Stellar (XLM): Sending any currency to the other side of the world, lightning-fast and dirt cheap
Stellar (XLM) is one of those cryptocurrencies that has been on the market since the early days of crypto. The network offers fast and cheap transactions, which is a common use case within the crypto industry. Stellar is, however, unique in many ways. But why is it compared with Ripple so often? This article will show you where this link between the two projects comes from, and much more.
Stellar: Fast, cheap, and open-source
Stellar was founded in 2014 by blockchain developer Jed McCaleb and former lawyer Joyce Kim. McCaleb is a name we have heard before in the crypto industry. He was also the co-founder of crypto exchange Mt. Gox and Ripple (XRP). You can read more about Ripple in this article. In 2014, however, McCaleb wasn’t happy with where Ripple was heading. Inside sources state that, for example, many ideas of McCaleb were shot down by the Ripple developer team.
Time to go, McCaleb thought. So he left the company and immediately started his own crypto project; Stellar! His project bears many similarities with Ripple. For example, in the way how transactions are confirmed and how the ledger is updated. However, there are two significant differences between Stellar and Ripple. First, Stellar is entirely open-source, meaning anyone can contribute to the development of the Stellar network. Also, anyone can become any type of node in the network.
Secondly, the target user group differs. For example, Ripple serves big banks and financial institutions, helping them facilitate fast and cheap international transactions. Stellar, on the other hand, targets a broader range of users. Some of the partnerships that Stellar has gained over the years are with big companies such as Deloitte and IBM. But we also find smaller startups on that list. Another important fact that we can’t leave unmentioned is that Ripple is a for-profit company while Stellar is supported by a foundation, the Stellar Development Foundation.
How Stellar works
But enough about Ripple and Stellar. Let’s focus on Stellar now. The Stellar network runs on the Stellar Consensus Protocol (SCP). This protocol is a so-called Federated Byzantine Agreement protocol, meaning it verifies transactions differently from Bitcoin or Cardano. Anyone with a computer and internet connection can run the SCP, secure the network and process transactions.
The Stellar ledger is a database with all Stellar balances and transactions. Every five seconds, the network transmits all new transactions or changes, making Stellar transactions among the fastest within the industry. But how is Stellar so fast? Instead of miners solving complicated mathematical problems, nodes in the Stellar network work differently.
Asking thousands of nodes to agree on a version of the ledger is impossible. The SCP approaches this challenge by not asking all nodes to agree with every other node in the network. Instead, nodes all select other nodes they trust, making it easier to decide on something as we are now dealing with smaller groups of nodes that trust each other. These smaller groups of nodes within the Stellar network overlap with other groups, causing a chain reaction on agreements between these groups. The result is a network that can process transactions lightning fast.
Token issuing on Stellar
One of the advantages Stellar offers is the possibility to issue your own tokens. Companies can, for example, launch a token on the network that represents real-world dollars. Every time a user deposits a dollar to the company, it promises to issue a digital version of this dollar. When someone redeems this digital dollar, the company will exchange it for a real-world dollar again. It doesn’t need to be a fiat currency, however.
You can, for example, decide to issue a token that represents a one-hour consultation session. It is easy to imagine the possibilities this offers for companies regarding loyalty programs and remittances between different currencies. Moreover, every one of these tokens can be exchanged on the Stellar network. The network has a decentralized exchange (DEX) that automatically seeks the best exchange rates between different currencies.
Say someone in the U.S. wants to send money to someone in China. Instead of going through the lengthy process via a bank or looking for the best exchange rates yourself, Stellar can do this automatically. The sender puts in dollars on one end, and the network automatically seeks a chain of exchanges to exchange that dollar to yuan for the best possible rate. The receiver then receives yuan on the other side! Instead of waiting days or weeks that banks nowadays take, asking for high fees, Stellar lets you transact anywhere with anyone for low transaction costs and times.
There are many connections between different digital assets. For example, we find tokens representing the USD dollar, euro, and even bitcoin (BTC) and ripple (XRP). You will find a complete list of all the assets that were launched on Stellar here. The native cryptocurrency of Stellar is lumens (XLM). In the next section, you will read what utility lumens have.
The need for lumens on Stellar
In essence, a network like Stellar doesn’t need its own token. Users create their own digital tokens, and the underlying technology makes it possible to exchange between these digital currencies. But Stellar saw that doing transactions this way is “too easy.” The ease of sending a transaction over Stellar meant that there would also be many spam and unnecessary transactions made, straining the network unnecessarily.
Lumens was introduced to create a slight barrier on the network. Every user needs at least 1 lumens in their account to be able to use Stellar. Also, every transaction has a transaction fee of 0.00001 lumens. This prevents spammers from sending thousands of transactions with the goal of crippling Stellar.
Lumens also has a “natural, pleasant, byproduct,” as Stellar states it. As users need a minimum amount of XLM in their wallets and pay transaction fees with the cryptocurrency, everyone on Stellar uses it. This means there is liquidity that can be used to bridge digital tokens that would otherwise be illiquid.
If you are a little bit overwhelmed with all the information in this article, here is a summary. Stellar is a digital payment network that lets users transact all kinds of digital tokens quickly and cheaply. The network is not just for big banks or financial institutions; anyone can use it to send value. Also, the development of the project is open-source, meaning everyone can contribute.
Do you want to learn more about Stellar? Find more information about the project on its own website, which you can find here.
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