Existing global financial infrastructure is made up of closed regional and national systems that do not easily intercommunicate due to differing financial and banking regulations, technology, infrastructure and diverse currencies. Stellar intends to use their ledger and orderbook network to make peer to peer payments across borders and currencies a frictionless experience.
One can conceive Stellar’s network as a distributed intermediary that connects disparate financial systems by translating a wide range of assets into credit representations, where assets can then be exchanged with greater speed, ease and under potentially more secure systems. It is important to note that the transactions within the network require trust amongst different credit-issuing parties to coordinate the actual settlement of assets. The Stellar Development Foundation was founded by Jed McCaleb in 2014 as a non-profit with a mission to promote global access, literacy and inclusion by facilitating cross-border peer-to-peer payments. Stellar is targeting the $574 Billion USD per year remittances market, so that individuals can send and receive money across political borders and between currencies faster and at significantly lower cost than is otherwise available through money wires, SWIFT and ACH transfers.
Another user base emerged on the network in early 2017, as projects launching tokens started exploring Stellar as an alternative to Ethereum. While Ethereum boasts about its “Turing-completeness”, Stellar argues that few projects actually need to utilize Turing-complete functionality and claims their decision to not build that functionality results in faster transaction processing speeds and significantly lower fees. Stellar maintains an average 5-second transaction processing time, each transaction costing USD $.00000306. Stellar only provides 12 possible operations types with which to build smart contracts, the Stellar team argues that this is more than sufficient for the vast majority of project use cases. The protocol provides features supporting KYC compliance and enforcement, multisignature capabilities, a decentralized exchange facilitating the instant conversion between various asset classes and currencies, and is secured through a node network utilizing the Stellar Consensus Protocol (SCP).
The Stellar Consensus Protocol (SCP) was launched in April 2015 under the guidance of Professor David Mazieres, head of Stanford’s Secure Computing group. In event of node disagreement, the SCP prioritizes safety over the network’s liveness, and claims to offer a set of provable safety properties. The SCP represents a new consensus category called a federated byzantine agreement (FBA), which differs from traditional byzantine agreements by allowing open node membership. Nodes that join the network identify other nodes that their operator trusts, and, in doing so, create a ‘quorum’.
Any account wishing to issue an asset, in the form of a tradable credit onto the Stellar network, is called an Anchor. Anchors can be thought of as private banks, issuing currencies that other accounts may choose to trust and do business with. Anchors can be individuals, companies, non-profits, financial institutions or other entities. The assets that they issue and trade on the network may be fiat currency, cryptocurrencies, commodities like oil and gold, fractional rights in real estate, equities, other types of securities or even their own token. The Stellar Decentralized Exchange (SDEX) is where assets are issued and made visible to the network, benefitting from the liquidity available on the market. The SDEX allows for someone to send a payment using one type of asset and receive another.
Stellar’s Lumen (XLM) is the native currency of the network and is intended to be used as a medium of exchange. The XLM grants access to the network; any account intending to transact must hold a minimum of 1 XLM. Lumens are also required to pay base fees for transactions and grant voting rights for XLM inflation distribution. Because it is the only asset on the network that does not require a trustline to exchange with, XLM acts as a bridge currency within the SDEX, pairing with any other asset to provide liquidity. There is a fixed supply of 100 Billion XLM, 95% of which the Foundation is mandated to distribute to the world through direct sign-up and partnership programs, retaining 5% for operations. New XLM are added to the network at a rate of 1% per year through a fixed inflation mechanism. On a weekly basis, the protocol distributes new XLM according to a community vote’s results. Each Stellar account has the ability to select an account on the network (including its own) as its “inflation destination”. New XLM are combined with all transaction fees accumulated since the last XLM distribution period, and distributed to any account that receives over .05% of votes. XLM are distributed pro rata across each destination account, according to the amount of XLM held by the account that originally voted for it. To meet the .05% quota, several community pools have been created such as Lumenaut or XLMPool that allow account holders with smaller amounts of XLM to participate in inflation distribution.