What are Stellar lumens?

Stellar is a blockchain-based distributed ledger that is designed to connect people and financial institutions around the world. The goal of Stellar is to increase financial inclusion by creating accessible, cheap, and easy-to-use global payment systems.

Stellar is the name of the network being built by the Stellar Development Foundation. The currency of the network are called Stellar lumens, or just lumens. The symbol for Stellar lumens is XLM.

Why are Stellar lumens (XLM) important?

Stellar lumens (XLM) are the tokens released as native assets by the Stellar Development Foundation, a nonprofit launched by Ripple co-founder Jed McCaleb in 2014. While some may think that Stellar is a fork of Ripple, upon closer inspection, the two actually have much more in the way of differences than they do in common. They are, in McCaleb’s words, two “completely different codes.”  While the codes do differ — and Stellar would argue they made significant improvements to problems with Ripple — the key difference between them lies in their vision for the future of cryptocurrency.

Stellar considers itself “finance with a mission.” Large portions of the world’s population remain unbanked, and Stellar seeks to create universal access and participation in the global economy.  This philosophy is fundamentally inclusionary, and the entire codebase is open-source, meaning anyone can change or modify the code, and everyone can participate. Whereas Ripple is for-profit, Stellar plans to cover operational costs by setting aside 5 percent of the total available lumens for their own use, along with accepting donations. If Ripple is going after the banking industry, Stellar is going after the individual.

One of the strengths of Stellar is the team they have created to guide the network they are building. They offer grants of up to USD $2 million in lumens to developer partners on behalf of the Stellar Build Project. Stellar recently partnered with IBM as part of their Hyperledger project, where they will attempt to solve the problem of global cross-border payments together.

Furthermore, Stellar contains one critical component that is not found with Ripple — the ability to conduct ICOs on the Stellar network. In other words, new cryptocurrency projects can use the Stellar blockchain to release their own token. So far, most new projects in the cryptocurrency space have launched ICOs using ethereum using ERC20 tokens. But, due to Ethereum’s popularity coupled with current scaling mechanisms, the past year saw massive backlogs of transactions with slow transaction speeds and volatile, hefty fees. Stellar promises faster transactions and lower costs than ethereum, which is why some crypto startups have started to use Stellar as a platform to launch initial coin offerings.

These features, combined with the decentralized and altruistic mission of Stellar, have attracted favorable attention in contrast to the criticism facing Ripple. The two are pursuing very different things, and many feel there is room for both in the big picture of the global financial ecosystem.

How do Stellar lumens (XLM) work?

Stellar operates on what is called the Stellar Consensus Protocol, a decentralized network of peers capable of running independently of one another. This decentralized network of servers syncs and reaches consensus, creating the Stellar network and allowing the ledger to be distributed as widely as possible. Stellar isn’t as decentralized as something based on a proof-of-work mechanism such as Bitcoin, but it achieves better speed and efficiency as a result of this trade-off. While the original code base was similar to Ripple, the latest version, Stellar-core, is quite different, using a separate consensus algorithm entirely.

Stellar also differs from Ripple in terms of how the exchanges take place. Banks collaborate directly with Ripple to provide the intermediary services necessary to exchange one currency for another and send it on its way. With Stellar, this occurs in a more decentralized fashion. Stellar uses what are called “anchors,” which in their words do the following:

“Anchors are simply entities that people trust to hold their deposits and issue credits into the Stellar network for those deposits. They act as a bridge between different currencies and the Stellar network. All money transactions in the Stellar network (except the native digital currency of lumens) occur in the form of credit issued by anchors.”

So, the anchors help with currency transfer, but how does the exchange take place? An official Stellar exchange supports transactions in a few ways. First, by facilitating peer-to-peer exchanges, such as when someone wants to exchange US dollars with someone else who has Indian rupees. Second, lumens can be exchanged for Indian rupees to bridge the gap: Someone can buy lumens with US dollars, exchange those lumens for Indian rupees on the Stellar exchange, and then send them to the final recipient. Lastly, a chain of conversions can be created to link them along. For example, the US dollar could be exchanged for euros, and then those euros could be exchanged for Indian rupees. This is all possible with the Stellar exchange, with the help of lumens to fill the gaps when necessary.