Stellar (XLM) is more than just another cryptocurrency—it’s a decentralized network designed to power fast, low-cost financial transactions across borders, with a mission to bring financial access to the unbanked. Built on a unique consensus mechanism known as the Stellar Consensus Protocol (SCP), the network offers a secure, scalable, and inclusive alternative to traditional banking systems. In this comprehensive guide, we’ll explore the core components of Stellar, how its consensus algorithm functions, and its growing real-world applications.
Understanding Stellar (XLM)
Stellar Lumens (XLM) is the native cryptocurrency of the Stellar network, launched in 2014 with an initial supply of nearly 100 billion tokens. Unlike Bitcoin or Ethereum, XLM does not rely on mining or proof-of-work. Instead, it uses a pre-mined supply and a consensus mechanism that enables near-instant transactions at minimal cost—typically just 0.00001 XLM per transaction.
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The primary purpose of XLM is to facilitate cross-asset value transfers on the Stellar blockchain. Every transaction requires a small fee, not for profit, but to prevent spam and network abuse. Additionally, each account must maintain a minimum balance of 20 XLM to remain active on the network.
One unique feature of Stellar is its built-in inflation mechanism: the total supply increases by 1% annually. These newly created tokens are distributed weekly through a voting system where users can nominate recipients. While this inflation model aims to promote network participation, it has also evolved over time, with proposals to disable inflation due to community feedback.
Stellar was founded by Jed McCaleb, who also co-founded Ripple, but with a distinct vision: while Ripple targets financial institutions, Stellar focuses on financial inclusion, aiming to connect underserved populations to affordable financial services.
The Stellar Consensus Protocol (SCP)
At the heart of the Stellar network lies the Stellar Consensus Protocol (SCP)—a groundbreaking consensus algorithm that enables fast, secure, and decentralized agreement without relying on energy-intensive mining.
SCP is based on the Federated Byzantine Agreement System (FBAS), a novel approach that allows nodes to reach consensus without requiring trust in every participant. Instead, each node selects a set of trusted peers—called quorum slices—to form its own trusted network. This design enables decentralized control while maintaining flexibility in trust assumptions.
Key Advantages of SCP:
- Decentralized control: No single entity governs the network.
- Flexible trust: Nodes choose whom to trust.
- Low latency: Transactions settle in 3–5 seconds.
- Asymptotic security: The system becomes more secure as more honest nodes participate.
This innovative structure makes SCP both efficient and resilient, especially for global payment systems where speed and reliability are critical.
What Are Quorums and Quorum Slices?
To understand SCP, it’s essential to grasp two core concepts: quorums and quorum slices.
A quorum is a group of nodes sufficient to reach agreement within the network. A quorum slice, on the other hand, is a subset of nodes that a particular node trusts to help it make decisions. A node may belong to multiple quorum slices, and these slices collectively form a full quorum when their overlap ensures global agreement.
For example:
- Alice, Bob, and Charlie form a quorum because they collectively trust each other.
- However, Bob, Charlie, and Daisy form only a quorum slice for Daisy—if Bob and Charlie agree on a transaction, Daisy will accept it.
- But if Alice doesn’t agree, Bob and Charlie won’t accept it either. So Daisy cannot validate a transaction unless Alice is involved.
Thus, the smallest quorum including Daisy must include Alice, Bob, and Charlie.
This layered trust model prevents isolated groups from creating conflicting ledgers—a critical feature for preventing double-spending and ensuring consistency across the network.
Hierarchical Quorum Structures
In practice, nodes in the Stellar network naturally organize into layers based on reputation and reliability.
- Tier 1 nodes are highly trusted entities such as major banks or institutional validators.
- Tier 2 nodes include smaller organizations or individual validators that rely on Tier 1 nodes for consensus.
These layers emerge organically through market dynamics rather than centralized control.
Example of Tiered Quorum Operation:
- Tier 1 nodes (e.g., banks) trust only other Tier 1 nodes. Each forms quorum slices with two other Tier 1 validators.
- Tier 2 nodes don’t trust each other but do trust Tier 1 nodes. They form slices using themselves and two Tier 1 validators.
- Nonprofits or hybrid validators may combine peers from their own group and Tier 1 nodes.
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Now imagine a malicious attempt: two corrupt banks try to execute a double-spend by sending 1 million XLM to both Charlie and Daisy for goods. If Charlie’s quorum slice includes only the corrupt banks, he might initially accept the duplicate transaction. But Daisy’s slice includes a nonprofit that already recorded the first transaction. Since the second transaction conflicts with the ledger state known to the nonprofit, it will be rejected.
As a result, consensus fails in Daisy’s quorum—and the double-spend is blocked. This demonstrates how SCP maintains integrity even when some nodes act dishonestly.
The Federated Voting Process
Consensus in SCP is achieved through a process called federated voting, which involves three key phases:
- Vote: A node expresses support for a proposed transaction.
- Accept: The node recognizes that its quorum slice agrees and formally accepts the transaction.
- Confirm: Once sufficient nodes have accepted, the transaction is confirmed and written to the ledger.
Let’s say Bob is deciding between two conflicting transactions—A or B—and initially votes for A. If his quorum slice supports A, he accepts and confirms it.
But suppose Bob votes for B while his v-blocking set—a group containing at least one node from each of his quorum slices—supports A. In that case, Bob is persuaded to abandon B and accept A instead.
This dynamic ensures that even if individual nodes start with different views, they converge on a single truth through overlapping trust relationships.
Real-World Applications of Stellar
Stellar isn’t just theoretical—it powers real financial infrastructure around the world.
IBM World Wire
IBM launched World Wire, a global payment platform built on the Stellar network. It enables near real-time settlement of cross-border transactions using digital assets as bridges between fiat currencies.
While XLM serves as one bridge asset, World Wire also supports stablecoins like Stronghold USD—a USD-pegged token issued on Stellar. This flexibility allows financial institutions to choose their preferred settlement asset, unlike Ripple’s xRapid, which relies solely on XRP.
World Wire demonstrates how blockchain can streamline international remittances, reducing costs and settlement times from days to seconds.
Stellar Decentralized Exchange – StellarX
Launched in 2018, StellarX is a non-custodial decentralized exchange (DEX) built on the Stellar blockchain. Users can trade XLM for other cryptocurrencies or fiat-backed tokens directly from their wallets—peer-to-peer, with no intermediaries.
Notably:
- No trading fees are charged.
- Network transaction fees are refunded.
- Inflation rewards (historically 1% APY) were distributed to users.
Although inflation distribution has been paused, StellarX remains a powerful example of decentralized finance (DeFi) in action on a high-throughput network.
Lightning Network on Stellar
Stellar is also developing Lightning-style payment channels to enable instant, private micropayments off-chain. These channels allow two parties to transact repeatedly without broadcasting each transaction to the main network.
Only when the channel closes is the final balance settled on-chain. This reduces fees and increases privacy—ideal for everyday transactions like tipping or streaming payments.
Frequently Asked Questions (FAQ)
Q: What is XLM used for?
A: XLM facilitates cross-border payments, prevents spam via micro-fees, and maintains minimum account balances on the Stellar network.
Q: Is Stellar proof-of-work or proof-of-stake?
A: Neither. Stellar uses the Stellar Consensus Protocol (SCP), a federated Byzantine agreement system that doesn’t require mining or staking.
Q: How fast are Stellar transactions?
A: Transactions settle in 3–5 seconds with finality—much faster than most blockchain networks.
Q: Can I earn rewards by holding XLM?
A: Historically, yes—via inflation payouts voted on by users. However, this mechanism has been effectively paused due to low participation.
Q: How does Stellar differ from Ripple?
A: Both were co-founded by Jed McCaleb, but Ripple focuses on banks using XRP; Stellar emphasizes financial inclusion and supports multiple assets including stablecoins.
Q: Is the Stellar network decentralized?
A: Yes—SCP allows decentralized control through user-chosen quorum slices, enabling organic trust formation without central authority.
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Conclusion
Stellar (XLM) stands out in the cryptocurrency landscape not just for its technology—but for its mission. By combining the Stellar Consensus Protocol, fast transaction finality, and real-world partnerships like IBM World Wire, it delivers practical solutions for global financial access.
With ongoing developments in decentralized exchanges and off-chain payment channels, Stellar continues to evolve as a scalable, inclusive platform for value exchange—bridging traditional finance with the future of digital assets.