separates itself from other blockchains. It also gives you a perspective of how different blockchains have different use cases and what type of audience they target. Whatever your purpose for choosing a blockchain is, know that you have various options available to you, and you should always target the one that serves your purpose.
Also, it is worth mentioning that you must conduct thorough research regarding the efficiency, efficacy, and security features of a blockchain before you decide to carry out any task you wish to perform on the said Blockchain, as you can never be too careful, especially in terms of familiarizing yourself with the risks involved with new technologies.
Future Prospects and Conclusion
Stellar’s trajectory toward the future holds promise for further innovation, advancements, and potential impacts on the global financial ecosystem.
Summary
- Stellar’s native cryptocurrency XLM, also called Stellar Lumens, is used to pay transaction fees.
- The Blockchain is one of the many competitors to the most famous blockchains like Ripple or Ethereum. Each Blockchain serves different use cases.
- Stellar is more focused on facilitating cross-border payments in a timely and efficient manner.
- Ripple focuses more on providing services to multinational corporations or institutional investors.
- Users of Stellar can only create new tokens, but it doesn’t have any feature of creating smart contracts, something you can do on the Ethereum blockchain.
As Stellar continues to evolve and adapt to the changing landscape of blockchain technology and global finance, its impact on traditional financial systems and the unbanked population remains a compelling narrative. The platform’s unique features, collaborative efforts, and commitment to inclusivity position it as a significant player in shaping the future of finance.
