Stellar: Everything to Know

By  Beluga Research August 4, 2023

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Summary

  • Stellar is a decentralized cryptocurrency platform enabling fast, low-cost cross-border transactions and facilitating the issuance of digital assets
  • Stellar (XLM) is a decentralized blockchain platform and cryptocurrency launched in 2014 by Jed McCaleb and Joyce Kim
  • It aims to facilitate fast and low-cost cross-border transactions, focusing on serving the unbanked and underbanked populations
  • Stellar uses a consensus algorithm called the Stellar Consensus Protocol (SCP) to validate transactions and maintain the network's security and integrity

Overview

Stellar is a decentralized cryptocurrency platform enabling fast, low-cost cross-border transactions and facilitating the issuance of digital assets. It is an open-source blockchain platform designed to enable efficient and inexpensive cross-border transactions.

It was created by Jed McCaleb, the co-founder of Ripple, and launched in 2014. Unlike traditional financial systems, Stellar aims to connect financial institutions, payment systems and individuals seamlessly to facilitate the transfer of various assets, including cryptocurrencies and fiat currencies.

A Brief History

Jed McCaleb, a prominent figure in the cryptocurrency space, envisioned a platform that would address the inefficiencies and limitations of traditional banking systems. With this goal in mind, McCaleb co-founded Stellar Development Foundation (SDF) and launched the Stellar network in July 2014.

Initially, Stellar utilized a consensus algorithm called Stellar Consensus Protocol (SCP) to validate transactions and secure the network. However, in 2015, Stellar underwent a significant upgrade and transitioned to a new consensus algorithm called Federated Byzantine Agreement (FBA). This change allowed for increased scalability and improved network performance.

Stellar: Everything to Know

  • Stellar's native currency. Stellar has its native cryptocurrency called Stellar Lumens (XLM). The XLM cryptocurrency serves multiple purposes within the Stellar network. It acts as a bridge currency, facilitating the exchange between different assets on the platform. Additionally, XLM plays a crucial role in preventing spam and malicious activities by imposing a small fee, known as the base fee, on each transaction.
  • Decentralized exchange. Stellar incorporates a decentralized exchange (DEX) within its platform, enabling users to trade various assets directly on the blockchain. This eliminates the need for intermediaries and reduces counterparty risk. The DEX on Stellar operates through a network of trusted gateways that issue asset-backed tokens, representing real-world assets such as fiat currencies, commodities or even other cryptocurrencies.
  • Stellar Consensus Protocol (SCP). Stellar initially employed the Stellar Consensus Protocol (SCP) to achieve consensus among network participants. SCP is a decentralized consensus algorithm that enables fast transaction confirmations and ensures the security and integrity of the network. It utilizes a federated voting process where nodes, known as validators, reach agreement on the validity and order of transactions.
  • Anchors and issued assets. Anchors are entities within the Stellar network responsible for issuing and redeeming assets. These assets can represent various forms of value, such as fiat currencies or commodities. Anchors serve as a bridge between the traditional financial system and the Stellar network, facilitating the seamless transfer of assets. Users can trust anchors to hold their deposited funds and issue corresponding tokens on the Stellar blockchain.
  • Stellar's mission for financial inclusion. One of the primary objectives of Stellar is to promote financial inclusion by providing affordable and accessible financial services to individuals who are unbanked or underbanked. Stellar's platform allows anyone with an internet connection to create a wallet and access a wide range of financial services, including low-cost remittances, micropayments and access to savings and credit.

Getting Started

To get started with Stellar, you first need to understand the basic concepts of the platform. At its core, Stellar is a distributed ledger technology (DLT) that allows multiple parties to agree on a shared version of the transaction history without the need for a central authority. This ledger, known as the Stellar Consensus Protocol (SCP), is maintained by a network of decentralized nodes, each of which participates in the validation and verification of transactions.

To create a Stellar account, a digital wallet that supports Stellar is need. There are various wallet options available, including desktop wallets, web wallets and mobile wallets. After deciding on a wallet, generate a Stellar address, which is a unique identifier that represents an account on the network. This address is used to send and receive Lumens and other assets on the Stellar network.

To acquire Lumens, either purchase them from cryptocurrency exchanges that list XLM. Or, receive them through various programs and partnerships offered by the Stellar Development Foundation (SDF), the non-profit organization that oversees the development and adoption of the Stellar network. Lumens can be stored in a Stellar wallet and used for transactions, paying fees and participating in the Stellar ecosystem.

Unique Aspects

Stellar offers several unique aspects that set it apart from other cryptocurrencies. One of its key features is its focus on facilitating cross-border transactions and enabling financial interoperability. Stellar's network allows for the seamless transfer of value between different currencies, making it easier and more cost-effective to send money across borders. This is achieved through the use of anchors, which are trusted entities that issue assets on the Stellar network and facilitate the conversion between different currencies.

Another notable aspect of Stellar is its built-in decentralized exchange (DEX). The Stellar DEX enables users to trade Lumens and other assets directly on the Stellar network, without the need for a third-party exchange. This provides users with greater control over funds and reduces reliance on centralized exchanges, which can be vulnerable to hacks and other security breaches. The DEX uses a unique trading mechanism called path payments, which automatically finds the most efficient trading route between two assets, taking into account the available liquidity.

Stellar also incorporates a feature called "federated Byzantine agreement" (FBA), which allows for flexible trust models among network participants. In traditional blockchain networks, all participants must agree on a fixed set of validators, which can limit scalability and introduce centralization risks. FBA, on the other hand, allows participants to choose which validators they trust, enabling a more adaptable and scalable network architecture.

Furthermore, Stellar has a strong focus on supporting financial inclusion and serving the unbanked population. Through partnerships with organizations and institutions around the world, Stellar aims to provide affordable financial services to those who are underserved by traditional banking systems. By leveraging the low-cost and efficient nature of blockchain technology, Stellar enables individuals and businesses in developing regions to access banking, remittance, and other financial services that were previously inaccessible or prohibitively expensive.

Advantages

  • Fast transactions. Stellar offers incredibly fast transaction times, with settlement taking just a few seconds. This makes it suitable for various use cases, especially those requiring quick transfers of value.
  • Low transaction fees. The Stellar network boasts minimal transaction fees, making it an attractive option for individuals and businesses looking to minimize costs associated with cross-border payments or remittances.
  • Scalability. Stellar's protocol is designed to handle a high volume of transactions per second, making it scalable for widespread adoption. This scalability is crucial in ensuring that the network can support increased demand as more users join the ecosystem.
  • Decentralization. Stellar embraces the principle of decentralization, which means that no single entity or group has control over the network. This distributed nature enhances security and reduces the risk of censorship or manipulation.
  • Stellar Consensus Protocol (SCP). This is the consensus algorithm used by Stellar, allows for fast and secure transaction confirmation without relying on resource-intensive mining. SCP achieves consensus through federated voting, enabling the network to process transactions efficiently.
  • Interoperability. Stellar is designed to facilitate interoperability between different assets and currencies. It provides a bridge between various financial systems, allowing for seamless transfers and conversions between different forms of value.
  • Smart Contract Capabilities. Stellar supports the creation and execution of smart contracts, enabling the development of decentralized applications (Dapps) on its platform. This feature opens up a wide range of possibilities for developers to build innovative financial applications.

Disadvantages

  • Centralized initial distribution. One of the criticisms of Stellar is that its initial distribution was relatively centralized, with a significant portion of Lumens (XLM) held by the Stellar Development Foundation (SDF). While efforts have been made to distribute Lumens more widely, this initial concentration raises concerns about the network's decentralization and potential for manipulation.
  • Limited adoption. Although Stellar has gained some traction and formed partnerships with various organizations, its adoption is still relatively limited compared to other cryptocurrencies like bitcoin or ether. Achieving widespread adoption and usage remains a challenge for Stellar.
  • Dependency on anchors . Stellar relies on anchors, which are trusted entities that hold deposit accounts and issue credit on the network. The reliance on anchors introduces a level of centralization and counterparty risk, as the performance and integrity of these anchors can affect the overall stability and security of the network.
  • Regulatory challenges. As with any cryptocurrency, Stellar faces regulatory challenges in various jurisdictions. The evolving regulatory landscape surrounding cryptocurrencies can impact the growth and development of the Stellar network, potentially limiting its adoption in certain regions.
  • Complexity for Non-Technical Users. While Stellar offers a user-friendly interface, understanding and navigating the intricacies of the network may still pose challenges for non-technical users. The concepts of wallets, key management, and decentralized exchanges can be daunting for individuals unfamiliar with blockchain technology.
  • Potential Security Vulnerabilities. Although Stellar has implemented robust security measures, no system is entirely immune to security vulnerabilities. As the network continues to evolve and attract attention, potential vulnerabilities may be discovered and exploited by malicious actors, posing risks to users and funds.
  • Competition. Stellar operates in a highly competitive landscape, with numerous other blockchain platforms and cryptocurrencies vying for market share. The success of Stellar depends on its ability to differentiate itself and offer unique value propositions that attract users and developers.