Stellar Blockchain: Overview, History, FAQ

What Is Stellar Blockchain?

The Stellar blockchain is one of the hundreds of networks that store and transmit cryptocurrencies. Stellar is designed to be used primarily by organizations to offer faster payment services to users worldwide.

Key Takeaways

• The Stellar blockchain is a distributed ledger used to transmit digital currencies.
• The main token of the Stellar blockchain is Stellar lumens (XLM).
• The Stellar blockchain uses a consensus algorithm that is faster, cheaper, and more energy-efficient than Bitcoin’s.
• The Stellar blockchain was launched in 2016 by Jed McCaleb, who also founded Mt. Gox and co-founded Ripple.
• Critics say that the Stellar blockchain is centralized around the Stellar Development Foundation, which controls a large share of the lumens tokens.

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.

The project stated a goal of processing up to 60% of all cross-border payments in a 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. 

Note

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 late 2024, the lumen token traded for about $0.53, according to the crypto data site CoinMarketCap.

How the Stellar Blockchain Process Works

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 transaction processing. This is because it uses quorum slices (or a portion of the network) to approve and validate a transaction rather than a network-wide competition to propose blocks. 

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 be able to process thousands of network operations per second.

Stellar Primary Uses

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 in this process.

Stellar’s Lumens cryptocurrency can also be used to provide liquidity and streamline payment processes. 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.

Note

Each Stellar wallet must maintain a minimum balance of 1 XLM to exist.

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 reward Stellar nodes with cryptocurrency, the Stellar developers simply created 100 billion lumens tokens, the vast majority of which 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 potential investors’ holdings. 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 similarities with the Ripple Ledger blockchain 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.

Ripple is a closed system, and Stellar is open-source. They target different sets of customers—Ripple works with established banking institutions and consortiums 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.

Is XLM a Good Crypto?

XLM, or Stellar lumens, is the native cryptocurrency of the Stellar blockchain, and it is used to pay transaction fees. Transactions are verified within seconds, and there appears to be a decent amount of daily trading volume. However, the blockchain isn’t as popular and has fewer participants than more popular blockchains, indicating possible security issues.

Could XLM Reach $1?

It’s possible that XLM could reach $1 if market conditions and investor sentiments allow it.

What Will XLM Be Worth in 2030?

There’s no way to know what XLM’s market value will be in 2030.

The Bottom Line

The Stellar blockchain is one of the thousands of cryptocurrencies and blockchain networks. It is designed 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 but maintains a decent 24-hour trading volume.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author owns BTC, ETH, ADA, and XRP.