Investing in Stellar XLM: What You Need to Know

Stellar Lumens (XLM) is the native cryptocurrency of the Stellar blockchain, a distributed ledger network designed to facilitate fast, affordable, and efficient cross-border payments. Unlike many blockchain platforms, Stellar focuses on bridging the gap between traditional financial institutions and digital currencies, enabling seamless transactions globally. Initially launched in 2014, Stellar has become a prominent player in the world of decentralized finance, offering a scalable and energy-efficient alternative to Bitcoin’s proof-of-work consensus.

Historical background

Stellar was co-founded in 2014 by Jed McCaleb and Joyce Kim, who aimed to create a decentralized payment network to enhance financial inclusivity. Jed McCaleb, known for founding the cryptocurrency exchange Mt. Gox and co-founding Ripple, left Ripple due to philosophical differences and initiated Stellar as a fork of Ripple’s codebase. Joyce Kim, a former lawyer, played a significant role in establishing the Stellar Development Foundation (SDF), a nonprofit organization overseeing the network’s growth.

The project received early funding from Stripe, which provided $3 million in exchange for 2% of the initial lumens supply. Additional partnerships, such as with Deloitte in 2016 and TransferTo in 2018, helped Stellar gain traction in the financial sector. Notably, Stellar became the first distributed ledger technology to receive Shariah compliance certification, broadening its global appeal. Despite its achievements, the project has faced criticism for its perceived centralization, with the SDF controlling a significant portion of the lumens supply.

In response to concerns about oversupply and dilution, the SDF burned 55 billion lumens tokens in 2019, reducing the maximum supply to 50 billion from 105 billion.

Currently, approximately 30.28 billion lumens are in circulation, with the foundation strategically allocating resources to promote network adoption and development.

Consensus mechanism

Stellar operates as a decentralized network of servers that maintain a distributed ledger, updated every two to five seconds. The network’s consensus mechanism, the Stellar Consensus Protocol (SCP), is a key innovation. Created by Stanford professor David Mazières, SCP uses a Federated Byzantine Agreement (FBA) algorithm to validate transactions.

Unlike Bitcoin’s energy-intensive proof-of-work, SCP relies on quorum slices — a subset of trusted nodes — to achieve consensus, making the process faster and more energy-efficient.

Each node on the Stellar network selects other nodes it trusts. Transactions are approved once all nodes within a quorum slice reach agreement.

This approach allows Stellar to process thousands of operations per second while maintaining decentralization. To deter spam and ensure network integrity, each Stellar wallet must maintain a minimum balance of 1 XLM.

Utility

Stellar’s primary utility lies in its ability to facilitate low-cost, high-speed cross-border payments. The network’s native currency, lumens (XLM), serves as a bridge asset, enabling users to trade between different currencies, whether fiat or digital. It was made to facilitate commercial transactions between small businesses. For example, a user in Australia can send funds to a supplier in Fiji, with Stellar’s blockchain automatically handling currency conversion and settlement.

Stellar’s anchor system further enhances its utility by connecting real-world assets to the blockchain. Trusted institutions, known as anchors, issue and redeem tokens that represent fiat currencies or other assets. This system streamlines the traditionally cumbersome Nostro-Vostro process for cross-border payments, significantly reducing transaction costs and time lags.

Additionally, Stellar supports multi-currency transactions, enabling seamless exchanges between different financial systems. The network’s low operational costs make it accessible to nonprofits and small businesses, aligning with its mission of fostering financial inclusion.

Difference Between Stellar (XLM) and Ripple (XRP)

Stellar and Ripple share a common origin, as both were co-founded by Jed McCaleb and utilize similar protocols. However, their objectives and operational structures differ significantly. Ripple focuses on providing solutions for established financial institutions, targeting banks and governments. In contrast, Stellar aims to empower individuals and smaller organizations in developing markets.

While Ripple operates as a permissioned system requiring user approval, Stellar is open-source and accessible to anyone. Another key distinction lies in their economic models: Ripple’s XRP employs a deflationary mechanism by burning transaction fees, whereas Stellar’s XLM followed a fixed annual inflation rate of 1%, fostering a steady supply of tokens for network participants. This inflationary model, however, has since been deprecated.

Stellar and ISO 20022 Compliance

Stellar Lumens is one of the few cryptocurrencies compliant with ISO 20022, an international standard for electronic payments. This compliance positions Stellar as a key player in bridging traditional financial systems with decentralized technologies. Its compatibility with central bank digital currencies (CBDCs) enables seamless integration into global payment networks, offering faster and more cost-effective solutions.

By adhering to ISO 20022, Stellar enhances its credibility among financial institutions and governments. The network’s robust architecture and focus on financial inclusion make it an ideal platform for developing innovative financial products, from stablecoins to smart contracts. Stellar’s ongoing collaborations with banks and financial institutions underscore its potential to revolutionize global finance.

A bright future

Stellar’s vision centers on empowering underserved populations by providing access to affordable and efficient financial services. Its focus on remittances and microfinance positions it as a vital tool for bridging economic gaps in developing regions. The network’s ability to facilitate cross-border payments without relying on traditional banking infrastructure is particularly appealing in areas with limited access to financial services.

Stellar’s roadmap includes integrating smart contract capabilities, expanding its utility beyond payments. By leveraging its scalable and decentralized architecture, Stellar aims to support a wide range of applications, from decentralized finance (DeFi) to tokenized assets. As adoption grows, Stellar’s role in shaping the future of global finance will likely expand, cementing its position as a leading blockchain network.