Image Source :

Stellar Lumens blockchain — Tech and business overview

As of writing this article, Stellar Lumens is among top 5 crypto currencies and there are number of organizations, including IBM and stripe, exploring Stellar network real world usage.

Rather than speculating price of Stellar crypto currency XLM, I thought to put some light from business and technology prospective.

Business overview –

The Stellar network is an open source, distributed, and community owned blockchain based network used to facilitate transfers of value across assets. Although, theoretically it can transfer any fungible asset, for now focus is currency transfer only.

Like Ripple, Stellar is also building real-time gross settlement system (RTGS) for cross border currency transactions and remittance.

International remittances is approximately $600-billion industry, majorly dominated by few major banks and financial institutes. The current inefficient money transfer process involves complicated and costly correspondent banking and settlement arrangements. This makes international fund transfer very expensive and slow. You can read my earlier article about Ripple to better understand current international fund transfer practices and pain points.

Although there are lot of similarities between Ripple and Stellar and both are trying to solve same problem, Stellar focus is more on money transfer services in developing countries. It wants to enable money operators to interoperate and expand retail operation, without the overhead costs.

Advantage of Stellar network

  • Real-time settlement (2–5 seconds)
  • Cryptographically secure transactions
  • Regulatory compliance
  • Payments that move like email
  • International reach with a single integration
  • Great for micropayments: A $0.01 fee handles ~600,000 transactions
  • Automatic currency exchange


Stellar Lumens (sym. XLM) is the native cryptocurrency of the Stellar network. Stellar initially created 100 billion tokens, and distributed a fraction of that to the market through various means including auctions, giveaways, and airdrops. Stellar also has a 1% annual inflation on top of the original 100 billion tokens. The new tokens issued via inflation through weekly ‘inflation voting’ process. Lumens are available for purchase on several known markets and exchanges.

Following are the main purpose of lumens on Stellar network -

  • Anti-spam — By charging every transaction a minor fees — 0.00001 lumens, it prevents users with malicious intentions from flooding the network (a.k.a DoS attack).
  • Account authenticity — Stellar network requires all accounts to hold a minimum balance of 20 lumens to ensure account authenticity.
  • Bridge currency — Lumens can facilitate trades between currency pairs when there is no large direct market exist to exchange them. Currently, USD is used as bridge currency in global financial market.

Anchors and credit

In Stellar network, Anchors are entities that people trust to hold their deposits and issue credits into the Stellar network for those deposits. All money transactions in the Stellar network (except lumens) occur in the form of credit issued by anchors, so anchors act as a bridge between existing currencies and the Stellar network. Most anchors are organizations like banks, savings institutions, farmers’ co-ops, central banks, and remittance companies.

Anchors issue credit (a.k.a IOU, I owe you) to customer’s ledger on Staller network. This IOU then can be sent to any other user on Stellar network and redeemed at other end from any Anchor on Staller network.

Seamless distribution of IOU seems fantastic idea in an ideal world but in reality it can cause problem when anchor issuing assets goes insolvent. IOU of insolvent anchor, spread throughout network, would cause losses to entire ecosystem. In the current banking system, IOU’s are backed by collateral or deposits in nostro account.

These are a few companies operating Stellar anchors right now:

  • TEMPO Money Transfer (40 countries, EUR)
  • (Philippines, PHP)
  • Parkway Projects (Nigeria, NGN)
  • NaoBTC (international, BTC)
  • RippleFox (China, CNY)
  • ICICI Bank (India, INR)
  • More can be found here

TEMPO — European licensed remittance, is working with Stellar to allow its customers to transfer money to customers in Philippines.

Distributed currency exchange

Staller network also supports distributed currency exchange where anyone can offer to exchange any currency pair. This allows people to not only buy and sell currencies in a foreign exchange like manner but also to convert currencies seamlessly during transactions.

For example, Jenny wants to send Steven euros, using her USD balance. Stellar automatically uses best offer from the distributed exchange selling USD for EUR.

Generally, market making division of banks facilitate the currency exchange by offering buy and sell between all possible currency pair.


New lumens are added to the network at the rate of 1% each year to tame down inflation. The network also collects a base fee for each operation in a transaction. The funds from base fees are also added to the inflation pool. Each week, the protocol distributes these lumens to any account that gets over .05% of the “votes” from other accounts on the network. Obviously, no one account ever will get 50 million votes to qualify to receive inflation lumens. There are already number of sites operating that pools Stellar member’s vote and receives inflation lumens when elected. They then distribute lumens in proportion to members.

The fundamental idea behind the inflation is very good but the distribution strategy could have been simpler and better, something like stock dividend that you automatically receives based on number of shares you hold.

Regulatory compliance

The financial world is highly regulated by number of law enforcement agencies and watchdogs across the globe. Stellar already have built-in functionality to fit itself into exiting regulatory and compliance framework. Every transaction on Stellar network hooks into existing regulatory framework and follows compliance mandates.

Technology overview –

The Stellar network is built on basis of blockchain but certainly have few deviation from the technology that Bitcoin uses. Stellar network architecture consist of few servers to help integrate with existing bank servers.

Image source :

Stellar Core

Stellar Core is the backbone of the Stellar network and does the hard work of validating and agreeing on the status of every transaction with other instances of Core through the Stellar Consensus Protocol (SCP). Stellar core nodes also allow owners to issue new assets in the network or submit transactions to the network. Anyone can download Stellar Core and start running a node.


Horizon is the client-facing RESTful HTTP API server for the Stellar network. It acts as the interface between Stellar Core and applications that want to access the Stellar network. The RESTful HTTP API makes it really simple for any kind of application to integrate and start using network. Stellar has already made available SDK in popular languages such as JavaScript, Rubby, Python, GO, and C#, Java to access Horizon server.

Bridge Server

Stellar’s Bridge server provides a simple interface for the Stellar network. Bridge server makes it easier to use the federation and compliance servers to send and receive payments. When using the bridge server, the only code you need to write is a private service to receive payment notifications and respond to regulatory checks from the bridge and compliance servers. It interface with horizon server to interact with Stellar Core.

Federation Server

The Stellar network supports its own DNS-like system where human readable account addresses are mapped to account IDs. This mapping is stored in federation servers. The Stellar federation protocol maps Stellar addresses to more information about a given user. It’s a way for Stellar client software to resolve email-like addresses such as name* into account IDs like: ACCVPYFOHY7ZB7557JKENAX62LUAPLMGIWNZJAFV2MITK6T32V37KEJ. Stellar addresses provide an easy way for users to share payment details by using a syntax that interoperates across different domains and providers.

Compliance Server

Compliance is a standalone server which communicate with bridge servers and payment recipient’s compliance server using Stellar compliance protocol for each payment request. Compliance server provides hooks to existing compliance systems in organization to perform checks like sanctions, KYC, Anti-Money Laundering. Bridge server contacts compliance server in order to authorize a transaction before sending it. Compliance server uses the compliance protocol to clear the transaction with the recipient’s compliance server, then lets the bridge server know the transaction is ok to send.

Ledger and Consensus protocol

A ledger represents the state of the Stellar network at a given point in time. It contains the list of all the accounts and balances, all the orders in the distributed exchange, and any other data that persists. Each ledger is cryptographically linked to a unique previous ledger, creating a historical ledger chain that goes back to the first ledger a.k.a genesis ledger.

Every Stellar Consensus Protocol (SCP) round uses last closed version of ledger and produce new ledger version after applying current transaction set.

The SCP provides a way to reach consensus without relying on a closed system to accurately record financial transactions or performing proof of work or proof of stake kind of implementations. It implements “Federated Byzantine Agreement,” a new approach to achieving consensus in a real-world network that includes faulty “Byzantine” nodes with technical errors or malicious intent. To tolerate Byzantine failures, SCP is designed not to require unanimous consent from the complete set of nodes for the system to reach agreement, and to tolerate nodes that lie or send incorrect messages.

In the SCP, individual nodes decide which other participants they trust for information, and partially validate transactions based on individual “quorum slices.” The system wide quorums for valid transactions result from the individual quorum decisions by individual nodes.

The SCP is safe consensus mechanism designed to achieve:

  • Decentralized control
  • Low latency
  • Flexible trust
  • Asymptotic security

Decentralization is achieved by assuming that each entity in financial world would run their own nodes and have their own set of trusted quorum. SCP does not require mining (proof of work) and consensus is achieved within 2–5 seconds.

Ideally, anyone can join Stellar network by deploying Stellar Core server to network. The network become more robust with more server. However, since there is no mining rewards to earn, only financial institutions are likely to join network for their own benefits. This would make network centralized among financial institutes only.

Detailed technical paper on SCP is available here and readable summary for easy understanding is available here.

About company

The Stellar Development Foundation ( incorporated itself as a not-for-profit organization with the main goal to expand financial access and literacy worldwide.

On the 11th of May 2017 announced, a for-profit company that will focus on providing services and support for new and existing partners, developing tools that make integration easier and providing functions above the low level Stellar protocol.

Although Stellar claims that it’s for non-profit, takes away that claim pretty much. This is similar to Linux and Red Hat story where Linux is community developed free to use core system, but Red Hat benefits most due to its enterprise licencing, support and maintenance contract with the corporate world. This is one of the smartest move in crypto world!

Stellar also claims that they have planned to give away 95% of Lumens gradually, although there is no way to validate any giveaways in past and probably in future too.

Nevertheless, success for Stellar + is depends on number of financial institution adapting fast enough and using it beyond proof of concept.

If you like my analysis, please clap for me.

Connect me on LinkedIn