What is Stellar and how does it work? This question has been gaining attention as global financial institutions, fintech startups, and individual users look for blockchain solutions that can make cross-border transactions cheaper, faster, and more inclusive. Stellar, launched in 2014, has positioned itself as a key player in bridging traditional finance with blockchain technology. Unlike Bitcoin, which is primarily seen as a store of value, or Ethereum, which is a hub for decentralized applications, Stellar was designed with one clear mission: to facilitate the seamless transfer of money across borders.
This investigative piece explores Stellar’s origins, technology, real-world use cases, partnerships, challenges, and its role in reshaping global financial systems.
The Origins of Stellar
Stellar was founded by Jed McCaleb, who also co-founded Ripple, and Joyce Kim, a former lawyer turned entrepreneur. While Ripple focused on serving banks and large financial institutions, Stellar’s mission was broader: financial inclusion. The idea was to create a decentralized network that could serve both large organizations and the world’s unbanked populations.
At its core, Stellar operates the Stellar Development Foundation (SDF), a nonprofit dedicated to maintaining the network and fostering adoption. Unlike many profit-driven blockchain projects, SDF has continuously emphasized accessibility and transparency.
How Stellar Works: The Technology Explained
The Stellar Consensus Protocol (SCP)
At the heart of Stellar is the Stellar Consensus Protocol (SCP), a unique consensus mechanism distinct from proof-of-work (Bitcoin) and proof-of-stake (Ethereum). SCP uses a federated Byzantine agreement (FBA) model, which allows for faster transaction confirmation without the energy-intensive mining process.
- Speed: Transactions typically settle in 2–5 seconds.
- Cost: Transaction fees average 0.00001 XLM (Lumens), making it one of the cheapest networks for payments.
- Scalability: The network processes thousands of transactions per second.
This efficiency makes Stellar particularly suitable for cross-border payments, micropayments, and remittances.
The Role of Lumens (XLM)
Stellar’s native currency is Lumens (XLM). While XLM is not designed to be a global digital dollar, it plays an essential role in preventing network spam and facilitating multi-currency transactions. For instance, if a user wants to convert euros into Philippine pesos, Stellar uses XLM as an intermediary currency to make the swap seamless and low-cost.
Use Cases of Stellar
1. Cross-Border Remittances
One of Stellar’s biggest promises is reducing the cost of international money transfers. According to the World Bank, global remittances surpassed $860 billion in 2023, with fees averaging around 6%. Stellar aims to cut these costs drastically, making it more affordable for migrant workers to send money home.
2. Partnerships with Financial Institutions
Stellar has secured partnerships with banks, fintech startups, and even central banks. Notably, IBM partnered with Stellar in 2017 to develop the World Wire platform, designed for cross-border settlements between banks. While the initiative faced adoption hurdles, it showcased Stellar’s potential in global finance.
3. Stablecoins and Tokenization
Stellar supports the issuance of stablecoins and tokenized assets. For example:
- Circle’s USDC, one of the most widely used stablecoins, is available on Stellar.
- Smaller fintech firms issue localized stablecoins to represent national currencies, enabling smoother cross-border transactions.
4. Financial Inclusion
Stellar’s low transaction fees make it an attractive option in developing economies where banking services are limited. Through mobile-based wallets built on Stellar, individuals can access digital financial services without traditional bank accounts.
Stellar vs. Ripple: A Tale of Two Visions
Because of Jed McCaleb’s involvement in both projects, Stellar and Ripple are often compared. Both networks aim to streamline global payments, but their philosophies diverge:
- Ripple (XRP): Focused primarily on banks and financial institutions.
- Stellar (XLM): Emphasizes open access for individuals, NGOs, and smaller businesses alongside financial giants.
This distinction has allowed Stellar to carve out a niche among organizations that prioritize financial inclusion over institutional efficiency.
Challenges Facing Stellar
Despite its potential, Stellar faces several hurdles:
- Adoption Barriers: While the technology is robust, widespread adoption among banks and remittance companies has been slower than expected.
- Competition: Networks like Ripple, Ethereum, and newer blockchains such as Solana and Algorand are competing in the same payments space.
- Regulation: With increased scrutiny on digital assets, Stellar’s role in cross-border money movement could attract regulatory challenges.
- Awareness Gap: Unlike Bitcoin or Ethereum, Stellar is less recognized by mainstream users, which limits its retail adoption.
The Future of Stellar
Stellar’s trajectory hinges on whether it can continue to expand its ecosystem of financial partners and decentralized applications. Its focus on real-world utility rather than speculation positions it well for a future where blockchain technology powers global finance behind the scenes.
Emerging opportunities include:
- Central Bank Digital Currencies (CBDCs): Stellar has already been explored by some central banks for digital currency issuance.
- Remittance Growth: As cross-border migration increases, demand for low-cost remittances will grow.
- Decentralized Finance (DeFi): Stellar’s compatibility with stablecoins may allow it to tap into DeFi markets.
If these opportunities align with growing institutional trust, Stellar could evolve into a backbone for cross-border financial infrastructure.
FAQs About Stellar
What is Stellar and how does it work in simple terms?
Stellar is a blockchain designed to make money transfers faster and cheaper. It uses Lumens (XLM) as a digital currency to help convert one currency into another and confirm transactions quickly.
What is Stellar and how does it work compared to Ripple?
Stellar is similar to Ripple in its focus on payments but differs in philosophy. Ripple targets banks and large institutions, while Stellar aims for open financial access for individuals and smaller entities.
What is Stellar and how does it work for remittances?
Stellar allows migrant workers to send money internationally at low fees and fast speeds, making it a strong alternative to traditional remittance services like Western Union.
What is Stellar and how does it work with stablecoins?
Stellar enables the creation and transfer of stablecoins such as USDC, allowing businesses and individuals to transact using digital versions of traditional currencies.
Conclusion: Stellar’s Role in the Future of Finance
So, what is Stellar and how does it work in the broader financial landscape? It is a blockchain that prioritizes low-cost, fast, and inclusive transactions, with applications ranging from remittances to tokenized assets. While challenges remain, Stellar’s nonprofit-driven approach and technological efficiency make it a unique player in the blockchain space.
As global finance continues to digitize, Stellar’s future will likely depend on its ability to strike partnerships, navigate regulations, and remain relevant in an increasingly competitive blockchain market. Whether it becomes a backbone for remittances, a platform for CBDCs, or a driver of financial inclusion, Stellar is poised to remain an important part of the blockchain narrative.