Investing in Stellar (XLM) – Everything You Need to Know

Stellar (XLM) is a decentralized, open-source blockchain network that facilitates swift and low-cost cross-border transactions between any pair of currencies.  It aims to connect financial institutions, payment systems, and individuals to create a more inclusive global financial infrastructure.

How Does Stellar (XLM) Work?

The operation of the Stellar network hinges on multiple things: Stellar Consensus Protocol (SCP), Stellar Core, Anchors, Assets, and the decentralized exchange.  Below, we take a look at what these offer users.

Stellar Consensus Protocol (SCP)

Stellar's consensus mechanism, the Stellar Consensus Protocol (SCP), represents a significant departure from traditional blockchain consensus mechanisms like proof-of-work (PoW) or proof-of-stake (PoS).  SCP is built upon the Federated Byzantine Agreement (FBA) principles, focusing on flexibility, scalability, and energy efficiency.

Federated Byzantine Agreement (FBA)

The core idea behind FBA, and by extension SCP, is the concept of decentralized trust.  Unlike systems requiring universal agreement among participants, FBA allows nodes in the Stellar network to choose a subset of other nodes they trust to validate transactions.  This subset is known as a quorum slice. The innovation here is that trust is individualized; each node has one or more quorum slices reflecting its trust decisions.

The Consensus Process in SCP

The consensus process in SCP unfolds through two main phases: the nomination phase and the balloting phase, followed by a final confirmation step.

1. Nomination Phase: This phase kickstarts the consensus process, where nodes propose what they believe should be the next set of transactions to confirm.  Through several proposals and responses, certain transaction sets gain majority support within different quorum slices.
2. Balloting Phase: Following the nomination phase, nodes engage in a more structured series of votes, or ballots, aimed at reaching a definitive agreement on the transaction set.  This phase is meticulously designed to ensure that, despite initial disagreements, nodes converge on a single set of transactions to apply to the ledger.
3. Confirmation: Once a consensus is reached, the agreed-upon set of transactions is applied to the ledger, synchronizing the state of the blockchain across the entire network.

Ensuring Safety and Liveness

SCP's design meticulously balances safety and liveness.  Safety in this context means the network will not validate conflicting transactions, ensuring consistency.  Liveness refers to the network's ability to continue processing transactions even in adverse conditions, such as network partitions or the presence of malicious actors.  SCP achieves this balance through its flexible trust model, where the network can reach consensus without requiring unanimous agreement or suffering from a single point of failure.

Advantages Over Traditional Mechanisms

SCP's departure from the energy-intensive processes used in PoW or the wealth-concentration risk of PoS presents several advantages.  It's significantly more energy-efficient, allowing for a greener blockchain solution.  Transactions are confirmed within seconds, offering a rapid settlement ideal for financial applications.  The flexible trust model enhances network resilience and scalability, as consensus does not hinge on every node's agreement but rather on the overlapping consensus of trusted quorum slices.

In essence, SCP enables Stellar to provide a secure, scalable, and efficient platform for financial transactions and applications, marked by quick confirmation times and reduced operational costs, while maintaining a decentralized and flexible trust network.

Anchors

Anchors act as bridges between the Stellar network and traditional financial systems, allowing users to deposit and withdraw fiat currency in exchange for Stellar's digital assets.  Users can send fiat currency to an anchor, which then issues the equivalent amount in a digital asset on the Stellar network.

This process enables seamless currency exchange and cross-border transactions. Anchors are trusted entities such as banks, payment processors, or other financial institutions.

Decentralized Exchange (DEX)

Stellar includes a built-in decentralized exchange where users can trade assets issued on the network without the need for a central authority.  The DEX supports limit and market orders, allowing users to trade directly from their wallets.  This feature facilitates liquidity and enables easy currency exchange, contributing to Stellar's goal of financial inclusion.

Assets and Tokens – XLM

XLM, or ‘Lumens', is the native digital currency of the Stellar network, designed to facilitate multi-currency transactions and prevent spam on the network.  As an integral part of Stellar's ecosystem, XLM serves several key functions:

1. Facilitate Transactions: XLM is used to pay for transaction fees on the Stellar network.  Every transaction has a nominal fee (currently set at 0.00001 XLM) to deter spamming the network with frivolous or malicious transactions.
2. Act as a Bridge Currency: XLM can function as an intermediary currency in transactions between different currencies on the Stellar network.  This feature is particularly useful in cross-border transactions where there might not be a direct market between the two currencies involved.  By converting through XLM, Stellar can facilitate these exchanges quickly and efficiently.
3. Maintain Network Security: To open an account on the Stellar network, a minimum balance of 1 XLM is required.  This requirement is intended to prevent ledger spam and ensure that all accounts on the network are genuine.
4. Provide Liquidity: In the Stellar decentralized exchange, XLM can be used to trade against all other forms of currency or tokens issued on the network.  This makes XLM a key liquidity provider, enabling users to convert between different assets easily.
5. Enable Access to Financial Services: Beyond its technical roles, XLM enables access to financial services on the Stellar network.  This includes payments, remittances, and micropayments, among others.  By using XLM, users can engage in financial transactions that are faster and cheaper than traditional banking systems, especially in underbanked regions of the world.

The Stellar network also supports creating and exchanging various digital assets and custom tokens that can represent fiat currencies, commodities, or any other form of value.  These assets can be traded on Stellar's decentralized exchange.

Pathfinding

One of Stellar's innovative features is its pathfinding algorithm, which automatically finds the best route for a transaction to go through when exchanging between different currencies.  This includes looking for offers in the decentralized exchange that can convert the currency efficiently, even if it requires multiple hops between different assets.

This capability ensures users can seamlessly transact in their preferred currency without worrying about the conversion process.

Security and Smart Contracts

While Stellar does not support Turing-complete smart contracts like Ethereum, it offers simple, smart contract capabilities through multi-signature accounts, batching transactions together, and time-bound functions.

This design choice prioritizes network performance and security, making Stellar an attractive platform for financial applications and services that require high throughput and low latency.

Use Cases

Stellar's architecture and features make it well-suited for various financial services beyond simple transfers, including micropayments, remittances, mobile banking, and token issuance.  Its focus on inclusivity, speed, and low transaction costs positions Stellar as a critical player in opening up global financial systems to everyone, everywhere.

History of the Network

The Stellar network, with its native currency, Lumens (XLM), has carved out a unique place in the blockchain and financial technology landscapes through its commitment to enabling low-cost, cross-border transactions.

Foundation and Early Days (2014)

Jed McCaleb and Joyce Kim co-founded Stellar in July 2014 under the auspices of the non-profit Stellar Development Foundation (SDF).  Initially based on the Ripple protocol, Stellar's mission was to improve financial inclusivity by connecting different financial systems worldwide.  Shortly after its inception, Stellar realized the need for a unique approach to consensus to ensure scalability and inclusivity, leading to significant early development work.

Reinventing Itself (2015)

In a pivotal move in April 2015, Stellar introduced the Stellar Consensus Protocol (SCP), marking a departure from its Ripple-based roots.  This new protocol was designed to enhance network security and decentralization, laying the groundwork for Stellar's future growth.  The year was characterized by infrastructural improvements and partnership developments, aiming to solidify Stellar's foundation.

Growth and Recognition (2017-2018)

By 2017, Stellar had begun to establish itself as a platform for Initial Coin Offerings (ICOs), attracting projects with its efficient and scalable network.  A landmark partnership with IBM showcased Stellar's potential in facilitating banking transactions across borders.  The following year, Lumens (XLM) experienced significant market growth, benefiting from the broader cryptocurrency boom and leading to increased network adoption.

Strategic Developments (2019-2020)

In a bold move in November 2019, the SDF decided to burn 55 billion of its XLM tokens, aiming to streamline the token's supply and potentially enhance its value.  This period also saw Stellar doubling down on its mission of financial inclusion.  The network's utility was further recognized in 2020 with the integration of USDC, a leading stablecoin, expanding Stellar's capabilities in global financial services.

Expansion and Innovation (2021 and Beyond)

Stellar's commitment to facilitating efficient global payments continued into 2021, marked by a collaboration with the Ukrainian government to develop a national digital currency.  The network also announced plans to expand its smart contracts capabilities, underscoring its adaptability and ambition to broaden its use cases.

Stellar has focused on innovation, strategic partnerships, and a commitment to financial inclusivity throughout its journey.  Its evolution from a Ripple derivative to a unique and influential player in the blockchain space demonstrates Stellar's resilience and vision. As the network looks to the future, it prioritizes scalability, usability, and financial infrastructure development that serves underserved markets, aiming to make financial services more accessible and efficient worldwide.

How to Buy Stellar (XLM)

Investing in Stellar (XLM) is easy when you know where to look.  First, it’s key that you understand that, in rare instances, Lumens may trade under both the XLM and STR tickers, depending on the platform you are on.  This is due to a decision to change the ticker from STR to XLM years ago.  To date, a select few exchanges decided to keep the original ticker regardless of the choice.

Uphold – This is one of the top exchanges for United States & UK residents that offers a wide range of cryptocurrencies.  Germany & Netherlands are prohibited.

Paybis – This truly global company offers services to residents from 180+ countries, including Canada, Europe, UK, & USA.

Kraken – Founded in 2011, Kraken is one of the most trusted names in the industry, with over 9,000,000 users and over $207 billion in quarterly trading volume.  This exchange offers trading access to over 190 countries, including Australia, Canada, and Europe, and is our most recommended exchange for USA residents. (Excluding New York & Washington state)

How to Store Stellar (XLM)

Securing Stellar (XLM) investments, especially for long-term holding or substantial amounts, necessitates a robust storage solution.

Hardware wallets, known for their enhanced security, are a top choice for safeguarding Stellar (XLM) holdings. These devices store cryptocurrency offline in “cold storage,” effectively insulating them from online vulnerabilities and hacking threats.  A look at some of the best solutions can be found HERE.

For those unsure of hardware wallets, Stellar (XLM) is also widely supported by non-custodial software wallets.  A look at some of the best software wallet solutions can be found HERE.

For Stellar (XLM) users, choosing the right storage option is crucial, with hardware and non-custodial software wallets providing a secure solution for substantial investments and long-term holding.

Stellar (XLM) – Financial Services on the Blockchain

Overall, Stellar's combination of the SCP, focus on low-cost financial services, and built-in asset issuance and exchange features create a powerful platform for transforming global finance.  Its innovative approach to achieving consensus rapidly and efficiently, along with its integration with traditional financial systems through anchors, makes it uniquely capable of facilitating cross-border transactions and expanding access to financial services.