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Cryptocurrency Explained: Stellar

July 17th, 2024Joey PrebysJoey Prebys

*This article was originally published on August 5, 2021.

Main Points

  • Stellar is an open-source network for currencies and payments that seeks to simplify the process of cross-border payments by uniting the world's financial infrastructure.

  • Stellar is used to send any currency to anyone, anywhere in the world quickly at virtually no additional cost.

  • Stellar Lumen (XLM) is the native asset of the stellar network and serves as a universal translator between currencies.

Look around your home. You may find coffee grown in Columbia, clothing sewn in India, technology manufactured in China, and so on. Thanks to the global economy, we can enjoy many different products, flavors, and materials that are not native to the country where we live.  

Yet, despite all the advancements in logistics and transportation that make it easy to move products worldwide, moving money across borders is still costly and time-consuming. You must be mindful of foreign currencies and their exchange rates, navigate to the right payment processor to facilitate your transaction, wait long processing times, and likely pay exorbitant fees. Stellar provides an alternative.   

What is Stellar?

Stellar is an open-source network designed to enable payments between different countries with different currencies. Launched in 2015 by Jed McCaleb and Joyce Kim, it is used to send any currency to anyone, anywhere in the world quickly at virtually no additional cost.  

For example, if someone in Mexico wants to buy coffee direct from Uganda, they’d normally have to go through banks and other middlemen to swap Mexican Pesos into Ugandan Shillings – at considerable cost and time. The Stellar payment system accepts Pesos from the Mexican bank account and converts them to Lumen (XLM) tokens in the Ugandan coffee dealer’s wallet. They can convert the Lumens to Shillings-in-the-bank with the press of a button or keep the Lumens to make other purchases around the world. These transactions are done in seconds with very low fees, thanks to Stellar’s protocol, which is hosted across hundreds of independent nodes across the world. 

Stellar is unlike other cryptocurrencies and considers itself cryptocurrency-adjacent. Unlike Bitcoin, which is designed to replace functions of traditional banking, Stellar’s software is intended to enhance traditional financial systems by providing a more efficient way to move value across different fiat currencies – but like all other cryptocurrencies it uses cryptography and distributed blockchain technology.  

How does Stellar work?

The Stellar network runs on a web of decentralized computers or nodes supported by individuals and organizations that keep track of data and transactions using a system called the Federated Byzantine Agreement (FBA) algorithm. The FBA enables faster transaction processing because it only uses a portion of the network to approve transactions.  

On the Stellar network, each node chooses a set of computers it will always agree with. The node processes the same transactions and keeps its list of transactions aligned with that set of trusted computers. The computer they have selected to depend on, in turn, chooses another set of nodes to agree with. Those nodes then select another group of computers, and so on, until eventually the whole network is covered in an interlocking web of agreement. 

With this agreement, every five seconds, the connected computers negotiate to finalize their agreements according to particular rules. Then, the computers cross-check with each other across the entire network, all at once. 

Because Stellar Lumens are not mined like Bitcoin, it does not take a high-powered computer to run a node. All that is required is about the same processing power as running an email server. So, it is common for companies that rely on Stellar to conduct their business to run their own nodes. Because they have a vested interest in Stellar performing optimally, these nodes are less likely to act maliciously on the network. 

Stellar and Remittances

The benefits of the Stellar platform do not extend only to businesses purchasing supplies from overseas. Those sending money across borders to loved ones can also benefit from the Stellar protocol. Remittances are money sent to support a family member in another country. With traditional finance, remittances can be costly and take several days to process. With Stellar, migrant workers can send money to their home countries in five seconds for a fee of less than a penny. So, suppose a Jamaican worker living in the United States wants to send $20 to their mom in Kingston. Instead of using a transfer service to move money from a US bank to a Jamaican bank, they can save money and time using Stellar.  

What are Stellar Lumens (XLM)?

In addition to acting as a currency intermediary when needed, Stellar's native token Lumen is also used to pay transaction fees. The base fee for a transaction on the Stellar network is about .00001 XLM, or $0.00000178. The more complicated the transaction, the higher the price, but as the Lumen exchange rate is low, the fee will usually be less than one cent.

As mentioned before, Stellar Lumens are not mined. When the network was launched in 2015, 100 billion XLM were created. In October 2019, that supply was reduced by 50 billion, and no more will ever be added. Twenty billion XLM are in circulation today, and the rest is held by the Stellar Development Foundation that runs Stellar. 

Price History and Outlook

XLM reached an all-time high of $0.89 in January of 2018, up from an all-time low of $0.002 in November 2014, just before its official launch. This represents a value increase of more than 4,000%, making it one of the more bullish alternative coins. Stellar Lumens are in the top 30 largest cryptocurrency by market capitalization and have been trading between $0.08 and $0.20 for the last year.  

Are you interested in purchasing some XLM? You can convert your cash to XLM cheaply and quickly at a CoinFlip ATM or through CoinFlip Preferred.

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