What is Stellar (XLM)? 


7 mins read February 20, 2024

Brief History of Stellar

Cryptocurrencies have taken the financial world by storm, offering innovative ways to transfer and store value. Stellar (XLM) is one such cryptocurrency that has gained popularity due to its unique features and mission to make financial systems more accessible. In this comprehensive guide, we will explore Stellar in-depth: its history, how it works, and what makes it unique.


Stellar XLM, often referred to simply as Stellar, was founded in 2014 by Jed McCaleb and Joyce Kim. Jed McCaleb is famous for his involvement in the Ripple crypto project. Stellar aims to address some of the limitations of the traditional financial system, particularly focusing on cross-border payments and financial inclusion.

Stellar was initially a fork of the Ripple (XRP) network, but it later evolved into an independent platform. McCaleb's vision was to create an open and inclusive financial network that could serve the unbanked and underbanked populations around the world.

What is Stellar?

Stellar is an open-source blockchain platform designed to facilitate cross-border payments and asset transfers with speed and cost-efficiency. It focuses on connecting financial institutions, payment systems, and people globally. It uses its native cryptocurrency, Lumens (XLM), to power transactions and support its network. Stellar aims to bridge the gap between traditional financial systems and digital assets, making it easier for users to send and receive money across borders.

The native cryptocurrency of the Stellar network is called Lumens (XLM). Stellar initially distributed 100 billion XLM tokens with a unique distribution strategy: 50% was reserved for distribution via direct signup programs, partnerships, and airdrops. 25% was allocated to Bitcoin and XRP holders in a one-time giveaway.

The remaining 25% was intended for operational and development expenses. Stellar Development Foundation (SDF) manages these Lumens and uses them for various network development purposes.

How does Stellar Work?

Stellar operates on a distributed ledger, which records all transactions on the network. Transactions on Stellar are not limited to transferring the native cryptocurrency, Lumens (XLM). Users can create and trade various assets, including other cryptocurrencies like USDC, tokens representing real-world assets (such as currencies, stocks, or commodities), and even non-fungible tokens (NFTs).

Stellar's underlying technology is based on a decentralised blockchain that employs a unique consensus algorithm called the Stellar Consensus Protocol (SCP). SCP enables the network to reach consensus on transaction validity in a more energy-efficient and scalable manner compared to proof-of-work (PoW) systems like Bitcoin. It does so by using a federated Byzantine agreement model, allowing validators to approve transactions. In SCP, the network reaches consensus through a process of voting among a set of trusted validators, known as "quorum slices." These validators are chosen by the network participants, ensuring decentralisation. To approve a transaction, a supermajority of validators must agree, preventing a single entity from controlling the network. 

Stellar's consensus algorithm and design allow for fast transaction confirmation. The average settlement time on the Stellar network is 2-5 seconds, making it suitable for real-time cross-border payments. Stellar is also known for its low transaction fees, making it an attractive option for micropayments and remittances. This cost-efficiency stems from its consensus model, which minimises the computational resources required for validation.

How is Stellar XLM created?

Stellar Lumens (XLM) cannot be mined like Bitcoin. Instead, they are created through a process called inflation.  Here's an explanation of the Stellar creation process:

Inflation Voting: Stellar account holders can participate in the network's inflation process by voting for a set of trusted nodes, known as "inflation pools." Each account holder can select one inflation pool to vote for.

Inflation Pools: Inflation pools are collections of validators on the Stellar network. The inflation pool that receives the most votes from the accounts is the one that will participate in the inflation process.

Weekly Inflation: Stellar's inflation process occurs weekly. It takes place at the same time each week and is initiated by the network.

XLM Distribution: During the inflation process, the winning inflation pool generates new XLM. The total amount created equals 1% of the total XLM in existence. These newly created Lumens are then distributed among the accounts that voted for the winning inflation pool.

Distribution to Voters: The Lumens are distributed proportionally to the accounts that cast votes for the winning pool based on their account balances. This means that users who hold more XLM in their accounts will receive a larger share of the newly created XLM.

It's important to note that not all accounts are eligible to receive inflation rewards. For example, accounts with minimum balance requirements or that haven't voted for an inflation pool won't receive these rewards. The purpose of the inflation mechanism in Stellar is to incentivise users to participate in the network and to encourage community involvement. It's worth mentioning that the total supply of XLM grows gradually due to inflation, but the rate is relatively low at 1% annually, which helps control inflation and maintain the stability of the network.

This unique approach to creating and distributing XLM aligns with Stellar's mission of financial inclusion by allowing users to earn XLM by actively participating in the network without the need for expensive mining equipment.

Stellar's architecture also includes a concept called "anchors." Anchors are trusted entities that issue assets on the Stellar network. These can represent real-world assets like fiat currencies. Users can trust anchors to maintain a 1:1 backing of the asset they issue with the corresponding real-world asset.

What Makes Stellar Unique

Stellar is a unique cryptocurrency and blockchain platform that distinguishes itself in several key ways:

  • Interoperability: Stellar is designed with interoperability in mind. It can be used to connect different financial systems, networks, and blockchains, making it a versatile platform for asset transfer and cross-border payment solutions.
  • Anchors and Tokens: Stellar allows the creation of custom tokens on its platform, which can represent various assets like fiat currencies, commodities, and more. These tokens can be easily traded on the Stellar network.
  • Fast and Low-Cost Transactions: Stellar transactions are lightning-fast, taking just 2-5 seconds to settle and incurring negligible fees, making it ideal for cross-border payments.
  • Decentralisation: While many blockchain platforms prioritise decentralisation, Stellar's approach stands out. It employs the Stellar Consensus Protocol (SCP), which relies on a decentralised network of validators to confirm transactions. This consensus mechanism enhances network security and resilience.
  • Lumens (XLM) for Anti-Spam: Stellar requires users to hold a small amount of Lumens (XLM) in their accounts to prevent spam and maintain the network's integrity. However, this amount is minimal and designed to be accessible, ensuring that users are not discouraged from participating.
  • Path Payments and Asset Exchange: Stellar's unique path payment feature allows users to send one type of asset and have it automatically converted into the recipient's desired asset. This feature eliminates the need for intermediaries and reduces the complexity of cross-currency transactions.
  • Inflation Mechanism: Stellar's unique inflation mechanism allows users to earn more Lumens by participating in the network's governance. Users can vote for inflation pools, which then distribute newly created XLM to those who participate, incentivising active engagement and community involvement.

Stellar’s Criticism

Stellar has received praise for its mission to provide financial services to the unbanked and underbanked, as well as its low transaction costs and speed. However, it has faced criticism regarding its token distribution. While Stellar emphasises decentralisation in its design, it has faced criticism for having a relatively small number of validators compared to more open blockchain networks. This has led some to question the degree of decentralisation in the Stellar network.

Stellar's close association with Ripple and its co-founder Jed McCaleb has led to comparisons with Ripple, which is considered a direct competitor. Some critics argue that Stellar has not done enough to differentiate itself from Ripple regarding technology and use cases. While the inflation mechanism can incentivise participation, it is seen by some as complex and may not be well-understood by all users. This could discourage some from actively participating in the network's governance.

Stellar vs. Ripple

Stellar (XLM) and Ripple (XRP) are often compared because they share similar origins and goals. They both aim to facilitate cross-border payments and make financial transactions more efficient. However, they have key differences from competitors like Ripple (XRP).  Stellar's key differentiator is its focus on cross-border payments and its commitment to inclusivity. While competitors like Ripple also target this market, Stellar distinguishes itself by emphasising decentralisation and open access, which can benefit individuals and institutions alike. 

Stellar's network is not controlled by a single entity, making it more resilient and censorship-resistant. Stellar's focus on inclusivity and its low-cost, fast transaction processing make it a strong contender in the cross-border payments space. Additionally, The Stellar Development Foundation (SDF) is a non-profit organisation dedicated to network development and community support. Ripple Labs is a for-profit company that aims to generate revenue through its various services and solutions.

How to Buy Stellar (XLM)

Buying Stellar (XLM) is a straightforward process, and there are various exchanges and platforms where you can purchase it. Yellow Card allows you to send and receive USDC on the Stellar network in the cheapest and fastest way. 

Future of the Cryptocurrency

The future of Stellar looks promising, with continued efforts to expand its ecosystem and foster financial inclusion. Stellar Development Foundation (SDF), a non-profit organisation, is pivotal in supporting the network's growth. The Stellar Development Foundation (SDF) focuses on supporting projects contributing to the Stellar ecosystem, fostering partnerships, and promoting financial literacy and access.

Stellar aims to become a vital player in the global financial system by providing an accessible and efficient platform for cross-border transactions and asset tokenisation. Stellar is a cryptocurrency with a noble mission and innovative technology. Its commitment to inclusivity, fast and low-cost transactions, and custom token creation make it a strong contender in the cryptocurrency space. Stellar is poised to play a vital role in reshaping how we think about cross-border payments and financial inclusion.

Beginners in the crypto world can explore the potential of Stellar as they navigate the exciting and dynamic world of digital assets and blockchain technology. You can learn more about Stellar on Stellar.org: The official website offers an array of resources, including documentation, blogs, and news updates.

Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.

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