Stellar is a decentralised, multi-purpose financial services platform originally stemming from the Ripple protocol. It is an open-source network whose novel consensus system allows for high scalability and energy-efficiency. Transactions on the Stellar network are validated by decentralised nodes that run independently of each other and can be run by anyone, thus having low barriers of entry. Stellar serves a dual function: it is both a decentralised exchange and a marketplace on which assets such as fiat currencies, cryptocurrencies, stocks and commodities can be traded and exchanged over the internet. Hence, Stellar can also handle exchanges between fiat currencies and digital assets. The seamless transfer of assets between participants is facilitated by a number of mechanisms that are built into Stellar’s public ledger including, among other things, its own order book and its native asset called lumen. Moreover, Stellar also allows for the creation and issuance of new digital tokens in a timely manner.

Stellar aims at overcoming the current state of fragmented financial structure of closed systems, thus lowering transaction costs, reducing friction when money moves across political borders while also lowering entry barriers for underbanked or unbanked people. Stellar emphasises openness by allowing decentralised and innovative participants to contribute to the network to facilitate organic growth akin to the Internet. Connection to the network costs nothing to use and there are straightforward instructions on the company’s website about how to connect using their ‘integration’ set-up, and then fine-tune your own database to work with Stellar.

The way in which the Stellar network operates differs somewhat from Bitcoin, particularly regarding its consensus mechanism, network speed (latency), the blockchain, computing requirements as well as characteristics of the native currency. The different design has positive implications for Stellar’s transaction speed, network scalability and energy consumption, to name a few advantages. On the downside, there is an evident trade-off with respect to privacy, decentralisation, censorship-resistance and immutability.

In July 2014, Mt. Gox founder Jed McCaleb who is also co-founder of Ripple, unveiled the Stellar project. In the same year, the non-profit Stellar Development Foundation (SDF), also referred to as Stellar.org), was established in collaboration with Patrick Collison, CEO of payments innovator firm, Stripe. Stellar received USD 3 million in seed funding from Stripe. Their mission is “to connect people to low-cost financial services to fight poverty and maximise individual potential.” The SDF was established for two main purposes. First, to develop the protocol and maintain the Stellar network and second, to ensure a wide distribution of the network’s native token, lumen, to businesses and users that form the ecosystem in order to promote and encourage adoption of the protocol. Among other things, SDF supports the Stellar community through technical guidance of Stellar’s various open-source projects, education and grant programs. As for the token distribution, the SDF is bound by its charter to distribute 95% of the native asset lumen (XLM) to ensure the operational and economic decentralisation of the network. Its operational costs are covered by setting aside 5% of the initial lumens and by accepting tax-deductible donations from the public.

In May 2017, with support from SDF, McCaleb and Brit Yonge announced Lightyear, a for-profit entity aimed at developing partnerships, support implementation and create products and services on top of the Stellar network. Lightyear had a separate board and a separate set of employees. In September 2018, Lightyear acquired Chain, a commercial company focusing on enterprise adoption of blockchain products that had formed partnerships with financial services companies such as Visa, Nasdaq and Citigroup. Chain was best known for developing the Chain Core infrastructure software, a permissioned blockchain platform catering to the financial services industry. According to Jeb McCaleb, the acquisition will contribute to building a future where money and digital assets move over open protocols. Equally important, he stated that the move is the “clearest evidence yet of the blurring of the once-firm division between private, enterprise blockchain solutions and public blockchains supporting a native cryptocurrency”.

As part of the merger, Lightyear will be renamed to Interstellar. Chain’s cloud platform, Sequence, will become a key component of Interstellar’s portfolio. Its offers allow clients to issue, manage and track assets transferred from private ledgers using the Stellar network. StellarX, a peer-to-peer trading platform for a range of assets including cryptocurrencies, fiat currencies, bonds and commodities which uses Stellar’s universal order book will also be part of Interstellar’s product offering. Adam Ludwin, Chain’s former CEO, will become Interstellar’s CEO while Lightyear’s co-founder Jed McCaleb will be CTO of Interstellar. The SDF will remain independent and will continue to focus on developing the open-source protocol and on supporting the community.

With Bitcoin, Stellar uses public key cryptography as part of its decentralised identity management. However, identities are not referred to addresses in Stellar. Rather, the network’s data structure is organised around accounts. Accounts are uniquely identified by a public key and saved in the ledger. Account access is controlled by private keys. Transactions must be signed by the private key that corresponds to that account’s public key.

Lumens (XLM) are the native currency of the Stellar network and are stored on the ledger. As outlined below, they enable transactions between different currencies and to move money around the world. The Stellar network’s built-in currency is not mined but all 100 billion lumens (originally called stellar) were created in the 2014 genesis transaction. The native token has two main functions. First, as part of its anti-spam function, lumens are required for transaction fees and minimum account balances in order to prevent bad actors from spamming the network through denial of service (DoS) attacks. Transaction fees (also called “base fee”) are currently 0.00001 XLM (100 “stroops”) and the minimum account balance is currently 0.5 XLM. Second, lumens can also serve as a bridge currency between illiquid or non-existing currency pairs provided that a liquid market exists between XLM and the thinly-traded currencies in question. Protocol-level rules specify that lumens have a 1% annual inflation rate. More importantly, the funds collected by the ledger as part of the transaction fees are also redistributed and are added to the pool of the 1% of new lumens. Each week, the network’s accounts vote on inflation allotment. Lumens are then distributed by the protocol to any account that gets a minimum of 0.05% of the votes. The inflation pool is then allocated on a prorated share to all accounts that received the minimum vote.

Stellar uses a novel consensus algorithm called the federated Byzantine agreement (FBA), as introduced in the “The Stellar Consensus Protocol: A Federated Model for Internet-level Consensus” by the SDF’s chief scientist and Stanford computer science professor David Mazières. The FBA claims to achieve robustness through so-called “quorum slices”. A quorum is a set of nodes that contains at least one slice of its members. Each participant (node) chooses an individual group of others (or quorum slice) in the network to agree on transactions. Every participant is free to choose the members he considers trustworthy to be in his quorum slice, thus ensuring decentralisation in that a member is not prescribed a given group which must be used for confirmation, but is able to choose himself the members he trusts. Put differently, consensus is achieved through a voting process amongst nodes. All nodes on the Stellar network make use of quorums and more specifically, quorum slices to achieve consensus.

The Stellar Consensus Protocol (SCP), originally derived from the Ripple protocol, is based on the underlying assumptions of FBA. Hence, the SCP differs from other consensus protocols in that network functionality does not depend on full agreement amongst nodes. Unlike typical quorums where all nodes must be in agreement in order to achieve consensus, quorum slices allow for greater consensus flexibility. That is, consensus can occur at a minimal level which prevents the network from slowing down too much. Essentially this means that nodes can enter slices (i.e. quorum subsets) that are in general consensus, even if each individual node within their own quorum is not. The foundation considers SCP to be the first provably safe consensus mechanism to enjoy four key properties simultaneously: 1. decentralised control, 2. low latency (i.e. fast transactions), 3. flexible trust (trust any combination of parties), 4. asymptotic security (protect against adversaries with vast computing power such as in 51% attacks). In contrast to other consensus models, the SCP also promotes organic growth through open membership. Given the modest computing and financial requirements, the SCP lowers the barrier to entry which in turn can potentially open up financial systems to new participants.

The Stellar platforms allow users and enterprises to hold, transfer and track a wide range of assets including US dollars, euros, bitcoin, stocks, and gold. Assets are specified by 1. asset type (e.g. USD or BTC) and 2. issuer (i.e. the account that created the asset). Holding a given asset in Stellar does not directly involve the physical asset (e.g. holding gold). Rather, it means holding credit from a particular issuer who agreed to trade its credit on the Stellar network for the underlying asset outside of Stellar. For example, Alice issues gold as credit on the network. If Bob holds gold credits, Alice and Bob have an agreement based on trust, also known as a “trustline”. Both have agreed that when Bob gives Alice a gold credit, she hands over the corresponding gold. Before holding a given user’s credit, issuers must first establish a trustline. All trustlines are recorded in the Stellar ledger. They also track account limits, current credit balances and liabilities. A trustline must always have sufficient balance to honour its selling and buying liabilities.

The Stellar network’s distributed exchange is another unique feature inherent to the platform. This multi-asset functionality allows for fast, cheap and transparent conversions of currencies and assets on a global scale. The network’s built-in ledger stores offers made by users to buy or sell currencies. Put simply, offers are publicly visible commitments by users to exchange one type of credit for another at a pre-determined rate. The aggregation of these offers form an orderbook. Given that an orderbook exists for each currency/issuer pair (e.g. Bank ABC/EUR for Crypto exchange XYZ/BTC), it allows users to seamlessly buy and sell currencies similar to foreign-exchange trading on a global marketplace. With regard to multi-currency foreign-exchange transactions, users can receive any currency through an “anchor” (see below) they added. For example, if Alice wants to send Bob USD, using her EUR balance, the network automatically places an offer to the distributed exchange selling EUR for USD based on the best possible exchange rate for the transaction. Likewise, in the absence of an available pair between offers to buy and sell, Stellar attempts to find offers based on a series of conversions from EUR to USD. For example, USD to BTC, BTC to XLM, XLM to EUR. Notably, account holders on the Stellar network can also exchange other assets through its decentralised exchange. A user can convert between two illiquid or thinly traded assets by “pathfinding”, i.e. the Stellar protocol decomposes the transaction in a series of trades between multiple tradable pairs of assets before the final conversion (also referred to as “hops”). Importantly, this chain of conversions is atomic, that is, all or none, so that the user is never left with an unwanted asset that was received during the pathfinding process. This features allows users to store money in any given asset (e.g. a stock or a bond) and convert it at any point. Additionally, if an account needs to submit a high-rate of transactions, it can do so through so-called channels which essentially use a base (source) account from which to send multiple transactions.

Another crucial feature of the Stellar network is the role played by “anchors”. The Stellar ledger records network participants’ funds as credit, which is issued by anchors to their accounts on the Stellar network. Conversely, network participants can make withdrawals by bringing anchors credit they issued. Participants thus entrust anchors with holding their deposits and honouring withdrawals. Anchors issue credits into the Stellar network for those deposits and act as a bridge between different currencies and the Stellar network. Similarly, banks and payment processors such as Paypal are good examples of real-world anchors: they issue credit to an online account which is essentially a virtual wallet in exchange for customer deposits. All money transactions on the Stellar network – with the exception of lumens – occur in the form of credit issued by anchors. Importantly, credited assets on the Stellar network can all be clearly identified by an asset code and the specific issuer. Equally important, anchors can vet credit holders through permissioned only access, and can also freeze credit held by an account, ultimately allowing a revocation.

One of the key advantages in the Stellar network lies in its transaction speed. It is significantly faster than other protocols such as Ethereum with respect to settlement time on its network for execution and secure confirmations. Stellar also has an edge in terms of fees. By design, transactions and accounts on Stellar incur very low costs. As of September 2018, USD 1.00 will cover about 500,000 transactions. Each account currently costs 0.5 lumens, or approximately USD 0.2. Transaction fees on the Stellar network equal the number of transactions times the base fee. The latter is currently 100 “stroops” or 0.00001 XLM which is deducted from the base account.

The distributed Stellar network is essentially a network of global decentralised servers that run the Stellar Core software including a distributed ledger. This ledger records every transaction in the system, with a full copy of the ledger hosted on each Stellar server that runs the protocol. The network’s robustness increases with the number of servers. To verify transactions, those servers communicate with each other and update the ledger every 2-5 seconds. The mechanism of validating transactions and syncing the ledger is also known as consensus. The Stellar ledger records a list of all the balances and transactions belonging to every single account on the network. The distributed Stellar network is made up of servers running the Stellar Core software. These servers are maintained by different individuals and entities. Stellar Core maintains a local copy of the network ledger, communicating and staying in sync with other instances of Stellar Core on the network.

The broader Stellar ecosystem encompasses both non-profit organisations and commercial entities. Stellar managed to increase its reach and adoption through a number of collaborations, most notably by partnering with technology company, IBM. The ongoing partnership spans a range of products, especially surrounding permissioned corporate blockchain solutions and cross-border transaction processing. According to IBM, Stellar was chosen “because of its design, which supports a scalable, secure digital asset registry and built-in distributed exchange that facilitates real time clearing and settlement across multiple asset types/classes.”. A specific payment system is the “IBM Blockchain World Wire” that can simultaneously clear and settle cross-border payments in near real-time using XLM as a bridge asset. The system can also be integrated with existing payment systems. In July 2018, Stronghold, a cryptocurrency trading platform based on the Stellar network launched a stablecoin on its parent network’s blockchain in collaboration with IBM. Regarding the public Stellar network, IBM also plans to introduce a token lifecycle management product that allows asset issuers to launch their own tokens.

A number of financial services companies such as Visa and consulting firms such as Deloitte have also established partnerships with Stellar or Stellar affiliates. In 2017, Wanxiang Group, a Chinese conglomerate, announced the launch of WanCloud, a new blockchain product which uses Stellar as one of the blockchain protocols included in the ecosystem.