Stellar (XLM)

What Is Stellar?

Sending $200 from the United States to the Philippines through a bank can take days and cost more than $10 in fees and exchange markups. Stellar was built in 2014 to make that transfer as cheap and fast as sending an email. Jed McCaleb, who had earlier co-founded Ripple, launched it with lawyer Joyce Kim, and the non-profit Stellar Development Foundation (SDF) has supported the network ever since.

The network does not try to replace the dollar or the peso. Instead, it lets regulated businesses called anchors issue digital tokens backed one-for-one by money they hold, such as dollars in a bank account. A user deposits cash with an anchor, receives the matching token on Stellar, sends it anywhere in seconds, and the recipient redeems it with another anchor for local currency. Circle issues USD Coin natively on Stellar, and MoneyGram has used the network since 2021 to let users convert USDC to cash at its locations.

That design makes Stellar a settlement rail more than a platform for speculation. To see why the lumen still matters, you need to look at how Stellar agrees on transactions and how it converts one currency into another.

How Does Stellar Work?

Stellar uses the Stellar Consensus Protocol (SCP), a form of federated Byzantine fault tolerance designed by Stanford professor David Mazières. There is no mining and no staking. Each validator chooses a set of other validators it trusts, called a quorum slice, and a transaction becomes final once enough overlapping slices agree on it. A new ledger closes roughly every five seconds, and closed ledgers are never reversed.

The network also includes a built-in decentralised exchange. Anyone can post offers to trade one Stellar token for another, and the ledger matches them. This order book makes possible Stellar’s most distinctive feature, the path payment, which converts currencies in the same transaction that sends them.

Suppose a freelancer in Germany wants to pay a designer in Mexico 1,000 MXN, but the freelancer holds only a euro token. With a path payment, the freelancer specifies “send up to 52 EUR, recipient must receive exactly 1,000 MXN.” The network searches its order books for the cheapest route. If no one directly trades euros for pesos, it can sell the euros for XLM and then sell the XLM for pesos, all in one atomic step. Either the whole conversion succeeds within the limit, or nothing happens and the freelancer keeps the euros.

This is why XLM exists. As long as each local currency has a liquid market against XLM, any two currencies on Stellar can reach each other through it, even if no one trades them directly.

Stellar vs. XRP

Both networks started from the same idea and still compete for cross-border payments. The practical difference lies in who controls the token supply and who the product is sold to. XRP is closely tied to a company that holds and sells a large share of it, while most XLM not yet in circulation sits with a foundation that distributes it through grants and partnerships.

Why Is Stellar Important for Traders?

XLM’s value depends on how much economic activity uses it as a bridge and a reserve, not on fees, which are too small to matter. When most payments on Stellar move stablecoins directly between anchors, they never touch XLM, so growth in network volume does not automatically raise demand for lumens. Traders who treat XLM as a proxy for Stellar adoption should watch how much of that volume actually routes through XLM.

Supply decisions have moved the market directly. In November 2019 the SDF burned about 55 billion XLM, cutting total supply roughly in half, after the community had voted to end the protocol’s 1% annual inflation earlier that year. Because the foundation still holds a large share of the remaining supply, its distribution schedule remains a source of selling pressure that holders cannot control.

The consensus model carries its own trade-off. SCP lets validators pick whom they trust, but in practice most rely on a small group of well-known organisations, including the SDF. In May 2019 the network halted for about an hour when several of those validators went offline at once. No funds were lost, yet the incident showed that SCP chooses safety over liveness: when trust is concentrated, the network prefers stopping to risking a conflicting ledger.

Key Takeaways

• Stellar is a payments blockchain where regulated anchors issue tokens backed by real currencies, which users can send worldwide in about five seconds.
• XLM pays fees, funds the minimum balance every account must hold and acts as a bridge currency when no direct market exists between two tokens.
• Path payments convert and send money in one atomic transaction, so the sender pays in one currency and the recipient receives another.
• The Stellar Consensus Protocol relies on validators choosing trusted peers rather than mining or staking, and it halts rather than risks a fork when trust breaks down.
• Demand for XLM grows only when payments route through it, and the foundation’s large holdings remain a supply risk for holders.