Key points
- Stellar is a blockchain built for cheap, secure and high-speed cross-border payments between individuals and organisations. As of September 2022, the network had more than 5 million addresses.
- The project’s native coin is Stellar Lumens (XLM), issued in 2014. It currently ranks among the top 50 cryptocurrencies by market capitalisation.
- The Stellar blockchain is used by MoneyGram, IBM World Wire and many local money-transfer operators worldwide.
- According to the roadmap, by the end of 2022 Stellar planned to introduce a virtual machine, enabling smart contracts and decentralised applications.
Who founded Stellar?
The Stellar project was founded in 2014 by the American programmer and entrepreneur Jed McCaleb. He was known as a co-founder of the file-sharing service eDonkey2000 and the ill-fated exchange Mt.Gox, and later as co-founder and CTO of Ripple. Disappointed by what he saw as the project’s high degree of centralisation and its focus on financial institutions, he set out to launch a decentralised alternative geared towards consumer electronic payments.
In July 2014, in San Francisco, McCaleb and Stanford professor David Mazières registered the non-profit Stellar Development Foundation (SDF). Soon after, it received $3 million in funding from the US tech firm Stripe, which develops electronic transfer and payments software.
The Stellar blockchain went live in autumn 2014. It began as a clone of Ripple with the same codebase. In spring 2015, however, SDF launched an updated Stellar blockchain on its own Stellar Consensus Protocol, designed by David Mazières.
In May 2017 Stellar’s commercial arm, Lightyear.io, began operating. In September 2018 it was acquired by Chain, and the combined company was renamed Interstellar. It builds and integrates solutions that use Stellar to make cross-border payments more efficient.
In 2019 Denelle Dixon, formerly COO of the Mozilla Foundation, replaced Jed McCaleb as SDF’s CEO.
How does Stellar work?
At the core of the network is the Stellar Consensus Protocol (SCP), which its creator David Mazières described as the first provably safe consensus mechanism. It uses a “federated Byzantine agreement system”: many equal peers participate in block production and transaction validation.
The SCP process for reaching consensus and adding approved transactions to new blocks has three stages:
- Nomination — nodes propose candidate blocks for approval;
- Voting — nodes vote for their own and others’ candidates; once a quorum is found, a “ballot” is formed that authorises inclusion of a new block in the chain;
- Timeout — a mechanism by which nodes drop candidates that cannot reach quorum and retry the vote.
Stellar has three types of nodes:
- Observer — submits transactions to the network;
- Validator — participates in SCP voting and confirms new blocks;
- Archiver — stores and continuously updates Stellar’s ledger.
As of September 2022, the Stellar blockchain had about 40 active validator nodes. Three belong to SDF; the rest are run by some two dozen organisations, including cryptocurrency exchanges where XLM is traded. This underpins the network’s decentralisation and security.
Thanks to this architecture, Stellar can process more than 1,000 transactions per second, with an average confirmation time of under five seconds.
Stellar’s tokenomics
At launch in 2014, roughly 100 billion XLM were created and inflation was set at 1% per year.
SDF initially planned to distribute over 50% of the XLM supply over the next ten years among partners and retail users. To that end, it designed an extensive programme of airdrops for bitcoin holders, XRP holders and users of various blockchain services.
In 2018–2019, for example, any verified user of the Blockchain.com wallet, as well as the Poloniex and Coinbase exchanges, could receive Stellar Lumens worth about $20–30 after taking a quiz about the project.
Generous XLM giveaways weighed on the asset’s market price. So in November 2019 Stellar’s tokenomics were revised: SDF decided to burn more than 55% of the XLM supply and scrapped inflationary issuance.
As of September 2022, total supply stands at 50 billion XLM, with over half already in circulation.
What is XLM for, and what are its features?
Within the Stellar ecosystem, XLM serves several core functions:
- paying transaction fees on the blockchain (0.00001 XLM per operation);
- account management on the Stellar network (to enable transfers, a Stellar wallet must hold at least 1 XLM);
- a unit of exchange on Stellar;
- an intermediate currency used to provide liquidity for any tokens issued on Stellar.
Stellar Lumens trade on major centralised cryptocurrency exchanges, both spot and futures. All popular multi-asset wallets support its storage.
For everyday users, XLM transfers are very fast and cheap, but not always convenient. When sending cryptocurrency to addresses of centralised exchanges and other custodial services, you must specify a Memo in addition to the address. This is an extra numeric or alphanumeric code generated in the wallet. You can send a transfer without a Memo, but exchanges will not be able to credit the funds to the intended account.
In early 2019, the crypto-focused investment firm Grayscale Investments launched a trust with Stellar Lumens as the underlying asset. It has not proved popular: as of September 2022 the trust’s capitalisation is only $7.7m.
What cryptoassets are issued on Stellar?
The Stellar blockchain lets anyone quickly and cheaply, in just a few simple steps, issue custom tokens with preset properties. Thanks to this, in 2018 the platform ranked second after Ethereum by number of ICOs.
Another important consequence of easy token issuance is the ability to tokenise real-world assets—for example, issuing stablecoins pegged to various national currencies. Their free convertibility is enabled by “anchors”—trusted financial organisations that handle the exchange of fiat currencies into tokens and XLM, and back. They can be viewed as bridges between the traditional economy and the Stellar network.
One of the first to use this was the French payment blockchain service Tempo, which in 2017 began issuing the euro-pegged Euro Tempo Token (EURT).
In April 2019, the British online bank Wirex issued 26 stablecoins on Stellar pegged to various national currencies, with instant conversion.
In February 2021, Circle began issuing the USDC stablecoin on Stellar. Many major crypto exchanges announced support for USDC transfers on this network.
How is Stellar evolving?
Unlike Ripple, Stellar was positioned from the outset as a scalable, fast and secure cryptocurrency for person-to-person payments. To bring XLM closer to consumers and bridge crypto and fiat, the Stellar Development Foundation forged numerous partnerships with payment systems worldwide, with a focus on Africa, Asia and South America.
A few of the more notable partnerships:
- In April 2015 SDF partnered with Oradian, a provider of cloud banking software, to integrate Stellar into Oradian’s platform for serving microfinance institutions in Nigeria.
- In 2016 Deloitte announced an integration of Stellar to build a cross-border payments app for Deloitte Digital Bank.
- In autumn 2017 Stellar signed a partnership with IBM. Later it unveiled IBM Blockchain World Wire, which allows financial institutions to make international payments in seconds.
- In late 2017 Stellar was adopted by SureRemit, a Nigeria-based cashless remittance platform.
- In October 2021 the payments company Flutterwave launched two new remittance corridors between Europe and Africa using the Stellar network.
One of Stellar’s key partners is MoneyGram, a global remittance service with 350,000 locations in 200 countries. In autumn 2021 the company began using Stellar to process transactions in USDC stablecoins.
Thanks to the Stellar–MoneyGram collaboration, in June 2022 users of the Vibrant and Lobstr digital wallets in several countries, including Kenya, Canada, the United States and the Philippines, gained the ability to convert local currencies into cryptocurrencies and back without a bank account or card.
According to the Stellar roadmap published in early 2022, the integration of a virtual machine and support for smart contracts was due by year-end. This significant upgrade could reshape the Stellar ecosystem and spur the development of DeFi services familiar to users of other blockchain platforms.