An Introduction To Stellar And XLM: Mission, Control, And Consensus

An Introduction To Stellar And XLM: Mission, Control, And Consensus

This project is an enigma. On the one hand, Stellar is not for profit, it doesn’t have owners or shareholders, and strives to be somewhat decentralized. On the other, Stellar is a compliance-focused protocol, and its directors often meet with shadowy organizations like the World Economic Forum. According to their website, the protocol seeks “to unlock the world’s economic potential by making money more fluid, markets more open, and people more empowered.” Fine, but, at what cost?

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According to the legend, Stellar is a Ripple fork. However, as you’ll see below, that’s not exactly true. Founder of the infamous Mt. Gox cryptocurrency exchange and co-founder of Ripple, Jed McCaleb, launched Stellar in 2014. Stripe financed the initial operation.  Joyce Kim, a lawyer, is his partner in the venture. 

The native currency of the whole ecosystem is called Lumen or XLM.

Securities.io interviewed the recently appointed CEO and Executive Director of the Stellar Development Foundation, Denelle Dixon. “The vision is big: Stellar and SDF hope to unlock the world’s economic potential by making money more fluid, markets more open, and people more empowered,” she told them.

On its website, the organization justifies its existence. “The way the global financial establishment is structured today, people are born into an economy just like they’re born into a political system. Stellar is a way out: it lets people participate in a worldwide, stable, financial network regardless of where they live.”

The controversial aspect is Stellar’s approach. It’s completely opposed to the cryptocurrency ethos. The company wants to build a bridge between the traditional banking system and the cryptocurrency space, but by following the traditional banking system’s rusty rules. “The software has always been intended to enhance rather than undermine or replace the existing financial system.” 

In other words, Stellar aims to provide a platform with which all financial actors can interact without any friction. All financial actors that are properly identified and approved by the legacy system, that is. 

As a consensus mechanism, Stellar doesn’t use Proof-Of-Work or Proof-Of-Stake. It uses its own Stellar Consensus Protocol (SCP.) For a formal definition, let’s quote the paper that Stellar presented at the Symposium on Operating Systems Principles. 

“With SCP, each institution specifies other institutions with which to remain in agreement; through the global interconnectedness of the financial system, the whole network then agrees on atomic transactions spanning arbitrary institutions, with no solvency or exchange-rate risk from intermediary asset issuers or market makers.”

And, what does the Stellar Consensus Protocol accomplish exactly?

“SCP lets Stellar atomically commit irreversible transactions across arbitrary participants who don’t know about or trust each other. That in turn guarantees new entrants access to the same markets as established players, makes it secure to get the best available exchange rates even from untrusted market makers, and dramatically reduces payment latency.”

For the system to function, Stellar relies on Federated Byzantine Agreements. For a description of what those do, let’s quote Bit2meAcademy:

“For the FBAs to function properly, participants must wait for the majority to reach a consensus. In this way, participants know which transactions are most relevant before starting to settle them. So when the majority of the network takes a position, the network accepts the transaction and makes it unfeasible to roll it back for an attacker.

In other words, the Stellar Consensus Protocol tends towards centralization and just ignores most of the problems that Proof-Of-Work solves. It does use significantly less energy, though.

• Almost all of the Stellar validators are corporate entities of some sort. Or are maintained by the  Stellar Development Foundation. However, “anyone can install the Stellar software and join the consensus process.”
• Each Stellar Lumen account must have a minimum of XLM in them. This minimum balance protects the network from spam accounts.
• The Stellar Lumen’s mission is to pay for gas to conduct operations inside the Stellar ecosystem.
• The Stellar ecosystem was not designed for direct payments. The idea is to provide a platform that serves as an intermediary in currency exchange.
• The system “doesn’t privilege any particular currency.”
• The code is open source and auditable by anyone.
• “The Foundation helps maintain Stellar’s codebase, supports the technical and business communities around Stellar,” great! “And is a speaking partner to regulators and institutions,” ow.
• Stellar recently signed a partnership with “crypto-asset risk management solutions” firm Elliptic. That means, “Elliptic’s monitoring, compliance, and analysis software now incorporates support for XLM, the native asset of Stellar.” Ow.
• With the recent protocol 13 update, Stellar allows “fine-grained control of asset authorization.” This means the issuer of an asset can deauthorize accounts and don’t let them use the asset. This means, more control and permissions.
• The Lumens had an inflation rate of 1% per year. In September 2019, Stellar removed inflation of Lumens. Also, the Stellar Development Foundation burned 55B of their Lumens. 

In its FAQ, the organization goes back to its origins:

“The old Stellar network launched in July 2014. The node software (stellard) was a modified fork of the Ripple node software (rippled). The ledger was completely new and contained no history from Ripple’s network.”

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So, the software was originally based on Ripple’s, but the ledger was brand new. Nevertheless, in 2015, when they released the Stellar Consensus Protocol, they re-wrote the software from scratch. From that point onwards, Stellar doesn’t share any code with Ripple.