Let’s quickly get our terminology in order

Stellar = the network

Lumens = the native tokens used to power the network

XLM = the ticker symbol for Lumen

This sounds familiar, right? Well, note that Stellar was initially based on the Ripple Labs’ protocol, and was developed by the Founders of Ripple, Jed McCaleb and Joyce Kim. The blockchain was created due to a hard fork, and the code was rewritten.

So how does the Stellar network work?

The Stellar network allows users to send any currency to anyone in the world, easily and effortlessly. The network does this by ‘tokenisation’. This means that Stellar takes physical FIAT currency, puts it in a bank and makes a virtual token of that coin. This is similar to stablecoins, which Stellar claims to be the first.

What happens when Person A is trying to send Person B $100? Person A adds $100 in FIAT to the Stellar network. Stellar converts this $100 into a digitised version and sends it to Person B. Person B can then convert the virtual $100 into FIAT $100 and withdraw the money.

The cool thing about Stellar is that it can also work from any currency. So hypothetically, in our example above, let’s say Person B wants their money in GBP. During the transaction, an additional step occurs in which the 100 virtual USD are converted to the equivalent in virtual GBP.

Not only this, anything can be tokenised into Stellar-Gold, Silver, Oil. This tokenisation means trade beyond currencies is viable. Even though there are traditional platforms that can offer a similar service for money, they can’t offer the same for the commodities.

Stellar makes sure the tokens issued are backed by real-world assets, using something called Anchors. These are trusted sources that show proof of funds and assets to gain that title. For being an Anchor, a small fee is earned as a reward.

Our Top Picks:

DOGWIFHAT

120,650%

SPX6900

17,000%

POPCAT

66,567%

PENDLE

5,002%

SOLANA

2,500%

HYPE

1,740%

Don’t miss our next 100X

Trusted by 230K+ investors

Get started

Why is it better to do this crypto style?

Doing this process blockchain-style means anything can be transferred as mentioned above. Any FinTech company can take part. The fees are also super low, and the whole thing is decentralised.

Introducing the Lumens token

Like most utility tokens, Lumens are used to power the stellar network. Transactions are processed in 5 seconds, and the fee is almost nil.

Unlike most cryptocurrencies, XLM tokens aren’t mined or produced. One hundred billion tokens were created at launch with the initial plan of 1% inflation yearly. However, in 2019 inflation was removed, and tokens were burned, leaving us with around 50 billion tokens. Twenty billion of these are in circulation and the others are held by the foundation and used to develop and promote the network.

Another main benefit of doing this crypto-style is blockchain security. So what consensus mechanism does Stellar use to secure the network? Surprisingly, Stellar doesn’t use a traditional method like proof of work or proof of stake. Instead, it uses a faster, more decentralised and cheaper alternative.

Stellar uses an adaptation of the ‘Byzantine consensus mechanism’. This is an interesting one. The network’s nodes reach a consensus and produce blocks. However, it lacks decentralisation as the nodes are pre-mined by a single entity, the same as Ripple.

Federated Byzantine Agreement 

FBA consensus mechanism: as you can guess from the title, it’s the same as the Byzantine mechanism but instead, anyone can operate a node. The Byzantine family of mechanisms get pretty detailed, so we will save that for another piece.

Interestingly, there is no financial reward for validators. This may sound like it’ll lead to a lack of validators. However, members of the community are willing to run nodes as they’re pretty cheap, and the success of XLM is reward enough. With lots of big companies already building products on Stellar, its success is important, and lots of nodes have been set up.

Check out the Ratings Guide for Cryptonary's transparent opinion on Stellar Lumens here.