What is Stellar? (XLM)
The Beginner’s Guide
Stellar seeks to reimagine the market for currency and asset transfer by creating a distributed network that’s been described as everything from a payment rail to an exchange.
So while answers to the question “What is Stellar?” may change depending on who you ask, that isn’t the fault of the technology. As it did at its 2014 launch, Stellar allows users today to send money and assets in ways that have traditionally been the domain of payment providers.
The difference is that Stellar enables these services by incentivizing a distributed network of computers to run a common software.
The idea is anyone using a service powered by Stellar could transfer everything from traditional currencies to tokens representing new and existing assets. These assets can then be traded between users (across borders) with less friction using its cryptocurrency, lumens (XLM).
In this way, Stellar shares similarities with the XRP Ledger (and its cryptocurrency, XRP), which is also meant to provide a protocol for payment providers and financial institutions.
But Stellar has also sought to position itself as a kind of decentralized exchange, as its ledger has what is effectively a built-in order book that keeps track of the ownership of Stellar assets.
Developers have increasingly sought to make Stellar a marketplace for assets issued on its own protocol, with features that allow users to manage buy and sell orders and set preferred assets when settling trades.
Who created Lumens (XLM)?
Stellar is the name for the distributed computer network on which lumens are the cryptocurrency required to send transactions. Lumens now trade under the ticker symbol XLM on exchanges like Kraken, and as a result, they are often called XLM for short.
The individual credited with creating lumens is Stellar co-creator (and Stellar Development Foundation founder) Jed McCaleb. McCaleb notably founded the first successful bitcoin exchange, Mt Gox, and designed the XRP Ledger.
McCaleb would go on to serve as the chief technology officer (CTO) of Ripple, the company that today sheppards the development of the XRP Ledger, until 2013 when he left to create Stellar.
Other notable contributors to XLM’s technology and ecosystem, include:
David Mazieres, author of the Stellar consensus protocol
Denelle Dixon, the SDF’s Executive Director and CEO
Joyce Kim, founder of Stellar and former Executive Director of the SDF.
More information about the Stellar Development Foundation’s leadership team can be found on the project’s official website.
How does Stellar work?
At the time of its launch, Stellar copied the code used to power the XRP Ledger, meaning it inherited much of its design and features.
However, Stellar has since made technical changes that differentiate its offering.
Stellar Consensus Protocol
Stellar’s biggest update occurred in 2015 when it replaced the mechanism it used to keep the computers running its software in agreement about the state of its ledger with a custom-built alternative.
Based on a concept called federated Byzantine agreement, a type of consensus method that predates the one designed for Bitcoin (BTC), the Stellar Consensus Protocol enables nodes to vote on transactions until quorums are reached.
More details can be found on Stellar’s Medium or in this technical explainer.
Running a Node
The software used to power the Stellar network is called Stellar Core, and it can be run in different ways depending on a user’s needs. Specifically, nodes can be set up to serve as Watchers, Archivers, Basic Validators or Full Validators.
Watchers are only able to submit transactions. Full Validators, by contrast, participate in the Stellar Consensus Protocol, voting on which transactions should be deemed valid and maintaining an archive of this history for other nodes.
More details about the various nodes can be found on Stellar.org.
Another important network function is performed by Stellar Anchors (originally called Gateways).
These entities accept deposits of currencies and assets, and issue new representations of these assets on Stellar. Anchors then establish the requirements Stellar users need to meet to hold the assets. They can also revoke user access to assets.
More details about how asset issuance works on Stellar can be found here.
Why does XLM have value?
Stellar has seen a number of changes to its economy over the years.
At launch, a supply of 100 billion lumens (XLM) were created, and for the first five years of the network’s operation, this increased 1% annually until 105 billion were in circulation.
As of late 2019, however, this subsidy is no longer in force, with Stellar users voting to end the programmatic supply increases. That year, the Stellar Development Foundation also took steps to regulate the XLM economy, electing to reduce its share of the XLM supply.
This dropped the number of available lumens from 105 billion to just over 50 billion.
Apart from its finite supply, XLM gains value from its use as fuel for transactions on the network, as a small amount of lumens, 100 stroops (0.00001 XLM), are deducted as fees whenever a transaction is made. This helps prevent bad actors from spamming the blockchain.
Kraken's Crypto Guides
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Why should I use Lumens (XLM)?
Today, the uses for XLM are varied. For example, you may find XLM to be a valuable addition to your portfolio should you believe financial institutions may seek out crypto networks where they have more control over who can use and access any assets they issue.
To date the largest test of the technology is by software giant IBM, which used Stellar in 2018 to create and launch a cross-border payments solution called World Wire.
Developers may find XLM useful should they want to issue new types of assets, and already entrepreneurs have used the network to launch new cryptocurrencies.
However, as of 2020, whether Stellar will gain traction with any of these more experimental use cases, or win a share of the competitive payments market, remains an open question.
Now you're ready to take the next step and buy some Lumens!