What is Stellar?

Stellar (XLM) wants to use its payment platform to connect banks, payment providers and people worldwide and across national borders and make money transfers faster, cheaper and more transparent. Stellar is often compared to Ripple. Unlike Ripple, Stellar is a non-profit organization with an “open source” approach, which means it is more likely to serve the general public. Stellar wants to open the markets above all for those who have not had access to the financial world due to a lack of infrastructure.

Stellar was created in 2014 as Fork (spin-off) from Ripple and is still in this tradition after the further developments of the following years. With regard to the objective, Stellar sees itself as a counter or rather new draft: Here, too, a medium for the worldwide cryptographic payment traffic is to be created, but less tailored to banks and other financial companies, but rather as a universal solution for all possible participants. With “Develop the world’s new financial system” and “The future of banking is here”, the claims on the stellar.org project website are correspondingly ambitious. In addition, Stellar is particularly concerned with the social component; not only does it attach great importance to the decentralization of the network, but above all it should also give the “Unbanked”, i.e. people who have not been able to participate in the system of cashless payment transactions so far, the opportunity to use electronic currencies.

Although Ripple was Stellar’s starting point, there have been some changes over time. The Stellar Development Foundation (SDF), which is responsible for Stellar, complained about shortcomings in the Ripple protocol as early as the end of 2014, which essentially meant that the performance of the network was bought at the expense of security. The resulting debate initially led to a dissociation from Ripple in terms of content and then to the software fork. The SDF created a further developed protocol, which became the new basis of the network from spring 2015. The tokens of the network, which were also called Stellar in the beginning, were also rebranded. Since then they have been called Lumen and traded under the abbreviation XLM.

How does Stellar work?

From a technical point of view Stellar is a hybrid between a peer-to-peer network, as it is also known from other crypto currencies, and providers of electronic payments on the Internet, such as PayPal. What is unusual first and foremost is its own terminology, which names various aspects of the system. In principle, Stellar is simply intended as a system for the transfer of means of payment (largely independent of the currencies used). Lumen are only used for internal billing in the network. The nodes in the Stellar network are called Anchor, they are the instances that receive currency from the participants and manage it as credit, similar to a bank or PayPal. If, for example, a money transfer is to be made to another country with a different currency, the Stellar network calculates the original value in the original currency in lumen and simultaneously searches for a suitable request to exchange the target currency to which the first order is placed. If there is no equivalent payment order, Stellar determines a chain of transfers by a series of exchanges until the transaction can be completed as desired. If possible, the most favorable rates are always searched and used.

All transactions are managed in Stellars Ledger. This is essentially the blockchain of the system, but the SDF avoids using the term blockchain in its publications, perhaps to distinguish itself more clearly as a transfer system for currencies. The verification of transactions is done through a consensus mechanism (as is common with blockchains), in the course of which the anchors agree on the correctness and completeness of the ledger.

The Stellar Consensus Protocol (SCP)

Consensus on the validity of transactions and the ledger is established by the Stellar Consensus Protocol (SCP). The conceptual basis for the SCP is the problem of the Byzantine generals:

During the siege of Constantinople (formerly Byzantium) in 1453, the generals of the Ottoman army faced the problem of having to agree on a common strategy (attack or retreat) for the siege of the heavily fortified city without fast and reliable communication. In addition, there was the difficulty that an unknown number of generals might have treacherous intentions. Applied to technical systems such as computer networks, this means that the participating nodes do not need to be able to tell whether other participants are behaving honestly or even functioning correctly. As long as such errors occur sporadically and are accompanied by a predominant overall consensus, they can be compensated, but as soon as the errors add up to a correspondingly large counterweight, catastrophic overall system failures can occur.

Since the 1980s, various solutions have been developed to ensure Byzantine fault tolerance, i.e. a greater or lesser stability against such Byzantine errors, for such systems. These strategies were mostly based either on a central instance monitoring the communication, the assumption that errors occur sporadically and thus remain below a certain critical threshold, or on cryptographic solutions such as a blockchain.

The developers of Stellar use approaches from existing concepts and refine them to their own consensus protocol, the federated Byzantine agreement, the basis of the SCP. The main innovation here is that it is no longer necessary to reach a consensus on every transaction by voting (“quorum”) in the entire network, but that a smaller part is sufficient for validation, which the participant concerned can choose freely (the so-called “quorum slice”). The expectation is that in the course of time, particularly trustworthy nodes will emerge in the network, which will become intersections of various quora and form so-called quorum intersections – nodes on a meta-level of relative trust that also stabilize the network against strong deviations and errors such as hacker attacks.

The lumens, the tokens of the system, also play a small but significant role in the protection of Stellar: Each Stellar transaction costs a fee of 0.00001 XLM (one hundred thousandth of a lumen). While this amount is virtually negligible in regular payment transactions, it adds up to considerable sums in frequent attacks on the network. This makes DDos attacks, such as botnets, which are otherwise characterized by the fact that they do not cost the attacker any resources or money, much less likely.

In order to form a solid meta network of trustworthy quorum intersections, a good contact to established and trustworthy authorities in the area of financial services is of great interest for Stellar. But also in general the developers are looking for the solidarity with big names in economy and technology. The project received a special boost at the end of 2017 from the partnership with IBM, among others. Together with the company, Stellar’s technology is to be set up as its own blockchain project in order to test the new possibilities for money transfer between banks. The announcement of the cooperation with the industry giant catapulted the lumen price to unexpected heights in a very short time and earned the coin the status of an insider tip in investor circles.

Similar to Ripple, the striking economic closeness of the SDF, which actually gives itself a special social status, is viewed with a certain suspicion in the community. As a non-profit organization Stellar is certainly dependent on financially strong partners, and in order to contribute the necessary technical infrastructure, there are certainly few better partners than IBM, but that among the donors for the SDF not only Google, but also the world’s largest financial service provider BlackRock is named, is in view of the objectives of the project at least surprising.

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