Stellar (XLM) is a decentralized, open-source blockchain network designed to enable fast, low-cost cross-border transactions between any pair of currencies. Its mission is to connect financial institutions, payment systems, and individuals to build a more inclusive global financial infrastructure. With its unique consensus mechanism, built-in decentralized exchange, and strong focus on financial inclusion, Stellar has carved out a significant role in the world of blockchain and fintech.
How Does Stellar (XLM) Work?
The functionality of the Stellar network relies on several interconnected components: the Stellar Consensus Protocol (SCP), Stellar Core, anchors, assets, and its native decentralized exchange (DEX). Together, these elements create a robust ecosystem for seamless value transfer across borders and currencies.
Stellar Consensus Protocol (SCP)
At the heart of Stellar’s architecture lies the Stellar Consensus Protocol (SCP)—a groundbreaking alternative to traditional consensus models like Proof of Work (PoW) or Proof of Stake (PoS). SCP is built on the principles of the Federated Byzantine Agreement (FBA), emphasizing flexibility, scalability, and energy efficiency.
👉 Discover how next-gen blockchain networks achieve fast, secure consensus without high energy costs.
Federated Byzantine Agreement (FBA)
Unlike systems that require universal agreement among all nodes, FBA introduces the concept of decentralized trust. In this model, each node selects a subset of other nodes it trusts—known as a quorum slice—to validate transactions. This personalization of trust allows for greater network resilience and avoids central points of failure.
Because quorum slices can overlap across different nodes, consensus emerges organically through shared trust relationships rather than forced agreement. This design enables faster decision-making while maintaining strong security guarantees.
The Consensus Process in SCP
SCP achieves consensus in three key phases:
- Nomination Phase: Nodes propose sets of transactions they believe should be included in the next ledger update. Through iterative proposals and responses, certain transaction sets gain majority support within various quorum slices.
- Voting Phase: Once nominations converge, nodes engage in structured voting rounds to formally agree on the final transaction set. This phase ensures that even if initial views differ, nodes eventually align on a single outcome.
- Confirmation: After consensus is reached, the agreed-upon transactions are applied to the ledger, updating the state of the entire network simultaneously.
This streamlined process allows Stellar to confirm transactions in just 3–5 seconds, making it ideal for real-time financial applications.
Security and Liveness
SCP strikes a careful balance between safety and liveness:
- Safety ensures that conflicting transactions cannot be validated—preventing double-spending and maintaining data integrity.
- Liveness guarantees that the network continues processing transactions even under adverse conditions such as network partitions or malicious actors.
By leveraging overlapping quorums and decentralized trust, SCP maintains both properties without relying on centralized authorities or energy-intensive mining.
Advantages Over Traditional Mechanisms
Compared to PoW and PoS blockchains, SCP offers several compelling benefits:
- Energy-efficient: No computational arms race means minimal environmental impact.
- Fast finality: Transactions settle in seconds, not minutes or hours.
- Decentralized yet scalable: Trust is distributed across independently operated nodes with flexible quorum configurations.
These features make Stellar an attractive platform for institutions and developers building high-throughput financial services.
Anchors: Bridging Traditional Finance and Blockchain
Anchors act as trusted intermediaries between the Stellar network and traditional financial systems. They allow users to deposit fiat currency (like USD or EUR) and receive equivalent digital tokens on the Stellar blockchain—effectively enabling seamless on-ramping and off-ramping of value.
For example, when you send $100 to an anchor, it issues a digital asset representing $100 USD on Stellar (often labeled USD₮ or similar). This token can then be sent instantly to another user anywhere in the world, who can redeem it for local currency through their own anchor.
Anchors are typically regulated entities such as banks, payment processors, or licensed fintech firms. Their credibility ensures the stability and reliability of issued assets.
Decentralized Exchange (DEX)
Stellar includes a built-in decentralized exchange (DEX) that allows users to trade any asset issued on the network directly from their wallets—without intermediaries.
Key features include:
- Support for limit orders and market orders
- Atomic swaps across different currency pairs
- Automated pathfinding for optimal exchange routes
This integrated DEX enhances liquidity and enables frictionless cross-currency payments, aligning with Stellar’s vision of open, accessible finance.
Pathfinding Algorithm
One of Stellar’s standout innovations is its pathfinding algorithm, which automatically identifies the most efficient route for converting one currency into another—even if no direct market exists.
For instance, if you want to send Nigerian Naira (NGN) to someone receiving Philippine Pesos (PHP), Stellar might find a path like:
NGN → XLM → EUR → PHP
using available order books across the DEX.
This automation removes complexity for end users and makes international payments feel local.
XLM: The Native Asset of Stellar
Lumens (XLM) is the native cryptocurrency of the Stellar network and plays several critical roles:
- Transaction Fees: Every transaction requires a minimal fee (currently 0.00001 XLM) to prevent spam attacks.
- Bridge Currency: XLM facilitates multi-currency trades by acting as an intermediary when direct exchange paths don’t exist.
- Account Minimums: Each account must hold at least 1 XLM to deter fake accounts and bloating of the ledger.
- Liquidity Provision: XLM is widely used in trading pairs on the DEX, enhancing overall market liquidity.
- Access to Financial Services: Holding XLM enables participation in payments, remittances, micropayments, and tokenized asset transfers.
Additionally, Stellar supports custom assets—tokens that represent fiat currencies, commodities, or loyalty points—making it a versatile platform for enterprise use cases.
Smart Contracts and Security
While Stellar does not support Turing-complete smart contracts like Ethereum, it provides essential programmable features:
- Multi-signature accounts
- Time-bound transactions
- Batch operations
This minimalist approach prioritizes speed, security, and predictability—ideal for regulated financial applications where reliability trumps complexity.
Key Use Cases
Stellar’s architecture makes it particularly well-suited for:
- Cross-border remittances
- Micropayments
- Mobile banking in underserved regions
- Tokenization of real-world assets
- Central bank digital currencies (CBDCs)
Notable partnerships include IBM’s World Wire project and Ukraine’s national digital currency initiative—both built on Stellar’s infrastructure.
👉 See how blockchain is transforming global remittance systems today.
A Brief History of Stellar
Founding and Early Development (2014)
Stellar was co-founded in July 2014 by Jed McCaleb (also a co-founder of Ripple) and Joyce Kim under the nonprofit Stellar Development Foundation (SDF). Initially based on Ripple’s protocol, Stellar quickly evolved to address broader financial inclusion goals.
Rebuilding Identity (2015)
In 2015, Stellar launched its own consensus protocol—SCP—breaking away from Ripple’s foundation. This marked a turning point toward greater decentralization and scalability.
Growth and Recognition (2017–2018)
By 2017, Stellar gained traction as an ICO launchpad due to its low fees and fast settlements. A landmark partnership with IBM showcased its potential in global banking. In 2018, XLM saw significant price growth amid wider crypto market enthusiasm.
Strategic Refinement (2019–2020)
In 2019, SDF made headlines by burning 55 billion XLM tokens to reduce supply and increase long-term value potential. The integration of Circle’s USDC stablecoin further expanded Stellar’s utility in global finance.
Expansion and Innovation (2021–Present)
Since 2021, Stellar has continued pushing boundaries—partnering with governments on CBDC projects and planning upgrades to enhance smart contract capabilities. Its ongoing focus remains on accessibility, scalability, and serving unbanked populations worldwide.
How to Buy XLM
Purchasing Stellar (XLM) is straightforward through major cryptocurrency exchanges:
- Coinbase: Available in over 100 countries including the US (excluding Hawaii), UK, Canada, Germany, France, Australia, and Singapore.
- Kraken: Trusted platform serving users in Europe, North America, and Australia (with some state-level restrictions).
- Uphold: A top choice for US residents (not available in Germany or the Netherlands).
Always ensure compliance with local regulations before trading.
How to Store XLM
Securing your XLM holdings is essential. Recommended options include:
- Hardware Wallets: Devices like Ledger offer “cold storage” protection against online threats.
- Non-Custodial Software Wallets: Apps like Freewallet or Lobstr give you full control over your private keys.
👉 Learn how secure crypto storage protects your long-term investments.
Frequently Asked Questions (FAQ)
Q: What is the purpose of XLM?
A: XLM serves as the native utility token of the Stellar network, used for transaction fees, preventing spam, enabling multi-currency exchanges, and maintaining account minimums.
Q: Is Stellar eco-friendly?
A: Yes. Unlike proof-of-work blockchains, Stellar uses SCP—an energy-efficient consensus mechanism that consumes negligible electricity.
Q: Can I earn interest on XLM?
A: Some platforms offer staking-like rewards or yield programs for holding XLM, though native staking isn’t supported directly by the protocol.
Q: How fast are Stellar transactions?
A: Transactions typically settle within 3–5 seconds, making it one of the fastest public blockchains available.
Q: Who uses the Stellar network?
A: Financial institutions, payment providers (like MoneyGram), central banks, and fintech startups use Stellar for cross-border payments and asset tokenization.
Q: Is XLM inflationary?
A: No. Originally featuring a small annual inflation mechanism, this was disabled in 2019. The total supply is now fixed at approximately 50 billion XLM.
Stellar combines cutting-edge consensus technology with practical financial tools to power a more open and efficient global economy. As adoption grows—from remittances to CBDCs—XLM continues to prove its relevance in reshaping how value moves around the world.