What Is Stellar and Lumens?
Stellar is a cryptocurrency which uses tokens called Lumens and trades under the symbol XLM.
Launched in 2014 it is a cross border payment and transfer currency network aimed towards developing economies and financial markets.
The Stellar network connects banks, payment systems and individuals over a decentralised protocol. Originally the company behind the cryptocurrency, Stellar Foundation, created 100 billion Lumens.
However, in November 2019 Stellar burned around 50% of their supply, with the company saying the reduction was taking the total available coins down to meet the network’s needs.
How Does Stellar Work?
Stellar employs blockchain technology like most digital currencies, using a network of servers to update and verify transactions to a public ledger. Where Stellar differs is in not using the whole community of its users to validate and add transaction blocks to the ledger.
Stellar instead employs a consensus protocol which only uses selected computers or nodes. It involves an algorithm known as the Federated Byzantine Agreement, where only trusted nodes or servers are selected, who in turn choose one more set of trusted nodes.
A transaction still needs to be approved by all the trusted nodes, but by only using a part of the community transactions can be processed faster and at less cost.
Stellar Lumens are used by the community to send money and to convert currency. Lumens were introduced to ensure the Stellar cryptocurrency remained a fast and efficient payments system.
A minimum balance of lumens plus a small transactional fee were considered an appropriate way to prevent the Stellar’s ledger from being misused. The benefits of Stellar depend on the ledger being quick and easy to maintain, which in turn meant it was more open to abuse without some form of barrier in place.
What Are the Use Cases for Stellar Lumens?
A primary use of Stellar is making multi-currency transactions, using Lumens as a bridge between currencies. For example you can make a payment or transfer money in US dollars to be received in Euros, using Stellar Lumens as an intermediary digital currency to reduce exchange costs.
Stellar is also useful in easing the process of sending money between currencies which are not so easily paired. Stellar cross-border transactions are also rapid, taking between three to five seconds to complete.
Another use case for Stellar is within developing markets where access to banks and financial institutions is underserved.
By using micro financial institutions that have the necessary banking platforms to use Stellar, residents can send and receive money without having to access central banks and central authority institutions.
Further assisting its aim to be a major player in cross border transactions, Stellar signed contracts with companies including IBM, Deloitte and TransferTo. The deal with IBM sees Stellar look to increase its proportion to 60% of cross border payment transactions in the South Pacific, while TransferTo will introduce Stellar to over 70 countries.
This fits with the ambition to make Stellar accessible across the world, providing affordable, integrated payment transactions for the ordinary person, whether it is in a national or digital currency.