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What is Stellar & How Does it Work: Deep Dive Into XLM

11 mins
Updated by May Woods
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Stellar is an open-sourced, blockchain-based database that was developed by the Stellar Development Foundation (SDF).

SDF is a nonprofit organization whose goal is to improve financial inclusion and break down barriers to financial services for the average consumer. To achieve this, the Foundation built Stellar to help make money transfers easy and quick.

Stellar’s goal is to disrupt the existing global financial landscape. It does this by providing faster transactions across a peer-to-peer network with the help of the Stellar database.

A Quick History of Stellar

  • The Stellar Development Foundation was created in 2014 by Joyce Kim and Jed McCaleb.
  • McCaleb was involved in the creation of the defunct Mt. Gox exchange and the decentralized file-sharing network eDonkey.
  • Most notably, McCaleb helped co-found Ripple Labs, the parent company of blockchain-based global payment network Ripple. However, he fell out with his co-founders, as they differed in philosophy and how they preferred to stir the Ripple ship. He eventually left to set up Stellar with a team of intelligent minds.
  • Some other notable team members include Nicolas Barry, their Chief Technology Officer, and David Mazières, a Computer Science professor at Stanford University.

Ripple V Stellar

The most significant philosophical difference between Ripple and Stellar concerns their approach to payments. Ripple’s goal is to help banks make swift cross-border payments at little to zero cost while Stellar’s focus is on helping the average person, particularly those in developing economies, to send and receive instant and affordable payments.

XRP RippleStellar was initially built on Ripple’s protocol – a detail that explains why many call it a Ripple ‘fork.’ However, Stellar’s source code was replaced in November 2015 with the Stellar Consensus Protocol (SCP). The SCP code came with Software Development Kits (SDKs) from several prominent programming languages, including Python, Java, Ruby, JavaScript, and .Net.

Institutions that Partnered With Stellar

In its mission to boost the adoption of its network and its digital asset, the Stellar Development Foundation has teamed up with some notable partners, as can be viewed on the Foundation’s “Projects” page. They include

1. Tempo: Stellar partnered with the French money transfer service provider, which now serves as the Stellar network’s Euro anchor.

2.  IBM: The IBM partnership is most likely Stellar’s most high-profile alliance. Announced in October 2017, it sees Stellar help the tech giant to optimize its cross-border transactions. The deal also includes a network of banking institutions that will move money across borders with XLM.


3. SatoshiPay: Stellar and SatoshiPay announced their partnership in 2017, with the latter explaining that it would use XLM as the underlying cryptocurrency ledger of its nano payment system.

  • Some other partners include Flutterwave, HTC Exodus, The White Company, Ownbit, Cowrie, and Curv.

The Stellar Consensus Protocol

The Stellar Consensus Protocol (SCP) is one of Stellar’s most distinguishable properties. While Bitcoin and Ether use proof-of-work (PoW) to reach consensus, Stellar uses the SCP.

Stellar originally started with the Ripple Consensus Algorithm (RPCA). The RPCA was a Practical Byzantine Fault Tolerant (PBFT) algorithm, which ensures that a distributed system can continue operating even if some nodes fail to communicate or act dishonestly.

The RPCA worked like this:

1. A central authority chooses a predefined set of validators

2. The validators govern the system by agreeing on the state of the network and other aspects such as transaction validation.
3. Once 66% of validators reach a consensus, it is recorded on the blockchain.

This way, things can run as long as the malicious actors on the network don’t make up to 34%.

  • Stellar held on to the system until the point when it forked from Ripple. They found some faults in the PBFT system. But, there were problems with the RPCA.
  • At the time, David Mazières, a Computer Science professor at Stanford University, introduced the SCP as a stable alternative to the RPCA.
  • In PoW, miners can join as long as they have adequate compute power to validate transactions. PBFT, however, is a centralized and closed membership system where entry is contingent on a recommended validator list drawn by a central authority. The SCP implements the Federated Byzantine Agreement Protocol, thus minimizing blocked agreements and neutralizing them with a ballot system.
Ocean Protocol

Types of Protocol

  • The protocol consists of 2 primary sub-protocols, the ballot and the nomination protocol. For every consensus slot, the nomination protocol shows candidate values.
  • Eventually, a node can generate a convergence value for every slot. However, it’s impossible to grasp when convergence occurs, and there’s also the possibility that malicious nodes reset the entire nomination process.
  • As soon as nodes agree that the nomination protocol has converged, the ballot protocol is executed. Here, a ballot is tied to the candidate value, and a node will have to either commit or abort the value tied to the ballot.
  • The distributed network that enables Stellar to work consists of servers that run the Stellar Core software. Each of these servers is maintained by different organizations and people, and the entire Stellar Core system maintains a localized copy of the network ledger.
  • The consensus protocol allows for cheap and quick transactions, with every member of the network agreeing on transaction validity in a matter of seconds. All nodes that update Stellar transactions to the ledger choose their mini-network of other trusted participants that they agree with.
  • These mini-networks (also known as quorum slices) overlap, thus allowing the entire network to reach an agreement about the transactions that are valid and which can be added to the ledger quickly.

Quorums and Quorum Slices

  • A quorum is a set of nodes that are required to reach an agreement in a distributed system. When nodes try to reach an agreement, they communicate and agree to implement an update. Once a threshold of nodes has been met, the node is implemented.
  • Quorum slices, however, are subsets of a quorum that can convince particular nodes to form an agreement. Thus, a node can rely on several sets of nodes and their statements. A node could depend on several slices for information, and the trust needed can be built based on external information.
  • Trust is set within the node’s config file, thus making it possible for a dynamic formation of quorum slices and, eventually, decentralization.
  • Traditional Byzantine Agreements require that all nodes accept the same slices, as opposed to discerning where the information is coming from—as such, distinguishing between quorums and slices is impossible. This means that a closed and permissioned member access to the network is required.
  • Quorums intersect if they share a node. They’re also responsible for ensuring that their quorum slices don’t violate any quorum intersections. When quorums don’t intersect, the phenomenon is known as disjoint quorums. These are bad quorums, and they can lead to contradictory statements that ultimately put the consensus in jeopardy.

How to Use Stellar

Stellar Payment Network

While Stellar operates on a decentralized channel, it’s worth noting that it’s not as decentralized as Bitcoin or other networks based on proof-of-work mechanisms.

Stellar Lumens (XLM) are pre-mined, and the creators tout the fact that it can maintain its decentralization while improving efficiency and reducing latency. However, it sacrifices a bit of its decentralization for the latter two.

In the Stellar network, Lumens are used to cover transaction fees, and they serve as a bridge between currencies.

Lumens was created to provide effective remittances and cross-border payments. While Ripple and its XRP are targeted at banks and financial institutions, Lumens work to improve everyday people’s ability to make transfers.

To maintain its network and prevent ledger spam, Stellar requires users to pay a small transaction fee and maintain the minimum account balance, which is currently set at 1 XLM.

Anchors and Credit

Anchors are entities on the Stellar network that can hold a deposit and issue credits into the network for those credits. Stellar has described these entities as the bridge between different currencies and the network.

Anchors usually back assets that don’t originate on the Stellar network. These assets themselves are usually called redeemable or tethered assets. They take the assets’ deposits, issue credits to the corresponding accounts, and they provide withdrawals by taking the credits they give a user and crediting their wallet account.

The entire mechanism of Stellar is heavily dependent on anchors, and trust is required if they will be able to perform their two most important duties – holding and issuing credits to users.

The Distribution of Lumen Tokens

The Stellar network was created by the Stellar Development Foundation. When the tokens were first created, 100 billion of them were minted, and the number continued to increase by 1 % for the first five years. This ended in October 2019, although the Lumen supply was reduced in November 2019.

Stellar confirmed last year that there are now 50 billion of the tokens in circulation, adding that it won’t be minting any more coins. Of this 50 billion, the Stellar Development Foundation has held on to 30 billion, while about 20 billion are in circulation.

Stellar v Bitcoin

  • Stellar was created to help simplify cross-border payments – a problem that Bitcoin has struggled with due to an insufficient transaction processing speed.
  • Stellar, on the other hand, provides speedier transaction processing than Bitcoin, with speeds of over 1,000 transactions per second – compared to an average of five on the Bitcoin network. The reason for this is that all Stellar nodes don’t have to validate all transactions. Instead, a node chooses its set of trustworthy “co-nodes,” and they all form a group. Each group operates independently of the other, thus ensuring quicker transactions.
  • This same streamlined process forms how Stellar eliminates processing delays on cross-border transactions. The Foundation even has its trading marketplace, StellarX, which is set up like a decentralized exchange, but it says it’s not. No custody, no keys, and no trading system—those are the selling points of the trading marketplace. Stellar describes the StellarX a Graphical User Interface “for the publicly-accessible Stellar trading environment.”

The Best Stellar Wallets

1. Ledger Nano S

  • The Ledger Nano S is a hardware wallet. This means it’s off-grid and can work without an Internet connection, to some extent. The Nano S is a cut above the rest of the pack, thanks to an amalgamation of expansive asset support, innovative design, and a great price.
  • The wallet supports XLM along with other popular digital assets like Bitcoin, Ether, Litecoin, and XRP.
  • The Nano S can easily synchronize with the Stellar Account Viewer, offering convenience and security. You can read more about the Ledger Nano S here.

2. Atomic Wallet

Atomic is a custody-free, multi-currency wallet that supports over 300 digital assets. This wallet allows you to exchange, manage, and purchase XLM in a secured environment.

Atomic supports most operating systems, including macOS, Windows, and Linux. There’s also an Android and an iOS app for mobile devices.

Atomic makes use of on-device intelligence and stores all private keys on your device. You also get a password and a 12-word mnemonic seed phrase.

There’s also an in-app buy option on the Atomic Wallet. Powered by Simplex, the wallet allows you to buy Stellar Lumens and other digital assets using a credit card in a few clicks. Fees for the transactions are charged at 2 %.

3. Stellar Desktop Client

The Stellar Desktop Client is a versatile wallet. It functions as both a hot and cold wallet, depending on your Internet connection.

The wallet comes with an easy-to-use desktop platform, and it also allows you to either create a new wallet or restore an old one, and it’s protected by a password that is generated and stored on your computer. Being a desktop wallet, we strongly advise you to keep your passwords in a secure location or away from your computer to prevent malicious attackers from stealing your funds.

4. Stronghold Wallet

  • Stronghold is a multi-currency wallet that runs on the Stellar blockchain. Stronghold has described its walls as the on-ramp and off-ramp of the Stellar network for XLM. By being housed in the Stellar network, the wallet is touted as a legitimate secure place to keep your assets.

5. Guarda Wallet

  • The Guarda wallet is a multi-platform, non-custodial wallet that supports the trading of Lumens and other top cryptocurrencies. It features cryptocurrency trading capabilities and custom fees and is generally seen as an all-encompassing wallet by all standards.
  • It’s available on desktop, web, and mobile. There’s also a special extension for the Google Chrome browser.
  • The wallet also provides exchanges’ features, and users can also use debit cards to make Lumens purchases straight from the wallet. On Guarda, you can also choose to either create a new wallet or import your existing wallet to the software.




6. Lobstr Wallet

  • The Lobstr Wallet was created as a for-Stellar wallet only. Jed McCaleb created it in line with Stellar’smission to bank the unbanked.
  • The wallet has been touted as one of the safest and most secure wallet options for XLM, and it was one of the very first ways to purchase XLM when the latter was first developed. Lobstr currently has a web application and offerings for iOS and Android.
  • As expected, Lobstr is based on the Stellar network, and it has even been endorsed by Stellar itself. Coins on this wallet are stored on the network, thus ensuring that they’re entirely safe. The wallet also ensures the safety of your private keys, although there will be no way to get them once they’re lost. This essentially means that losing your private key is tantamount to losing your funds entirely.


Stellar was developed to be a platform that helps make seamless and faster cross-border payments. Like every crypto firm, however, its success with that mission has been largely limited.

While it has established partnerships with some major companies over the years, XLM has suffered from the lack of widespread adoption. There are different reasons why this is so. But, some people believe a combination of factors such as lack of aggressive marketing and consensus issues sit at the very top.

Stellar and its native cryptocurrency are not quite popular due to its little to zero marketing. Then, there’s the past issue of the consensus dilemma, which is absent on other digital assets like XRP. You also have the absence of audits on the Foundation’s funds, which helps breed transparency and trust in an asset created by a nonprofit. Despite all these shortcomings, Stellar’s Lumens is still one of the top cryptocurrencies in the market. It’s ranked at #12 on Coinmarketcap with a market cap of $774,237,133.

Frequently asked questions

What is Stellar Lumens?

How does Stellar Lumens work?

What are the benefits of Stellar Lumens?

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Jimmy Aki
Based in the United Kingdom, Jimmy is an economic researcher with outstanding hands-on and heads-on experience in Macroeconomic finance analysis, forecasting and planning. He has honed his skills, having worked cross-continental as a finance analyst, which gives him inter-cultural experience. He currently has a strong passion for blockchain regulation and macroeconomic trends as it allows him peek under the global bonnet to see how the world works.