What is Stellar Blockchain? A Complete Guide for Beginners

With a growing number of digital currencies, setting up a trading platform that deals in digital as well as fiat currencies is imperative. Stellar is an intermediary platform that allows you to trade nearly all currencies, whether cryptocurrency or USD, making money transfers simple and secure. Stellar operates on the same principle that tokens use. These tokens can then be traded; if necessary, one can also withdraw the money. This has made international remittances faster and more convenient than traditional banks.

The Stellar architecture serves as a distributed ledger network that connects banks, payment systems, individuals, and other institutions. This architecture aims to facilitate cross-asset and low-cost value transfers.

This article will discuss all major aspects of the Stellar blockchain platform.

• What is Stellar blockchain?
• What are Stellar blockchain features?
• How does Stellar blockchain work?
• How does the Stellar payment system work?
• The decentralized system of Stellar and its components
• How does the Stellar protocol ensure the integrity of the financial network?
• What are the business applications of Stellar blockchain?
• Stellar smart contract on Soroban

What is Stellar blockchain?

Stellar is an open-source and decentralized global exchange network that allows digital currency to fiat money low-cost transfers. It also allows cross-border financial transactions among any pair of currencies. It operates on blockchain technology like other cryptocurrencies, which enables it to keep the network in sync. Stellar is faster, cheaper, and more efficient than other blockchain-based financial access and inclusion systems. Stellar Lumens (XLM) is Stellar’s cryptocurrency that facilitates cross-border payments.

Stellar allows users to trade money or tokens with the help of the Stellar Consensus Protocol. This decentralized and distributed network connects interconnected servers (nodes) within the Stellar network. Anyone can create a Stellar core verification node by using the Stellar core, which is the backbone of the Stellar network. It is responsible for verifying transactions using the Stellar consensus protocol, the algorithm that verifies transactions on the Stellar network. The Stellar core is run by trusted nodes, known as verification nodes, that verify transactions.

What are Stellar blockchain features?

Now that we know in brief what Stellar blockchain is, let us 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 3 to 5 seconds, made possible by its consensus mechanism.
• It can support thousands of transactions per second.
• It enables multi-signatures and smart contracts.
• It has a 1% fixed annual inflation.

How does the Stellar blockchain work?

Like any other blockchain platform, transactions on the Stellar network are added to a shared and distributed public ledger. Stellar uses a consensus algorithm based on the Federated Byzantine Agreement (FBA) called the “Stellar Consensus Protocol” (SCP).

SCP facilitates fast transactions at lower costs, with everyone on the network reaching an agreement about a transaction’s validity within a few seconds. Each participant (called a node) that helps add transactions to the global ledger selects their mini-network of other trusted participants. These mini-networks are called Quorum Slices. The extensive Stellar network can reach a consensus on valid transactions and add the same to the ledger quickly as long as Quorum Slices overlap.

How does the Stellar payment system work?

Let us take an example to understand how the Stellar payment system works.

Janet resides in the US, and Keith lives in the UK.

Janet wants to send USD 5000 to Keith for a cross-geography business transaction, which converts to Pound Sterling (GBP).

How will this transfer take place?

Let us assume Janet has an account with Bank A based in the US and Keith has an account with Bank B based in the UK. Both these banks are linked to the Stellar network and are “Anchors.”

Here is what happens.

Janet sends Keith USD 5000. The transaction intent is sent to Bank B within seconds to see whether Keith is compliant.

The moment Bank A receives approval from Bank B, they deduct the funds from Janet’s account.

The USD is then transferred to Bank A’s pool account and moved as XLM into the Stellar network.

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

Stellar’s decentralized system and its components

The Stellar system works peer-to-peer and is not centrally managed. Stellar is decentralized, and below are the components of this decentralized system:

The ledger system

The Stellar architecture uses an open ledger system. The transactions are stored on the blockchain, which acts as an open and transparent ledger system. All users can view the ledger, enabling them to see every transaction.

Stellar consensus protocol

Consensus is the basis for every decision made on the Stellar network. The process of reaching consensus takes place every 3-5 seconds on the Stellar network.

Anchors and credit

Anchors are responsible for holding deposits and issuing credits as needed in the Stellar architecture. Anchors facilitate the movement of value from the traditional banking system into Stellar and vice-versa. They are a bridge between the Stellar network and other payment rails. Stellar network Anchors are a key component of the Stellar network. Anchors are responsible for the following:

• Holding deposits for users
• Issuing credits to users

Multi-currency transactions on Stellar

This is undoubtedly one of Stellar architecture’s most important features. This means that user A can send USD to user B using Yen. This seamless decentral forex is the USP of Stellar. Transactions can take place in many ways, but we will concentrate on the USD/EUR currency for convenience.

Direct exchange

Stellar looks at the USD/EUR exchange in order to determine if anyone wants to buy EUR for USD. If someone is available, the transaction happens immediately.

Indirect exchange

Stellar can also search for individuals looking for USD to exchange for Lumens. They will connect you to someone looking for Lumen in return for Euros and then make sure the transaction goes through. However, the network could go through a conversion chain if none of these conversions are available. BTC/XLM and XLM/EUR are examples of such conversions.

How does the Stellar protocol ensure the integrity of the financial network?

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

In the FBA system,

• Participants are organized into mini-networks.
• Each node within such mini-networks knows its essential participants.
• When a transaction initiates, a node waits for most participants within its mini-network to agree on the transaction before considering the settled transaction.
• Similarly, the other participants do not agree with the transaction until the members that are considered essential agree.
• Eventually, a sufficient number of participants in the network accept a transaction making it impossible for a hacker or an attacker to roll it back.
• Only then any participant considers the transaction settled.

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

What are some business applications of the Stellar blockchain?

Stellar has applications beyond financial markets to ensure organizations safely perform essential functions. Considering the various features of the Stellar blockchain, one can think of the platform’s numerous possibilities and applications.

Here is a list of potential applications:

• Anchors in more currencies
• Mobile and trading clients
• API Mashups
• Merchant plugin
• Micro savings 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 are 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.

Stellar smart contract on Soroban

Stellar Development Foundation (SDF), in March 2022, announced their plan to bring Turing complete smart contracts to Stellar. They also stated that this was a strategic part of the technical roadmap to increase the surface area for developers to innovate on the Stellar network. This was their first Futurenet release. The incentivized testnet will continue to be upgraded, most notably in the first quarter of 2023. Soroban, which is Stellar’s smart contract development platform, will be launched on the mainnet in the first half of 2023.

As Soroban is now live on Futurenet, developers can start writing and deploying smart contracts in a test environment and be rewarded for it. As mentioned, Soroban introduces Rust-based smart contracts to the Stellar network that are Turing complete and are built on WASM. Hence, Stellar’s Soroban platform serves as a new type of smart contract platform purposefully built to perform. This, in combination with the Stellar network’s power, will lead to use cases that expand financial services access. Soroban smart contracts include a batteries-included developer experience. They are also designed to scale and provide reliable access through the Stellar network to financial rails.

The Soroban Adoption Fund has allocated $100M to developers who create products and tools that support the Soroban ecosystem. Sorobanathob: First Light will offer an incentive program to encourage developers to test Soroban, share their feedback, and create Soroban content. This includes tutorials and code examples. More details on Sorobanathon: First Light are available on soroban.stellar.org.

Endnote

The Stellar architecture makes it a valuable global exchange network. Stellar can host thousands of currency and token exchanges, allowing you to exchange crypto for fiat or vice-versa. The exchange on Stellar is quick and easy. Stellar is intended to allow users to transcend their local economies and be able to interact with the global marketplace. It can handle any asset, and transactions are almost completely free, so they can be used to make micropayments.

Stellar blockchain technology connects financial infrastructure regardless of where it is located so that all forms and types of value can be interoperable. This technology allows for greater access and inclusion. It helps us build a world in which equitable access is not a privilege but a right. This is the power of Stellar!

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