What is Stellar (XLM) and How Does it Work? | KuCoin Crypto Gem Observer

2022/07/14 06:17:16

Despite achieving notable milestones over the years, the traditional financial system remains inefficient and costly. These shortcomings emanate from gaps within the system and bridging these gaps often results in high costs and slow transactions. These limitations have left billions of people financially under-served or excluded.

Hoping to address these issues, the Stellar Development Foundation (SDF) rolled out the Stellar protocol in 2014. In essence, Stellar aims to solve the shortfalls of the existing financial system by integrating a similar approach to the internet. This approach allows the protocol to grow organically and avoid a setup that requires trust.

What is Stellar?

Stellar is an open-source, decentralized blockchain protocol that seeks to streamline cross-border payments. While Stellar runs on the blockchain, its design aims to bolster the current financial system instead of replacing it. This means the Stellar network can handle both digital currencies and fiats.

The network has a native token dubbed lumen (XLM). Apart from XLM, Stellar does not tout a specific currency. Instead, it seeks to make fiats more useful. For instance, Stellar can allow users to create a digital representation of a fiat currency. This setup makes money borderless and bypasses the need for a bank account.

The Stellar network also features an open financial infrastructure that allows developers to build apps and wallets, among other products on its blockchain without permission from a centralized entity.

How Does Stellar Work?

Stellar leverages a unique consensus mechanism, which does not require the entire miner community to verify transactions. Instead, the network leverages the federated Byzantine agreement (FBA).

Unlike Proof-of-Work, FBA is an efficient consensus model in that each node knows others it considers trustworthy. The node requires the other parties it considers trustworthy to agree on any transaction before considering it settled.

These nodes also require the majority of other nodes they consider trustworthy to agree on a transaction before accepting it as settled. If a big enough fraction of the network agrees on a transaction, it becomes impossible for a malicious actor to roll it back.

Through FBA, Stellar shortens the time needed to verify transactions, making the network extremely scalable. Stellar currently handles between 1,000 and 5,000 transactions per second. The network has hundreds of nodes across the globe. Moreover, anyone can install the Stellar software and join the consensus process.

Additionally, Stellar leverages a unique algorithm dubbed Stellar consensus protocol (SCP). SCP features four crucial properties. These are decentralized control, low latency, flexible trust, and asymptotic security.

Decentralized control means anyone can participate, while low latency means SCP can reach consensus in seconds. As for flexible trust, SCP ensures Stellar users have the freedom to trust a combination of entities they deem fit.

Asymptotic security means Stellar relies on digital signatures and hash families with adjustable parameters to protect itself from malicious actors with vast computing power.

Who Created Stellar?

The Stellar Development Foundation (SDF), a US-based non-profit entity, guides and supports the development of the Stellar network. Specifically, the non-profit organization manages Stellar’s codebase and supports the business and engineering communities on Stellar.

Additionally, SDF represents the Stellar ecosystem in talks with regulators and partners. SDF does not have shareholders, a trait that allows it to focus all efforts on making Stellar a neutral, equitable, and public network.

SDF’s co-founders are David Mazières and Jed McCaleb. Mazières serves as SDF’s Chief Scientist, while McCaleb is the organization’s Chief Architect. Denelle Dixon is the CEO and Executive Director at SDF.

Other executives include COO Jason Chlipala, CMO Jordan Edelstein, CTO Nicolas Barry, Chief Legal Officer Candace Kelly, VP of Ecosystem Justin Rice, Vp of Engineering Karen Chang, Head of People & Culture Katya Korepanova, VP of Business Development Mark Heynen, and VP of Tech Strategy Tomer Weller.

What is XLM Used For?

XLM serves as the primary token within the Stellar ecosystem. Although the network supports multiple currencies, it chose XLM to avoid picking one national currency over others. The token’s use cases include initializing accounts and making transactions.

XLM eases the movement of money between users from different jurisdictions. Seeing as everyone has and needs XLM, the token serves as an efficient medium of exchange between illiquid assets.

All account holders on Stellar must always have a small amount of XLM. At the moment, the minimum amount for an account is one XLM, and the minimum fee per transaction is 0.00001 XLM. While these requirements are low enough to keep Stellar accessible, they are big enough to discourage large-scale bad behavior.

What Makes Stellar Unique?

Unlike other blockchain networks, Stellar aims to improve the current financial system instead of replacing it. This design allows the network to foster financial inclusion without forcing users to embrace cryptocurrencies. The project’s native token, XLM, is easily swappable for fiat currencies.

Stellar also features Anchors, entities that the network’s users trust to hold their deposits and issue credits into the network for the deposits. Anchors act as bridges between different fiat currencies and XLM.

Closing Thoughts

Through its mission to enhance the existing financial ecosystem, Stellar positions itself for rapid adoption. The network’s support for fiat currencies allows people from different countries to access mainstream financial services without going through the intricacies of creating bank accounts.