What is Stellar and XLM?

Stellar is a blockchain designed for low-cost, secure, and high-speed international payments between individuals and organizations. How does it work? Is it as useful as it seems? Let’s see!

The Stellar network has over 5 million addresses, according to data from September 2022.

Stellar Lumens (XLM) is a native coin that debuted in 2014. It is now one of the top 50 cryptocurrencies in terms of market capitalization.

MoneyGram, IBM World Wire, and many other local operators use the Stellar blockchain to send money around the world.

Stellar, according to a roadmap, would have implemented a virtual machine by the end of 2022. It will enable us to create smart contracts and design decentralized applications.

Who founded Stellar?

The Stellar project was founded in 2014 by Jed McCaleb, the American programmist and entrepreneur.

He was known at the time as a co-founder of the eDonkey2000 file sharing service and the infamous crypto exchange Mt.Gox, and then he was a co-founder and technical director of Ripple. Mcaleb was dissatisfied with the project’s high level of centralization for financial institutions, so he decided to launch a decentralized version specializing in private electronic payments.

In July 2014, McCaleb and David Mazier, professor of STanford University, registered a non-commercial organization Stellar Development Foundation (SDF). It soon received the $3 million financial support from the American IT company Stripe, which is developing an app for wire transfers and payments.

In the autumn of 2014, the Stellar blockchain went live. It began as a Ripple clone and shared the same code base. However, in the spring of 2015, SDF launched an updated Stellar blockchain based on David Mazier’s Stellar Consensus Protocol.

In May 2017, Lightyear.io company, a commercial department of Stellar, started its work. In September 2018, it was purchased by Chain, and the united company got the name Interstellar.

It develops and integrates new solutions to improve the efficiency of international payments using the Stellar blockchain.

In 2019, Denelle Dixon, a former Mozilla Foundation COO, succeeded McCaleb as SDF CEO.

How does Stellar work?

Stellar Consensus Protocol (SCP), according to Jed McCaleb, is the first approved secured consensus mechanism. It employs the “federated system of Byzantine agreements” architecture, in which many peer-to-peer computing nodes participate in the process of generating blocks and verifying transactions.

In SCP, the procedure for reaching consensus and including approved transactions in new blocks is divided into three stages:

• Nomination — nodes nominate candidate blocks for approval;
• Voting — nodes vote for their own and others’ candidates, and in case of finding a quorum, a “ballot” is formed allowing the inclusion of a new block in the blockchain;
• A timeout is a mechanism by which nodes reject candidates for whom a quorum could not be obtained and retry voting.

There are three types of computing nodes in Stellar:

• Observer — sends transactions to the network;
• Validator — participates in the SCP voting process and confirms new blocks;
• Archiver — stores and constantly updates the Stellar blockchain registry.

As of September 2022, there are about 40 active validator nodes in the Stellar blockchain. Three of them belong to the SDF, while the rest belong to two dozen organizations, including cryptocurrency exchanges where the XLM coin is traded. This ensures network decentralization and security.

The Stellar blockchain can process over 1000 transactions per second, with an average confirmation time of less than 5 seconds, thanks to the described architecture.

How does Stellar tokenomics work?

Approximately 100 billion XLM were created during the launch of the Stellar network’s 2014, with the inflation rate set at 1% per year.

Over the next ten years, the Stellar Development Foundation intended to distribute more than half of the XLM issue to partners and private users. To accomplish this, an extensive airdrop program for bitcoin holders, XRP coins, and users of various blockchain services was created.

In particular, in 2018–2019, every verified wallet user of Blockchain.com, as well as the Poloniex and Coinbase crypto exchanges, who passed the project knowledge test, could receive Stellar Lumens coins worth approximately $20–30.

The generous distribution of XLM, on the other hand, had a negative impact on the asset’s market quotations. As a result, the Stellar tokenomics were revised in November 2019: the SDF decided to burn more than 55% of the XLM issue and cancel the inflationary issuance of new coins.

As of September 2022, the total volume of the offer is 50 billion XLM, more than 50% of the coins are already in free circulation.

Why do we need XLM and what are its features?

The XLM coin in the Stellar ecosystem performs four main functions:

• Payment of fees for transactions in the blockchain (0.00001 XLM per operation);
• Account management in the Stellar network (to activate the transfer function, there must be at least 1 XLM in the Stellar wallet);
• A unit of exchange in the Stellar blockchain;
• An intermediate currency used to ensure the liquidity of any tokens issued on the Stellar network.

Stellar Lumens cryptocurrencies are traded on the largest centralized cryptocurrency exchanges (both in the spot section and in the form of futures). All popular multi-currency wallets support its storage.

Ordinary users find XLM transfers to be very fast and inexpensive, but not always convenient. When sending cryptocurrencies to the addresses of centralized crypto exchanges and other custodial services, for example, a special Memo note must be specified in addition to the address. This is a unique numeric or letter code generated by the wallet. Without a Memo, you can send a transfer, but exchanges will be unable to transfer funds to the desired account.

At the beginning of 2019, the well-known investment company Grayscale Investments, focused on investing in crypto assets, launched a trust fund, the underlying asset of which was the Stellar Lumens coin. However, it is not popular: as of September 2022, the capitalization of the trust is only $ 7.7 million.

Which crypto assets are issued in the Stellar blockchain?

The Stellar blockchain allows us to create custom tokens with specified features fast and cheaply. As a result, the Stellar platform ranked second after Ethereum in terms of the number of completed ICOs in 2018.

Another important result of such a simple token issue was the ability to tokenize any real asset. For example, consider the issue of stablecoins pegged to various fiat currencies. Their free conversion is made possible by special “anchors,” which are trusted financial organizations that provide free exchange of national currencies into tokens and XLM coins and vice versa. They can be thought of as links between traditional economics and the Stellar network.

The Stellar network was first used by the French payment blockchain service Tempo. In 2017, it began issuing Euro Tempo Tokens (EURT) that are pegged to the euro.

In April 2019, Wirex, a British online bank, issued 26 Stellar stablecoins. They were pegged to various national currencies, with the option of instant conversion.

In February 2021, Circle company began issuing USDC stablecoins based on Stellar. Many major crypto exchanges have announced that they will support the USDC transfers in this network.

How is Stellar developing?

Stellar, unlike Ripple, was initially positioned as a scalable, fast, and secure cryptocurrency for individual settlements. To bring XLM closer to private users and break down the barrier between cryptocurrencies and fiat money, the Stellar Development Foundation has formed numerous partnerships with payment systems around the world, with a particular emphasis on Africa, Asia, and South America.

Here are just a few of the most interesting partnerships:

1. In April 2015, SDF partnered with cloud banking software developer Orcadian to integrate Stellar into the Oradian platform for servicing microfinance organizations in Nigeria.
2. In 2016, Deloitte Corporation announced the integration of Stellar to create an application for cross-border payments of Deloitte Digital Bank.
3. In the fall of 2017, Stellar entered into a partnership agreement with IBM Corporation. The IBM Blockchain World Wire service was introduced later, which allows financial institutions to make international payments in a matter of seconds.
4. At the end of 2017, Stellar began using the SureRemit cashless money transfer platform located in Nigeria.
5. In October 2021, the payment company Flutterwave launched two new money transfer corridors between Europe and Africa using the Stellar network.

One of the major partners of Stellar is the international money transfer service MoneyGram, which has 350 thousand service points in 200 countries around the world. In the fall of 2021, the company began using the Stellar blockchain for USDC stablecoin transactions.

Thanks to the cooperation of Stellar and MoneyGram, in June 2022, users of the Vibrant and Lobstr digital wallets in several countries of the world, including Kenya, Canada, the USA and the Philippines, had the function of converting local currencies into cryptocurrencies and vice versa without having to have a bank account or plastic card.

According to the Stellar development roadmap published in early 2022, the integration of the virtual machine and smart contract support into this network should be completed by the end of the year. This significant update has the potential to change the Stellar ecosystem and lead to the active development of DeFi services familiar to users of other blockchain platforms.

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