DEFINITION of Stellar (Cryptocurrency)

The Stellar network is a blockchain-based distributed ledger network that connects banks, payments systems and people to facilitate low-cost, cross-asset transfers of value, including payments. Stellar has its native cryptocurrency called lumens, which is denoted by the symbol XLM. All three terms—Stellar, lumens and XLM—are used interchangeably, though stellar is blockchain network, lumen is the cryptocurrency and XLM is its trading symbol.

BREAKING DOWN Stellar (Cryptocurrency)

Stellar is operated by a non-profit organization called Stellar.org and was founded by Jed McCaleb, who also co-founded another popular cryptocurrency, ripple. Similar to ripple, Stellar is also a cross-border transfer and payment system that connects financial entities with an aim to significantly reduce the transaction costs and time lags. Each transaction has a standard mining fee of 0.00001 lumens.

Stellar’s primary focus is on the developing economies in the areas of remittances and bank loans to those who are still outside of the scope of the banking services. It doesn’t charge individuals or institutions for using the Stellar network. It received initial funding from the payments startup Stripe and donations from organizations like BlackRock, Google.org and FastForward. It covers the operational costs by accepting tax-deductible public donations, and by using the 5% of lumens set aside initially for the purpose.

How Stellar Works?

While Stellar works similar to most decentralized payment technologies like bitcoin, its key distinguishing feature is its consensus protocol. The present-day Stellar is a result of a 2014 fork that created the Stellar Consensus Protocol (SCP) following which Stellar became an open-source system. Under this protocol, the transaction authentication process is confined to a select set of trustworthy nodes rather than being left open to the whole network of nodes. Each node on the network selects a set of such trustworthy nodes, and a transaction is considered approved once authenticated by all nodes that are part of this select group. This shortened approval cycle allows the Stellar network to process transactions faster and keep transaction costs lower.

Stellar supports a distributed exchange model, which allows a user to send payment in a particular currency (like EUR) though they may be holding USD credit. The network automatically performs the forex conversion at the best available rates. The receiver can withdraw the EUR equivalent through the partner institute like a bank.

During 2018, Stellar signed a deal with TransferTo for cross-border payments to more than 70 nations. It also became the first distributed technology ledger to obtain a Shariah-compliance certificate for payments and asset tokenization, and was selected as a partner by International Business Machines Corp. (IBM) for a double-pegged stablecoin project.

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