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. Stellar Lumens (XLM) are one of the leading cryptocurrencies with steadily rising acceptance and adoption in the market. 

In this article, we will focus on the following aspects of the Stellar blockchain platform:

  • What is Stellar?
  • The Stellar Network vs. Stellar.org
  • What are the features of Stellar Blockchain?
  • How does Stellar Blockchain work?
  • From where is the value of Stellar derived?
  • How does the Stellar Payment System work?
  • What is the Base Transaction Fee on the Stellar Network?
  • What is the 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 the integrity of the Financial Network?
  • What are the business applications of Stellar Blockchain?
  • Protocol 13

What is Stellar?

Stellar is a payment protocol based on the distributed ledger technology. It allows 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 is intended to “move money quickly, reliably, and at almost no cost.”

Stellar Lumen (XLM), the native digital currency of Stellar, powers the entire range of operations on the blockchain network. At the inception of the Stellar network, 100 billion XLM/Stellar Lumens were created.

The only other mechanism for the creation of XLM is inflation. There is a fixed 1% annual inflation on the Lumen creation rate 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 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 financial inclusion, development of tools and social initiatives around the Stellar network. Employees of Stellar write code for the Stellar network, but the technology is independent of the organization.

What are the features of Stellar Blockchain?

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 3 – 5 seconds, facilitated 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 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 his/her 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.

From where Is the Value of Stellar Derived?

Stellar is a global exchange network with the ability to host thousands of exchanges between currencies and tokens per second. Hence, it holds undisputed value and utility. 

The transfer of cryptocurrencies and/or fiat currencies is a long-drawn and expensive affair. Stellar makes it swift and cheap. XLM (the cryptocurrency 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.

Example of Stellar network explained

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’s 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’s what happens.

Janet sends Keith USD 5000. The transaction intent is sent to Bank B within seconds to see if Keith is compliant or not.

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.

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 transaction operation. This fee does not have a profit motive. It acts as a deterrent for malicious activities (such as DoS attacks). 

At present, the base fee is .00001 XLM. The sender of the transaction incurs the expense. The fee is collected by the ledger and subsequently redistributed in the process of inflation.

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

Using the Stellar network is entirely free. All of the required software for integration is licensed under the Apache License (version 2.0). It permits commercial use, modification and/or distribution. 

In terms of Stellar, integration refers to the technical process of connecting to the Stellar network. It means to configure existing or new systems to talk to the Stellar network.

Integrators will need to assign technical resources for integrating with Stellar. Technical development takes between 120-200 hours, based on the development team’s size and experience level. 

So, suppose you’re using a third-party blockchain as a service (BaaS) provider. In that case, all the fees that you will incur will relate to expert consultation, advisory and the development team cost.

What are “Anchors” in the Stellar Network?

In the Stellar network, anchors are entities that can hold deposits and issue credits based on a requirement. 

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 credit issued by Anchors.

Stellar’s system significantly relies on Anchors. One needs to trust Anchors to hold deposits and issue credits ultimately.

What are Distributed Exchanges on Stellar?

To understand the concept of distributed exchanges better, 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 “order book.” The network has an “order book” for every currency/issuer pair. 

For example, there is an “order book” to convert RBS/GBP to Bitstamp/Bitcoin.

Multi-Currency Transactions on Stellar

Multi Currency Transactions of stellar network

One of the key features of Stellar is multi-currency transactions. For example, you can send money in USD to your friend residing in the USA. This seamless decentralized foreign exchange is a unique feature of Stellar. Transactions can occur 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 wants to purchase EUR for USD. If it finds a buyer, the transaction occurs instantaneously.
  • Indirect Exchange
    The Stellar network can also look for people who are willing to get USD in exchange for XLM, as 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 conversions chain. For example, USD/EUR, EUR/BTC, BTC/XLM, XLM/EUR.

How Does the Stellar Protocol Ensure Integrity of 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 similarly 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 participant’s 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).

Business Applications of the Stellar Blockchain

Business Applications of 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’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.

 Protocol 13

 Protocol-13-of-stellar-network

Every year, Stellar introduces significant updates to its core. In 2020, Protocol 13 was launched which introduced three fundamental updates:-

Fee Bumps

Fee bumps facilitate the following:-

  • Assist applications to cover user fees 
  • Allow fee increment for pre-signed transactions
  • Allow fee raising flexibility to validators

Fine-grained Control of Asset Authorization

Protocol 13 allows you to nullify authorization while retaining orders on the books, making it easier to tag regulated assets like securities. The issuers of regulated assets can perform three operations in one transaction:-

1. Sanction the account to use assets (signed by the issuer)

2. Pay or make the offer (signed by user)

3. Deny the account to use the asset (signed by user)

First Class Multiplex Accounts

Protocol 13 has introduced account addresses that include an embedded 64-bit memo. This update is essential for exchanges and other custodial services that 

  • maintain a single deposit stellar address
  • need memos to navigate payments to correct user accounts properly

The short name for multiplexed accounts is “muxed accounts.” Custodial services can give each user personal account ID to route the underlying exchange Stellar address.

If you’re looking for more real-time information on the Stellar blockchain, you may consider having a look at a Stellar blockchain explorer. 

A blockchain explorer is like a browser for the blockchain, similar to IE or Google Chrome.

A Stellar blockchain explorer provides live insights on recently mined blocks and a live feed of all the blocks added to the Stellar blockchain.

For better decision making regarding the network assets, it presents:-

  • detailed statistics
  • pricing history
  • insightful reports

The global financial infrastructure is an extensive network of closed systems. The inter-system gaps have led to increased transaction costs and slow money movement across political and geographic boundaries. Hence, the financial services sector has not grown to its full potential, leaving many communities underserved financially.

One solution is to build a financial infrastructure supporting the massive organic growth and innovation and ensuring financial transactions’ integrity. 

Heavy reliance on entry barriers and established institutions’ regulation to maintain integrity has been seen. 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 open to anyone. It ensures that participants record transactions accurately and collectively maintain the integrity by agreeing on one another’s transactions’ authenticity or validity. In such a network, new organizations quickly 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. Our Stellar blockchain experts will help you take your project from imagination to business results.

Author’s Bio

Akash Takyar
Akash Takyar
CEO LeewayHertz
Akash Takyar is the founder and CEO at LeewayHertz. With the experience of building over 100+ platforms for startups and enterprise allows Akash to rapidly architect and design solutions that are scalable and beautiful.
Akash's ability to build enterprise-grade technology solutions has attracted over 30 Fortune 500 companies, including Siemens, 3M, P&G and Hershey’s. Akash is an early adopter of new technology, a passionate technology enthusiast, and an investor in AI and IoT startups.
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