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What is Stellar? A Comprehensive Guide

NOTE: At the end of the article, we have a GetSmart Quiz for you. If you correctly answer all the questions, you will receive (1) entry to win $4,000 CAD of Bitcoin! Draw will be Sept. 30th 2021.

In Brief:

  • Stellar is a decentralized peer-to-peer network created by Jed McCaleb and Stellar Org.
  • The native token is Stellar Lumens (XLM) which has a fixed 1% annual inflation rate.
  • The Stellar Consensus Protocol (SCP) is the first provably safe consensus mechanism.
  • Anchors act as a bridge between the traditional finance world and the Stellar network.
  • Stellar and IBM had partnered to form the IBM World Wire.

Stellar is a decentralized peer-to-peer network created by Jed McCaleb and Joyce Kim. It was formed back in 2014 when it was forked from the Ripple protocol and is often considered Ripple’s biggest competitor.

However, the core differences between these systems are that while Ripple wants to work exclusively with banks and financial institutions, Stellar – on the other hand – is a payment system designed from the ground up by keeping the masses in mind.

When it comes to the Stellar chain, here are some points to keep in mind:

  • It is decentralized and open-source.
  • The transaction confirmation time is around 3-5 seconds.
  • The native token (XLM) has a 1% fixed annual inflation rate.
  • Enables multi-sigs and smart contracts

The Stellar Network vs. Stellar.org

Like the Ripple blockchain and Ripple Labs, Stellar also has two different entities – Stellar Network and Stellar org. The Stellar Network is the underlying blockchain technology that facilitates financial transactions. This technology is open-source, distributed, and community-owned.

On the other hand, Stellar.org or Stellar Development Foundation is a non-profit organization that aims to develop tools and create social initiatives to help “unlock the world’s economic potential by making money more fluid, markets more open, and people more empowered.” Along with maintaining Stellar’s codebase, it supports various technical and business communities, along with being a speaking partner to regulators and institutions.

Stellar Lumens (XLM) – The Tokenomics

The native token of the Stellar network is Lumens or XLM. XLM helps power up the entire range of operations on the blockchain network. During launch, around 100 billion XLM tokens were created. As previously mentioned, XLM has a fixed annual inflation rate of 1%. XLM has three main functions in the ecosystem:

  • Pay transaction fees.
  • Account management on the Stellar network.
  • Finally, and most importantly, to fuel the Stellar payment system.

In fact, let’s expand on the last point a bit more. Check out this diagram:

Image Credit

Imagine that you are living in the US and your friend Mary is living in the UK. Now, let’s go through the steps.

  • You want to send $100 USD to your Mary.
  • Both of your banks – Bank A and Bank B – are connected to the Stellar network through “Anchors” (more on this later).
  • Your transaction intent is first sent to Bank B to see if Mary is compliant with this transaction or not.
  • Upon receiving Mary’s consent, Bank B deducts the amount from Bank A.
  • Your USD amount is transferred to Bank A and converted to XLM in the Stellar network.
  • The tokens are then moved to Bank B, wherein it’s converted into British Pounds and then gets credited to Mary’s account.

How Do Transaction Fees Work On Stellar?

XLM transactions need to be cheap and efficient since their main use is in creating a global payments network. This is why the transaction fees associated with them are a lot more manageable than Bitcoin or Ethereum.

For comparison’s sake, think of it like this.

Over the past year, Bitcoin’s transaction fees have ranged from $6 to $60. Ethereum has hovered between $1.5 and $40. Stellar, on the other hand, has been fixed at 0.00001 XLM. In other words, 1 XLM is enough to cover 100,000 transactions!

The XLM transaction fees are relative to its price. So higher the price, the more the transaction fees.

Image Credit

Despite this, the chart above tells us that Stellar transactions will remain relatively cheap even at higher prices. For example, at $5 per XLM, the transaction fees would still be around 1/200th of a penny.

How Does Stellar Consensus Protocol (SCP) Work?

As with any decentralized protocol, Stellar requires a consensus mechanism for syncing and making decisions. The SCP allows its network to scale up quickly, a lot more significantly than proof-of-work (PoW). SCP is the first provably safe consensus mechanism that ensures that the network works under any node-failure scenario.

Here are the main features of SCP:

  • The network has no central authority and anyone can participate in the consensus process. This ensures that the whole network is trustless.
  • The nodes can reach consensus very fast and with low latency.
  • The entire system works together to protect Stellar against threat actors with a lot of hash power.

What Are Stellar Anchors?

Anchors in the Stellar network are trusted entities that hold deposits and issue credits in the form of XLM tokens as and when required. You can think of anchors as the bridge between the traditional finance world and the Stellar network.

So, why do we need these anchors in the first place?

When you look at the global payment landscape, we can see that it is hugely fragmented since each region has its own payment system like SEPA, SPEI, etc. This is why we are still stuck with systems like SWIFT that are heavily dependent on many intermediaries, making them slower and more expensive.

Through these anchors, it’s possible to convert the world’s currencies to XLM tokens and make these payment systems more interoperable – not only with each other, but also among all the systems, wallets, apps that leverage the Stellar network.

Stellar and IBM – Connecting The World

Stellar and IBM have partnered together to make the IBM World Wire – a project that researches and deploys methods to make global payment cheaper and simpler. It connects larger-scale financial institutions to Stellar via a publicly-permissioned network. The institutions that have joined World Wire were all selected by IBM.

The reason why IBM chose Stellar is because:

  • Issuing assets on Stellar is simple.
  • Stellar can handle a high throughput. Since the World Wire covers 72 countries and 47 currencies, scalability is critical.
  • IBM believes that a non-profit organization like Stellar Org is ideal for stewarding a global payments ecosystem.
  • The SCP mechanism prevents forks and enables near-instantaneous settlement and finality.

Where Do I Buy Stellar XLM?

If you are sufficiently interested in Stellar and want to get your hands on some XLM tokens, you can do so via CoinSmart. CoinSmart allows you to buy cryptocurrencies like Lumens with ease via fiat

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