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Introduction to Stellar: An open-source global payments network

Stellar is an open-source distributed ledger for facilitating peer-to-peer payments across geographies, countries, and asset classes.

Stellar is an open-source distributed ledger for facilitating peer-to-peer payments across geographies, countries, and asset classes. Stellar aims to be protocol-level financial infrastructure that anyone can utilize to send and receive payments, or use to create and exchange custom tokens. Stellar also offers a decentralized exchange designed to provide liquidity for fiat currencies, cryptocurrencies, commodities, securities and other assets, and to make payment with one asset and receiving another as frictionless as sending an email.

Stellar utilizes the Stellar Consensus Protocol (SCP), which is a novel approach to node consensus that they claim is provably safe and categorize as a federated byzantine agreement (FBA). In SCP, nodes self-select other nodes that the operator trusts to exchange information with, effectively creating sub-groups called “quorums” that overlap with one another, forming larger interconnected networks of trust. Stellar believes that the SCP will enable the network to scale, which in combination with low transaction fees, fast transaction processing speeds, and open source standards positions Stellar as a potentially competitive solution for global remittances.


Existing global financial infrastructure is made up of closed regional and national systems that don’t easily intercommunicate. This is due to differing financial and banking regulation, technology, infrastructure and currencies across different geographic regions. Sending and receiving payments across these disparate systems requires time and encounters multiple points of friction, resulting in costly and geographically limited remittances services offered by banks. Historically, money transfer services like Western Union and Moneygram have dominated this niche, offering more physical locations––Western Union operates in 200 countries and territories with more than 500,000 agent locations.

Stellar intends to disrupt the global remittances market by making 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 a single standardized language of value, where assets can then be exchanged with greater speed, ease and under potentially more secure systems. The Stellar network is a ledger and exchange pair orderbook maintained by a public, global node network that aims to increase security, eliminate control by any central party, and keep transaction fees competitively low. While Stellar is decentralized in this sense, the transactions within the network require trust amongst different credit-issuing parties.

Stellar History

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. Domestic money transfer issues, experienced by individuals in developing nations, were the foundation’s initial focus, so the foundation began a pilot program in Nigeria, where payment inefficiencies are more pronounced in daily life than in developed nations. Additionally, 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 offered by banks.

Another userbase 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. As of April 17th 2018, Stellar maintains an average 5-second transaction processing time, each transaction costing USD $.00000306, while Ethereum maintains an average transaction processing time of 44 seconds at a cost of USD $.011 per transaction. Kik is a notable project that decided to utilize the Ethereum blockchain for liquidity and the Stellar ledger for transaction speeds, despite having originally launched their token on Ethereum.

Stellar acknowledges that onboarding projects launching tokens is happening at a faster rate than progress towards their goal of solving peer to peer remittances globally, since solving global remittances requires a wide network of banking partners to join the network and provide the (primarily fiat) liquidity necessary to address the problem. For banks to issue fiat on the network, they must gather required licenses from local government agencies, which is a time consuming process. Despite these two use cases moving at different speeds on their network, Stellar appears devoted to accommodating both.

Product Details

Stellar strives to support these somewhat diverse activities by providing an open source protocol that developers and financial institutions can utilize to build their own payments infrastructure, which, thus far, appear to be mobile apps enabling cross border micropayments.

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.

While Stellar is not a Turing-complete smart contracting platform like Ethereum, and only provides 11 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. By offering a flexible API, Stellar aims to be modular enough to support complex customizable payment flows, while maintaining average 5 second transaction processing speeds. 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. The SCP prioritizes safety over liveness of the network in the event of node disagreement and claims a set of provable safety properties. The SCP represents a new consensus category called a federated byzantine agreement (FBA) that differs from traditional byzantine agreements by allowing open node membership. Nodes that join the network identify other nodes that they operator trusts, and, in doing so, create what’s called a quorum––an interconnected node group that together form a larger tapestry of trust. This architecture is designed to mimic how human social groups organically operate. A healthy FBA model requires that quorums overlap, so that different quorums share the same node(s). If quorums don’t overlap, they become disjointed and may independently arrive at contradictory decisions, undermining consensus. The onus to ensure properly overlapping quorums is put on the node itself, as each node is responsible for selecting the nodes that it trusts.

Unlike Proof of Work (PoW) where upfront hardware and ongoing energy costs are high, the SCP requires only maintaining the most recent version of the ledger. Interestingly, nodes are not compensated for validating transactions with transaction fees. Instead, direct access to the Stellar network, which offers higher security and improved performance, incentivizes users to run nodes. The SCP claims to be the only protocol that delivers 4 key mechanisms, while PoW, PoS, Byzantine Agreement and Tendermint solve for 3 at most.

  • Decentralized control refers to open node enrollment and participation in securing the ledger.
  • Low latency describes data being processed and node consensus being reached with minimal real time delay.
  • Flexible trust, as Stellar defines it, refers to system participants having the ability to trust any other participants as they see fit.
  • Stellar defines asymptotic security as “safety rests on digital signatures and hash families whose parameters can realistically be tuned to protect against adversaries with unimaginably vast computing power”.

As of April 25th, 2018 there are approximately 80 nodes operating globally, and, in the coming months, the Stellar Development Foundation plans to stop running nodes altogether to further decentralize the network.

Most applications access the Stellar network through Horizon, a RESTful HTTP API server. Horizon connects to the backbone of the Stellar network, called Stellar Core, which manages the underlying ledger, the Stellar core node network and the Stellar Consensus Process. Creating an account allows access to The Stellar ecosystem Accounts are derived from a public key and seed pair. Each account must hold a minimum balance of 1 Stellar Lumen (XLM), the network’s native token. All actions within Stellar, including sending and receiving payments, require what they call an ‘operation.’ A transaction may include one or multiple operations, plus information such as identifying the originating account, the cryptographic signature for verifying authenticity, and optional metadata. Stellar provides a set of tools in their laboratory where users can practice building a transaction, signing it, and submitting them to the network.

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, while Stellar’s transaction fees are paid entirely by the account that originates the transaction, regardless of which other parties are involved. This might mean that a user in London could send Euros to a user in Mexico, and that person would receive pesos. Stellar imagines that this seamless value exchange could be applied more creatively as well, theoretically allowing for a person to pay for a cup of coffee with a fraction of their Snapchat shares.

Each transaction on the Stellar network requires a modest base fee of .00001 Lumen per operation (currently at fractions of a penny USD). The fee is less a compensation mechanism but more designed to prevent a Distributed Denial of Service (DDoS) attack, where an attacker would push a large quantity of transactions onto the network in an attempt to overload and hold it hostage, leveraging their control of the network to make demands. The network can process 1000 operations per second, and disputed transactions are at least partially resolved by allowing the original issuer of the asset credit to freeze it, even while that credit is held in the recipient’s account. This renders it unusable, apart from sending it back to the originating account. While Stellar transaction fees are remarkably low, anchors may implement their own additional fees for transacting, which will likely reflect market forces of supply and demand. It will be interesting to see if anchors providing liquidity for fiat on the SDEX implement significant fees due to low supply as they come onto the network, only to drop them over time as other service providers join, in an effort to remain competitive.

It’s important to note that the Stellar network does not possess direct custody of the underlying funds or assets on the network, nor do they provide a redemption layer for transactions. Rather Stellar acts as a matchmaker, facilitating the discovery of other users intent on trading and leaving the details of that exchange up to the parties themselves. Stellar enables an anchor claiming to own an asset- be that a barrel of oil, an orange tree, or a certain quantity of ethereum- to represent that asset as a credit and make it discoverable on their network. It allows for cross-asset trading through a process called pathfinding, where up to 6 currency pairs are exchanged as intermediaries between the originating asset and the final one. Cross-asset payments are atomic, meaning that every operation within a transaction must succeed in order to be successfully processed.

From that point, payment redemption requires a unique integration among involved parties, which occurs outside the Stellar network. A participating traditional bank providing Euros in exchange for bitcoin might have their own documentation for initiating an ACH payment by API call, whereas the grower of an orange tree might have instructions for how to meet in person for delivery. Anchors issuing fiat currencies onto the network must comply with all regulation, generally requiring them to be a licensed money services provider or mobile money operator. Thus far, Stellar seems largely uninvolved with the details of such arrangements, encouraging users to establish their own documentation for integration and navigate the nuances with one another directly.

Because of this design, counterparty trust plays an ironically necessary role, as it underpins the entire decentralized Stellar ecosystem. The ease with which buyers and sellers can exchange assets comes at the expense of having to trust any anchors involved in the transaction. What’s really being exchanged on the SDEX, for example, is not BTC for USD, but BTC credits for USD credits. Those credits are representations of underlying assets, held in accounts outside Stellar and controlled by the underlying issuer. If an anchor within the network is a malicious actor, then transacting with them potentially exposes one to risk. To make trust explicit within the network, Stellar prohibits accounts from trading assets with other accounts not already approved in advance through a ‘trustline’, an on-chain ledger entry that can include the conditions and limitations under which trade with specific accounts can occur. Stellar appears to help projects connect and develop trustlines with compatible anchors, though each anchor is responsible for outlining the specifications unique to transacting with them. Stellar hopes that “off-chain” relationships (like trusting that a bank won’t take your deposit or that Paypal won’t steal a portion of your payments) can migrate to or be replicated on the Stellar network.

As of early 2018, the equivalent of  ~1 Million USD is transacted per day on the Stellar network and 4 financial institution anchors are live on the network, with approximately 15 in the process of gathering the licensing required to fully integrate. TEMPO money transfer, a French bank, currently provides liquidity for Euros, while USD liquidity is expected to come online mid-2018. Stellar plans to implement Lightning on their network to maintain and improve upon transaction speed as the network scales. They anticipate Lightning being live on the Stellar livenet by December 1st 2018.

In terms of notable partnerships, Deloitte, the world’s largest professional services provider by revenue, integrated with Stellar to create a mobile app prototype used for cross-border payments. IBM has selected Stellar as their partner for public blockchain payment solutions, the integrations for which they create on behalf of their clients, including banks and other financial institutions. Now that these organizations are recognizing the benefits of applying blockchain technologies to cross-border payment workflows (the primary benefit being significantly lowered fees), IBM has positioned itself as a service provider facilitating integration with Stellar, so that clients can avoid building integrations internally. Of note is that Stellar launched its own for-profit company offering similar Stellar network integration services, Lightyear, in May 2017. Lightyear is a separate entity from the Stellar Development Foundation, with entirely different board members and employees. Stellar claims that Lightyear has no special privileges on the network and they expect additional competitive alternatives like IBM to come online over time.

Asset Details

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 in that holding a minimum of 1 XLM is required for any account wishing to transact. 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 doesn’t 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. Stellar launched a notorious Facebook distribution strategy in March 2017, where bitcoin holders could collect XLM by authenticating their identity using their Facebook account and verifying that they hold bitcoin. As the campaign gained momentum, Facebook users found ways to game the identity verification component, some utilizing Amazon’s Mechanical Turk to create fake accounts to collect XLM. Despite the imperfect nature of this distribution method, wide distribution of tokens is a challenge many projects face. The identity component of distribution is especially difficult to perfect, and centralized companies like Facebook have large databases of potentially usable identity data. It will be interesting to see if decentralized identity solutions such as Civic, Uport and Valid gain enough momentum to become a KYC layer underpinning future token distributions, and to what extent they might be gamed by users.

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 the results of a community vote. 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.


Stellar is comprised of the Stellar Development Foundation (SDF), the Stellar Network and the Stellar Protocol. The Stellar Development Foundation (SDF) is a non-stock nonprofit Delaware corporation responsible for developing and maintaining the open source network and protocol. The SDF was founded in 2014 by Jed McCaleb, a developer and early influencer in the bitcoin and decentralized technology space as it evolved from 2009 onwards. Jed launched the Japan based Mt.Gox exchange in 2010, which was the world’s largest bitcoin exchange before it was hacked in 2014, resulting in $450 Million in customer bitcoin holdings lost. Jed had sold Mt.Gox to Mark Karpeles in March 2011, who was operating the exchange during the time of the hack a few months later in June. Jed’s work in payment networks began in 2011 as he began developing what would later become the Ripple protocol, an enterprise currency remittance and settlement network.

As Ripple progressed, Jed’s vision for the project began to conflict with other core leadership, culminating in a split in 2013. When Jed launched the Stellar network in 2014, it was originally a fork of Ripple, though he later rewrote its codebase so that currently the two projects share no code. On December 5th 2014, the Stellar network experienced a hard fork, which they attributed to a failure of the underlying Ripple consensus protocol. For a period of time following the fork, the Stellar network reverted to using a single server to process transactions while rebuilding their own codebase and consensus mechanism, now the Stellar Consensus Protocol (SCP).

The Stellar foundation (SDF) has publicized a commitment to never profit from transaction fees on Stellar, instead funding operations with 5% of the Lumens initially created. The foundation accepts charitable contributions from individuals and companies, membership fees are collected from SDF members, and additional funding was provided in 2014 by a USD $3 million loan from Stripe, a leading online payment processor. The loan was repaid in the form of 2 billion lumens.



Consensus: Stellar Consensus Protocol

Hash Algorithm: SHA-256

Block creation time: 2-5 seconds

Launch condition: Full pre-mine

Total Supply: 100 Billion

Inflation Rate: 1% per year

Blockchain: Stellar