Stellar is an open-source, decentralized blockchain network that aims to provide a common platform for the exchange of fiat and cryptocurrencies across the globe. Its native currency is called lumens which is denoted by XLM. Any currency from across the world, be it crypto or fiat, can be represented as assets on the Stellar blockchain network. These currencies then can be exchanged with any other asset present on the Stellar network. All the transactions are submitted to a shared and distributed public ledger. Each Stellar node has a copy of this public ledger which makes tampering with these transactions almost impossible.
Stellar blockchain was built to make the financial system across the globe work as a single network. Stellar provides the following features to do so.
(i) Speed :- It takes about 2-5 seconds for a Stellar transaction, which is faster than the fiat transactions that may take days. Stellar has its own consensus method that makes it way faster than the other blockchains like BTC, which may take 10 min for a transacti and upto 60 min or more for a transaction to make irreversible and secure.
(ii) Digital Asset Representation :- Functionality of cryptocurrencies like BTC, ETH are limited to their own networks. These currencies are not interconvertible. But any of these cryptocurrencies and even fiat can be represented as a digital asset on Stellar.
(iii) Security:- All the transactions on Stellar network, like other blockchain networks are stored in a decentralized, public ledger. It makes the data on Stellar network very secure and almost impossible to tamper with.
(iv) Low Transaction Fees:- A transaction on Stellar network can have many operations, each of these operations cost a base fee. The more complex the transaction, the more operations that transaction will include and the higher the fees will be for that transaction. The base fee per operation is very low for Stellar. It is 0.00001 XLM per operation.
(v) Minimum Balance:- In blockchains like BTC, ETH, etc., it doesn’t cost anything to create an account. As a result, any malicious user can spam the network by creating many accounts. To prevent against this, each account on the Stellar blockchain must hold a minimum balance to activate its account and keep performing operations. The minimum balance that the user must hold is 2 XLM currently for a newly created account. This value increases as user performs more operations like issuing trustlines, placing buy, and sell orders etc.
COMPONENTS OF STELLAR
The following are the components of Stellar described in brief.
(i) ANCHORS:- Anchors are trusted entities like banks or other financial institutions that people trust to hold their deposits and issue equivalent Stellar assets. For example, a user may deposit BTC to an anchor to get equivalent amount of BTC Stellar asset in their Stellar account. Similarly, a user must trust that if the user returns the BTC asset to the anchor, then the anchor would return the BTC back to the user.
(ii) In-Built Decentralised exchange:- Stellar has in built exchange for the digital assets that it hosts at the protocol level. Hence, it provides all the functionality it requires to build a financial application at its core, like placing buy and sell orders and maintaining an orderbook and trade history. It makes it easier for new users to integrate Stellar blockchain.
(iii) Public ledger:- All transactions on the Stellar network are stored on a decentralized public ledger. Anyone on the ledger can look at the transaction and get to know its details. It promotes transparency in the system.
(iv) Multi-Currency Transactions:- One of the most important components of the Stellar network is the ability to have traded between two currencies. Let us take an example to understand this.
Suppose we have two users Alice and Bob, Alice lives in the US and can only hold American currency USD(american dollars) and Bob lives in India and can only hold INR (Indian rupee). Stellar can allow a transaction where the USD can be sent by Alice and Bob will receive the payment as INR. This trade can happen in two ways
(a)Direct Exchange:- The Stellar network checks if there is any user that willing to exchange USD for INR. If such an offer exists, the transaction will happen almost instantaneously.
(b) Indirect Exchange:- Suppose there are no users willing to exchange USD for INR, but there are users who are able to exchange USD for XLM and XLM for INR. Then the given exchange will happen in two steps, firstly USD will be exchanged with XLM and then XLM would be exchanged with INR. SImilarly exchange may happen in multiple steps like exchange between USD to INR may happen as USD/XLM, XLM/BTC, BTC/INR.
(v) Consensus:- All blockchain networks have a way to reach consensus to validate transactions on its network. Stellar also has its own consensus mechanism which is based on Federated Byzantine Agreement (FBA) and is called SCP (Stellar Consensus Protocol) .
As per SCP whitepaper “In FBA, each participant knows of others it considers important. It waits for the vast majority of those others to agree on any transaction before considering the transaction settled. In turn, those important participants do not agree to the transaction until the participants they consider important agree as well, and so on. Eventually, enough of the network accepts a transaction that it becomes infeasible for an attacker to roll it back. Only then do any participants consider the transaction settled. FBA’s consensus can ensure the integrity of a financial network. Its decentralized control can spur organic growth.”
Stellar can be used in the following use cases in real-world applications.
(i) Financial Transactions:- Stellar can help financial institutions to send any currency anywhere at the fraction of the fees and time it takes with fiat and even with other cryptocurrencies like BTC or ETH.
(ii) Decentralized Exchange:- Stellar has an inbuilt decentralized exchange and all the functionalities related to it are included at its core at the protocol level. It gives us the ability to place orders, maintain order book, and trade history for given asset pairs. It also has its own order matching mechanism which matches the buy and sell orders to generate a trade.
The Stellar network aims to be the central hub for the exchange of digital assets for both cryptocurrencies and fiat in the future. It aims to provide a shared platform where users from all over the world can come and trade their assets with any other asset present on the exchange and do transactions with these assets which are cheap, fast, and secure.
In this blog, we learned about the basics of Stellar blockchain, and it elements and features.
For more information on Stellar blockchain, you can read the Stellar DOCUMENTATION.
Since Stellar is an open source, you can refer to its code HERE.