What is Stellar Blockchain? A Complete Guide for Beginners

What is common among the fastest growing blockchain platforms? The answer to this question is not difficult if we take a closer look at the leading and emerging blockchain platforms. All of the emerging blockchain platforms are betting their bucks on three winning combinations – increased speed, scalability and reduced cost of transactions compared to the older predecessors. And Stellar blockchain is in the same league. If the focus is not strong enough on these three areas, it is almost impossible for a blockchain platform to take off.

At present, Stellar is among the top 10 popular blockchain platforms, with Stellar Lumens (XLM) being one of the leading cryptocurrencies whose acceptance and adoption in the market is steadily rising. In this article, we will focus on the following aspects of the Stellar blockchain platform:

  • What is Stellar?
  • The Stellar Network vs. Stellar.org
  • Leading Features of Stellar Blockchain
  • How Does Stellar Blockchain Work?
  • Where Is the Value of Stellar Derived From?
  • How Does the Stellar Payment System Work?
  • What is the Base Transaction Fee on the Stellar Network?
  • Start-up cost and Integration Fees for a dApp on the Stellar Network
  • What are “Anchors” in the Stellar Network?
  • What are Distributed Exchanges on Stellar?
  • Multi-currency Transactions on Stellar
  • How Does the Stellar Protocol ensure Integrity of Financial Network?
  • Business Applications of Stellar Blockchain

What is Stellar?

Stellar is a payment protocol based on the distributed ledger technology, which allows for quick, cross-border transactions between any pair of currencies. In many ways, it is similar to other blockchain-based cryptocurrencies. According to their website, Stellar blockchain “is a platform that connects banks, payment systems, and people” and intended to “move money quickly, reliably, and at almost no cost.”

The Stellar blockchain network and the entire range of operations on it are powered by its native digital currency named Stellar Lumen (XLM). For blockchain developers interested in Stellar mining, it is essential to note that XLM is not a mining-based currency. At the inception of the Stellar network, 100 billion XLM or Stellar Lumens were created.

The only other mechanism for the creation of XLM is inflation. There is a fixed 1% annual inflation or rate of Lumen creation to account for economic growth and lost Lumens. The newly created Lumens are generated every week and distributed via a direct voting method.

The Stellar Network vs. Stellar.org

The Stellar network refers to the distributed ledger technology that facilitates financial transactions. This technology is an open-source, distributed and community-owned.

On the other hand, Stellar.org or Stellar Development Foundation is a non-profit organization that contributes to the development of tools and social initiatives around the Stellar network and financial inclusion. Employees of Stellar write code for the Stellar network, but the technology is independent of the organization.

Features of Stellar Blockchain

Now that we know in brief what is Stellar blockchain, let’s have a quick rundown of the features that matter:

  • The Stellar database is decentralized and open-source – the leading traits of a true blockchain platform.
  • The transaction confirmation time is between 3 to 5 seconds, which is facilitated by its consensus mechanism. We shall discuss this shortly.
  • Can support thousands of transactions per second.
  • Enables Multi-signatures and Smart Contracts.
  • Has a 1% fixed annual inflation.

How Does Stellar Blockchain Work?

Like any other blockchain platform, transactions on the Stellar network are added to a shared, distributed, public ledger, which can be accessed by anyone worldwide. To safely, quickly and accurately arrive at a consensus on transactions, Stellar uses its own unique consensus algorithm based on the Federated Byzantine Agreement (FBA). The algorithm is called “Stellar Consensus Protocol” or, in short, SCP.

SCP facilitates fast transactions at lower costs, with everyone on the network reaching an agreement or consensus about the validity of a transaction within a few seconds. Each participant (called a node) on the Stellar network that helps add transactions to the global ledger selects its own mini-network of other trusted participants. As long as these mini-networks (called quorum slices) overlap, the more extensive Stellar network can reach consensus on valid transactions and add the same to the ledger quickly.

Where Is the Value of Stellar Derived From?

Being a global exchange network with the ability to host thousands of exchanges between currencies and tokens per second, Stellar holds undisputed value and utility. The transfer of cryptocurrencies and/or fiat currencies, which is otherwise a long-drawn and expensive affair, is rendered swift and cheap with Stellar. XLM, the cryptocurrency that is supported within the Stellar Wallet, is used to pay transaction fees and manage accounts on the Stellar network.

How Does the Stellar Payment System Work?

Let’s take an example to understand how the Stellar payment system works. For instance, Janet, who lives in the US, wants to send money to Keith who lives in the UK, for a cross-geography business transaction. Let’s say, Janet wants to send $5000 USD to Keith, which will be converted to Pound Sterling (GBP). How will this transfer take place?

Let’s assume, Janet has an account with Bank A based in the US and Keith has his account with Bank B based in the UK. Both these banks are linked to the Stellar network and are “Anchors”. Let’s see what happens.

Janet sends Keith $5000 USD and the transaction intent is sent to Bank B within seconds to see if Keith is compliant or not. The moment Bank A receives a go-ahead from Bank B, they deduct the funds from Janet’s account. The USD is then transferred to Bank A’s pool account and then moved into the Stellar network in the form of XLM, the native Stellar cryptocurrency.

Once inside the Stellar network, it looks for the best exchange rate to use to convert the XLM into GBP. The money then moves to Bank B’s base account, which then gets credited to Keith’s account.

What is the Base Transaction Fee on the Stellar Network?

The base fee for a transaction on the Stellar network is a nominal amount associated with each operation in a transaction. This fee does not have a profit motive but is instead meant to act as a deterrent for malicious activities (such as DoS attacks). At present, the base fee is set to .00001 XLM, which is a fraction of a penny. The sender of the transaction incurs the fee. The fee is collected by the ledger and subsequently redistributed in the process of inflation.

Start-up Cost and Integration Fee for a dApp on the Stellar Network

Using the Stellar network does not invite any fee for a user, which means it is entirely free to use. All of the required software for integration is licensed under the Apache License, version 2.0, which permits commercial use, modification, and/or distribution. For starters, integration in terms of Stellar refers to the technical process of connecting to the Stellar network. It means configuring existing or new systems to talk to the Stellar network.

Integrators will need to assign technical resources for integrating with Stellar. It typically takes anywhere between 120-200 hours of technical development, based on the size and experience level of the development team. So, if you’re using a third-party blockchain as a service (BaaS) provider, all the fees that you will incur will be related to expert consultation, advisory and the development team cost.

What are “Anchors” in the Stellar Network?

Anchors are entities in the Stellar network that can hold a deposit and issue credits, based on a requirement. Another way to understand this is to think of an “Anchor” as a bridge between different currencies and the Stellar network. All money transactions on the Stellar network, except XLM, take place in the form of a credit issued by Anchors.

As you can gauge, Stellar’s system significantly relies on Anchors and one needs to trust Anchors to hold deposits and issue credits ultimately.

What are Distributed Exchanges on Stellar?

Exchange is yet another critical component of the Stellar system.To understand this concept better, first, we need to know what “offers” are. In terms of Stellar, an “offer” is a public commitment to exchange one type of credit for another at a predetermined rate. The Stellar network thus becomes a marketplace that facilitates the buying and selling of different currencies.

All the “offers” in the Stellar ledger form an “orderbook,” with the network having an “orderbook” for every currency/issuer pair. For example, there is an “orderbook” to convert RBS/GBP to Bitstamp/Bitcoin.

Multi-Currency Transactions on Stellar

One of the key features of Stellar is multi-currency transactions, meaning a person can transfer money to another person residing in another country as the destination country currency. This seamless decentralized forex is a unique feature of Stellar. Transactions can take place in one of the following ways (for ease of reference, we will consider USD/EUR as an example):

  • Direct Exchange
    The Stellar network can look up the USD/EUR exchange to identify anyone who would like to purchase EUR for USD. If a buyer is found, the transaction occurs instantaneously.
  • Indirect Exchange
    The Stellar network can also look for people who are willing to get USD in exchange for XLM. In this scenario, it can connect that person to someone looking for XLM in exchange for Euros and make the transaction successful.
  • Conversion Chain
    Finally, if none of these conversions are available, the network can go through a chain of conversions. For example, USD/EUR, EUR/BTC, BTC/XLM, XLM/EUR.

How Does the Stellar Protocol Ensure Integrity of Financial Network?

We mentioned previously in this write-up that Stellar’s consensus mechanism is based on the Federated Byzantine Agreement (FBA). FBA achieves operational efficiency through individual trust decisions, called quorum slices, made by each node, which collectively determine system-level quorums. The Stellar network is bound together by slices similar to the way peering and transit decisions of individual networks unify the Internet.

In the FBA system, participants are organized into mini-networks and each participant or node within such mini-networks knows the participants they consider as important. When a transaction is initiated, a node waits for the majority of the participants within its mini-network to agree on the transaction before considering the settled transaction.

Similarly, the other participants do not agree to the transaction until the participants they consider essential, agree. Eventually, a sufficient number of participants in the network accepts a transaction such that it becomes impossible for a hacker or an attacker to roll it back. It is only then that any participant considers the transaction settled.

Thus, FBA’s consensus mechanism ensures the security and integrity of a financial network running on the Stellar network. It also ensures that SCP is free from blocked states (in which consensus is no longer achievable) as long as participant’s failures do not make it impossible to satisfy trust dependencies.

Business Applications of the Stellar Blockchain

Stellar has applications beyond financial markets to help ensure organizations safely perform essential functions. Considering the various features of the Stellar blockchain, one can think of numerous possibilities and applications of the platform. Here’s a list of the leading application ideas:

  • Anchors in more currencies
  • Mobile and trading clients
  • API Mashups
  • Merchant plugin
  • Microsavings account for school, health, insurance
  • Microinsurance
  • P2P lending
  • Conditional cash transfers
  • Donation systems for nonprofits
  • Loyalty points programs
  • Community currencies
  • Time banks
  • Volunteer hour tracking
  • Anywhere ATM or human ATM mobile apps

If you’re looking for more real-time information on the Stellar blockchain, you may consider having a look at a Stellar blockchain explorer. Wondering what a blockchain explorer is? Think of a blockchain explorer as a browser for the blockchain, similar to IE or Google Chrome.

A Stellar blockchain explorer will provide you with live insights on recently mined blocks on the Stellar blockchain and a live feed of all the blocks added to the blockchain. Furthermore, it presents detailed statistics, pricing history, and insightful reports for all the assets on the Stellar network, which helps better decision-making.

The global Financial infrastructure is currently an extensive network of closed systems. The existing gaps between these systems have led to rising costs of transactions and slowed down the movement of money across political and geographic boundaries. Because of this, the financial services sector has not grown to its full potential, leaving a large number of communities underserved financially.

One of the steps towards solving these problems is to build a financial infrastructure that supports the massive organic growth and innovation, taking wings from the Internet and ensures the integrity of financial transactions. Historically, in the absence of other potent means, there has been a heavy reliance on entry barriers and regulation of established institutions to maintain integrity. This approach conflicts with the prerequisites necessary for organic growth, which demands new, innovative participants equipped with only the bare minimum financial and computing resources.

In such a scenario, the Stellar blockchain platform shows promise and perhaps leads the way to a global decentralized financial network that is open to anyone. It ensures that participants record transactions accurately and collectively maintain the integrity by agreeing on the authenticity or validity of one another’s transactions. In such a network, new organizations easily gain entry and extend financial access to unserved communities.

If you have an idea or a business case for setting up a transaction mechanism on the Stellar network, get in touch with us, and our Stellar blockchain experts will help you take your project from ideation to business results.

Author’s Bio

Akash Takyar
Akash Takyar
CEO LeewayHertz
Akash Takyar is the author of Blockchain Technology and Business book. He is the co-founder of LeewayHertz and is a consultant to fortune 500 companies including Siemens, 3M, Hershey’s and others. He has a Masters Degree in Computer Science. Akash’s experience of building over 100+ apps allows him to rapidly architect and design solutions. His ability to explain complex technologies in simple and practical ways has resulted in him becoming a popular speaker at colleges, universities, and conferences.
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