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Stellar (XLM) 101 - Complete Guide

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Author: Benson Toti Updated: January 28, 2022

Stellar is a blockchain protocol aimed at decentralising the way people move and store money. The Stellar network is open source, and the protocol is an improvisation of the Ripple Labs protocol. Lumens (XLM) is the digital currency that powers transactions. The cryptocurrency makes the movement of assets and value across borders less expensive. 

If cryptocurrencies hold the potential to revolutionise finance, then Stellar could certainly be considered as one of the most important. But what exactly does Stellar have to offer in terms of an investment opportunity? Read on to find out.

What Is Stellar and Why Was (XLM) Created?

Stellar was launched in 2015 by Jed McCaleb. McCaleb describes the Stellar blockchain as an open-source, decentralised payment network protocol that facilitates cross-border transactions between different currency pairs in a fast and affordable way. Lumens (XLM) is the cryptocurrency native to the network, and it powers all of its operations.

Before founding Stellar, Jed McCaleb was on the founders’ list of Ripple, another blockchain technology focused on transforming financial systems. However, disagreements on the implementation of Ripple's core principles led to his departure in 2013. He hooked up with Joyce Kim, a lawyer, and wrote the first code for Stellar, based heavily on the Ripple source code.

According to its website, Stellar is a powerful network that facilitates limitless transactions across international borders. Users can "create, send, and trade digital representations of all forms of money". The ultimate goal is to create a single network in which all financial systems work together. This would eliminate the friction that financial institutions and consumers experience when sending and receiving money around the globe.

Most blockchain projects are run by a team of developers who take care of core operations as well as administrative tasks. Stellar too has the Stellar Development Foundation, with Jed McCaleb holding the position of CTO. The foundation is non-profit, and its aim is to increase the flow of money in the world's economy in a way that increases the openness of markets and further empowers the people.  

How Does Stellar Work?

Stellar looks like a real contender for the most important cryptocurrency project on record, but how exactly does it work? Well, we first have to understand how a blockchain works.

A blockchain network/platform is a collection of blocks of information recording information to a ledger. This ledger is distributed across different computers across the world where each computer (node) just has possession of the entire record. Due to the distributed nature, a blockchain allows for peer-to-peer transactions, and it secures information by making it immutable. 

Stellar uses this similar mode of operation. One more thing, there must be consensus before a transaction becomes valid. Conventional blockchains achieve consensus through proof of work or proof of stake system. For Stellar, it uses a unique consensus mechanism called Stellar Consensus Protocol (SCP). 

The SCP implements a system where each node (or participant) on the Stellar network selects a small network of trusted nodes (mini-network) to validate transactions. Before the transaction is confirmed, the protocol must be able to confirm that the mini-network overlaps. If so, the Stellar network achieves consensus, and the transaction is compiled into a block that increases the Stellar's chain.

Stellar also relies on the SCP to achieve platform security. The protocol enables decentralised control of the network, lessens network latency, enforces trust, and guaranteed security. SCP enables new nodes to join the consensus making process, and it ensures that all nodes have just enough decision-making power. For this reason, transactions over the network are fast and cheap if compared to proof of work blockchains.  

3 Key Selling Points of Stellar (XLM)

1

Low flat fees

Transaction costs might have been a significant factor that made digital currencies popular, but they remain a sticking point for some, like Bitcoin. Nevertheless, Stellar is doing great on the transaction fees front. No matter the size of the transaction, users incur just 0.00001 XLM, which is pretty much insignificant. At the time of writing, this amount of XLM was equal to $0.000000797. Well, you get the point.

2

Partnerships with reputable tech companies

Stellar Development Foundation is among the few blockchain companies to secure working relationships with big-name tech companies; in this case, it is IBM. Together, the companies launched World Wire, a service that enables financial institutions to move fiat currency with digital assets such as stablecoins acting as intermediaries.

3

A flexible consensus mechanism

Since Bitcoin launched, many blockchain projects have sprung up and what makes them different is the consensus mechanism. Nonetheless, few consensus mechanisms have been able to achieve the latency levels and energy efficiency of the Stellar Consensus Protocol. This consensus system is flexible in that it allows the transaction confirmation process to complete fast, hence elevating the transaction per second rate of the entire network.

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Is Stellar Worth the Investment?

Stellar hosts many great projects by large enterprises and small startups, all of them focused on accessing new markets and moving money. As a result, demand for XLM has been on the upward trend. Since the start of the year to date, the Stellar price has grown by 82% to $0.0801. 

XLM's stature as a major cryptocurrency in cryptoverse has been on the wax, especially due to important developments such as Stellar's partnership with TransferTo. In 2018, the two companies agreed to leverage the Stellar network to create a cross-border payments system that would serve over 70 countries. Other partnerships like the one with IBM that spawned World Wire have shown that Stellar developers are ready to push the envelope whenever the time is right.

It is inevitable that the financial industry will look different in future and projects such as Stellar could play a significant role in the shift. This should tell you that the XLM price is likely to look much different when the future acquiesces to the advances of digital currencies.

However, cryptocurrencies are still a bit technical to many investors, meaning there is a need for more information before one is certain on the next step in terms of whether to invest in Stellar Lumens and other cryptocurrencies. In the same breath, one should not look buying Stellar Lumens as a get-rich-quick scheme but an opportunity to participate in the shaping of the future of finance. In other words, one must appreciate the immense risks that come with investing in a new concept.

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Frequently Asked Questions

  1. Stellar is the blockchain technology that supports products such as lumen, which is a digital currency. Lumen provides the liquidity that helps to move funds and transfer value within the Stellar network. Finally, XLM is the ticker name for lumen. However, it is not uncommon to find all three terms being used interchangeably to refer to the lumen token.
  2. Yes. Many crypto exchanges list the digital currency as a tradeable asset, and many more merchants accept XLM as a legitimate means for settling transactions.
  3. Buying XLM is possible through various top exchanges among them being Huobi Global, BitZ, Binance, and others.
  4. XLM powers the Stellar network and the more useful the network, the more demand for the digital currency.
  5. Stellar hosts various projects but the most significant product right now is the global exchange network. This network hosts crypto-to-fiat currency and crypto-to-crypto exchanges numbering in thousands. The Stellar network also powers a cross-border payments system.
  6. So far, there is no data indicating if XLM has a supply limit. During the founding of the Stellar network, the Stellar Development Foundation issued 100 billion tokens. Currently, the number of XLM in circulation is about 20 billion.
  7. The network uses the Stellar Consensus Protocol as a security tool. The tool controls the decision-making power of all nodes in the network to prevent bad actors from exploiting loopholes.
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