Stellar Blockchain: Overview, History, FAQ

What Is Stellar Blockchain?

The Stellar blockchain is one of the hundreds of networks that store and transmit cryptocurrencies. As bitcoin garnered headlines over the past ten years, many other virtual currencies and platforms racked up impressive gains and user bases. The stellar blockchain, with its lumens token, is one of them.

In early 2021, the value of Stellar’s lumen token grew more than fivefold, from $0.13 to $0.73, before collapsing over the following year. As of early 2023, the lumen token is trading for about $0.08, according to the crypto data site CoinMarketCap.

Understanding Stellar Blockchain

Stellar’s basic operation is similar to that of most decentralized payment technologies. It runs a network of decentralized servers with a distributed ledger that is updated every two to five seconds among all nodes. The most prominent distinguishing factor between Stellar and bitcoin is its consensus protocol.

Stellar’s consensus protocol does not rely on the entire miner network to approve transactions. Instead, it uses the Federated Byzantine Agreement (FBA) algorithm, which enables faster processing of transactions. This is because it uses quorum slices (or a portion of the network) to approve and validate a transaction. 

Each node in the Stellar network chooses another set of “trustworthy” nodes. Once a transaction is approved by all nodes within this set, then it is considered approved. The shortened process has made Stellar’s network extremely fast and it is said to process as many as 1,000 network operations per second. 

How the Stellar Blockchain Process Works

The current process for cross-border transfers is a complicated one. It requires domestic banks to maintain accounts in foreign jurisdictions in local currencies. Their correspondent banks must operate a similar account in the original country.

The Nostro-Vostro process, as it is known, for cross-border transactions with fiat currencies is a lengthy one involving conversion and reconciliation of accounts. Because it enables simultaneous validation, Stellar’s blockchain can shorten or eliminate the delays and complexity involved.

Stellar’s Lumens cryptocurrency can also be used to provide liquidity and streamline the process. According to some reports, banks will use their own cryptocurrencies to facilitate such transfers in the future. According to David Mazières, a Stanford University professor and SCP creator, the protocol has “modest” computing and financial requirements. This enables even organizations with minimal IT budgets, such as nonprofits, to participate in its network. 

History of Stellar Blockchain

Stellar was launched in 2014 by Jed McCaleb (pictured), who also co-founded the cryptocurrency company Ripple and the exchange Mt. Gox. After leaving Ripple over his differences with other co-founders, McCaleb and his partner Joyce Kim launched the Stellar protocol as a fork of the Ripple codebase. Payments company Stripe provided $3 million in seed funding.

Stellar came into the spotlight in October 2017 after it announced a partnership with IBM. The partnership envisages the setting up of multiple currency corridors among nations in the South Pacific.

The project stated a goal of processing up to 60% of all cross-border payments in the region, which includes countries like Australia, Fiji, and Tonga. This would enable connections between small businesses, non-profits, and local banking institutions to expedite commercial transactions. For example, a farmer in Samoa would be able to connect and conduct transactions with a buyer in Indonesia.

In 2016, prominent technology consulting firm Deloitte also announced a partnership with Stellar to develop a payments app. At a conference in 2017, McCaleb confirmed that 30 banks signed up to use Stellar’s blockchain for cross-border transfers. 

Concerns About Stellar Blockchain

Following the launch of the Stellar protocol, many investors raised alarms about the high number of lumens tokens controlled by the Stellar Development Foundation. Rather than let Stellar nodes “mine” new cryptocurrency, the creators of Stellar simply created 100 billion lumens tokens. The vast majority of them were assigned to the Stellar Development Foundation.

Although these resources are ostensibly intended to fund development and adoption, some investors worry that they could be sold on the market, thereby diluting the holdings of potential investors. In order to address these concerns, the SDF intentionally destroyed 55 billion lumens tokens in 2019.

There are also concerns that the network relies on a small number of nodes, many of them controlled by the SDF. In 2019, two of those nodes unexpectedly failed, causing the Stellar blockchain to halt for over an hour.

Stellar Blockchain vs. Ripple

Stellar is an open-source payment technology that shares several similarities with Ripple and its XRP cryptocurrency. Like Ripple, Stellar is a payment technology that aims to connect financial institutions and reduce the cost and time required for cross-border transfers.

Both networks use similar protocols and were derived from the same codebase. In both protocols, there is no mining or algorithmic proof-of-work: All tokens were created at the moment the blockchain was launched.

The majority of XRP tokens are controlled by Ripple, a for-profit company, while the majority of lumens tokens are held by the nonprofit Stellar Development Foundation. While Ripple is a closed system, Stellar is open-source.

They also have different customers. Ripple works with established banking institutions and consortiums in order to streamline their cross-border transfer technology. In contrast, Stellar is focused on developing markets and has multiple use cases for its technology, including money remittances and bank loan distribution.  

The Bottom Line

The Stellar blockchain is one of the thousands of competitors to Bitcoin and Ethereum. It is used for fast, cheap transactions with minimal computational or energy costs. Although it has occasionally enjoyed sharp price rises, the value of Stellar lumens has plunged with respect to other cryptocurrencies.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns cryptocurrency.