Mark Tripoli I am HP Nonstop developer, who develops train control systems. I love open source projects and information and attempting to teach others new tools. I am a blockchain junkie and love its tech!

What is Stellar Lumen (XLM)?

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Back in mid 2017, I noticed my tiny pot of Ethereum had begun to take flight to the "moon". I had completely forgotten I even owned any, after a co-worker in 2016 recommended I check it out. So I jumped onto my Coinbase account to discover my new minuscule fortune. I honestly had no idea what ETH was all about at the time. I was quite familiar with Bitcoin (BTC) from my previous USB mining experience from a few years back. Although I was familiar with BTC from previous experiences, I had no idea that there were actually more currencies outside of Litecoin and Bitcoin. So I decided to delve into the realm of Blockchain outside of BTC to really understand all the different technologies out there. That led me to my greatest selection of cryptos out there, Stellar Lumens (XLM).

Ok, so clarify, I am not an XLM fan boi or think it's the end all be all of cryptocurrencies. I do see the enormous potential in its utility though. Yes, there are a tremendous number of great currencies out there that do wonderful things, but I truly feel like XLM is a sleeping giant when it comes to its utility. I digress though, I am here to discus, "What exactly is Stellar and what are Lumens?". I will go into some minor technical detail while also providing a high-level overview of how the Stellar network operates, and what exactly makes Stellar different from the rest. So here we go...

What is Stellar?
This is the first and most simple question which needs to be answered. What is Stellar? I am sure most of you reading this have heard of Ethereum and its ICO pump in late 2017. Many people will compare Stellar to Ethereum, when infact they are totally different networks and serve two different use-cases. Ethereum is Turing Complete and allows developers to create virtually any type of application on it. Whereas Stellar is not Turing Complete. This is what make Stellar a faster network and useful for simple applications, creating tokenized assets, etc. (more later). So please keep this simplistic description in mind when reading.

Stellar was created by Jeb McCaleb and Joyce Kim in 2017 and was forked from Ripple (Which Jeb helped created). Since then the Stellar code as been completed changed and refractored from is forked code, making it completely different from Ripple. According to Stellar's website, Stellar is, "Stellar is a platform that connects banks, payments systems, and people. Integrate to move money quickly, reliably, and at almost no cost.".

This is the key difference between ETH and XLM and, in my personal opinion, what makes XLM different from others in the space.

The quote above sounds all cool and fancy but what can Stellar actually do?

Features

  • Built in decentralized exchange (SDEX)
  • Decentralized open ledger (think database)
  • Can process thousands of transactions per second (which scales depending on hardware)
  • Utilizes simple smart contracts and multisignatures transactions
  • Allows holders to "sign up" to an inflation pool and recieve 1% inflation
  • Asset creation (similar to ETH)
  • REST API (Horizon) to communicate with Stellar network

How it works?

Decentralization of Network
Unliked traditional banking system which utilize one or more mainframes (usually HP NonStops) to handle customer transactions which are centrally owned by a particular bank, Stellar uses a decentralized network.

Credit: Stellar.org

So in laymens terms, instead of "Bank A" being the primary source of the network having its own cluster of mainframes powering the network, you, me, or even a BANK! can run its own individual node (server) which will connect to the network to power transactions made.

Ledger
Traditional banking utilizes normal databases to record balances. These balances are technically only available to the bank (but they obviously give their customers access to their account information). When a customer withdrawls or deposits funds from their account, simply put, the mainframe will:

  • Query the users account
  • Check for available funds (if withdrawl)
  • If user holds a valid ammount requested, will unlock the account
  • Process the transaction
  • Record the transaction and update the balance
  • Lock the account
  • Return new balance

This is assuming you are not using cash. Obviously if you are using cash there is no way of recording a transaction unless done manually.

The main problem with this method is that the bank has absolute control of the database. This means it is technically mutable, where they could technically "fix the books".

With Stellar, the Ledger is immutable and all balances and transactions are recorded and can never be changed or fudged to reflect something different. In-fact almost all cryptocurrencies utilize immutable ledgers. What's even more cool is that ANYONE can access the ledger. So you could technically query any and all accounts on Stellar and view their various balances and transactions made, with 100% certainty that it's truthful.

But just how exactly do all these nodes ensure that transactions are valid? Aha!

Consensus Method
This is the key to how the network actually works. Stellar utilizes a consensus method to ensure the validity of all transactions. Simply put, nodes will talk with one another and agree on transactions to ensure they are valid.

Each cryptocurrency utilizes its own consensus method or similar algorithm. With Stellar, it utilizes the Stellar Consensus Protocol or SCP (original right? /s).

Disclaimer: This part will be filled with technical jargon

Alright now for the first bit of fun. What exactly is the SCP?

SCP is a Federated Byzantine Agreement. I know, you may be asking yourself, "What the #$^! does that mean?". With the FBA, nodes do not have to be known to one another and verified before the transaction has occured. Membership into the network (aka running a node) is open, thus allowing for a decentralized network. Similar to the average Joe hooking up some ASIC miners in their basement to "mine" BTC. Since SCP relies upon trust, any group of nodes can trust each other and not someone else. This results in network-wide quorum slices. If this doesn't make sense, don't worry it's understandble. Take a look at how the FBA works explained Here this page does a decent job of explaining it and I dont wan't this to turn into a 3 hour read.

When it's all said and done, this entire process allows transactions to be processed in 2-5 seconds (although i've seen them happen instantly many times).

Anchors
Anchors are nothing more than entities that individuals use to hold their deposits (USD, Gold, etc.) and provide a tokenized asset of that deposit (USD Coin, Gold Coin, ...). This is a really cool idea of Stellar. Let's say Bank A is back in the picture. They want to issue a stable coin of USD which is 1-1 back by the Dollar. This anchor will create a new asset (which we will call USDC for this) and issue it on the SDEX (more later). Maybe you're in the market to trade some XLM for USDC, you will simply perform a buy order for USDC and, upon completion, will receive USDC. When the time comes and you want to cash USDC in for actual USD. You will turn in your USDC and the issuer will provide you will the payout in some form.

This is how Stellar is able to tokenize real-life tangile objects into tokenized, digital assets. There are endless possbilities here on what you can tokenize. Some recent and upcoming items becoming tokenized by various entities are:

  • Gold
  • Silver
  • Diamonds
  • Oil Bonds
  • Many many fiat currencies

This give the average, everyday Joe access to purchase these items without actually having to physically own them, until they want to receive them. Without the need to be on a centralized exchange where you never actually own the physical object. With trades costing fractions of a penny! Say goodbye to those pesky trading fees. Oh, and you can also place a sell order on the SDEX at a price of your choice where anyone can buy that asset from you. Or you can send your grandma a nice Gold Coin for Christmas.

Now you may be asking yourself, "How can I trust they will do that?". Alas! This is where Trust comes into play.

Trust
When you want to recieve any non-native asset (i.e. XLM), you must trust the issuer. The issuer is nothing more than the account which the custom asset derived from. Essentially you are saying you trust that this issuer will honor your request to turn in their asset to receive the physical or digital object from them. Unlike using a centralized entity like PayPal where you deposit money into your PayPal account and they credit your account with that amount and you know you'll always get that amount. You must verify that the issuer is trustworthy (welcome to decentralization!). You are in control of your finances, so always make sure you're working with a reputable source. If you have questions about an issuer contact the Stellar.org team or the Stellar subreddit, there are many who will help you. Just for the love of god don't go to the /r/cryptocurrency subreddit.....

When you trust an issuer, you will create a Trustline. This will allow you to recieve that particular asset and hold it.

Decentralize Exchange
Personally, I find this to be the coolest thing about Stellar. I will describe what the SDEX is and help you understand it on a basic level.

Credit: Stellar.org

With traditional cryptocurrency and stock exchanges, there is a centralized entity (Binance, Coinbase Pro, Robinhood, Wallstreet, you get the picture) which either operates the exchange or taps into one of the major exchanges. These exchanges have their own servers, databases, and all that other fun stuff.

These exchanges in many ways work in a similar way to how banks work, and even use the same type servers! But what the key thing to know is, you never actually hold the assets you own (private keys, stocks, etc.). When you deposit, let's say BTC, into an exchange. You are doing nothing more than depositing your coin into their wallet. Then then credit you with that amount on your account. When you place any sort of trade they will perform a lot of the same functions that banks do and your balances and transactions are logged into their private databases. You are essentially trusting them to hold your coins for you. It's extremely risky when you think about, and you may have heard of all the cryptocurrency exchange hacks over the years.

What makes Stellar so different is their SDEX is BUILT INTO the network. Meaning any and all trades occur on the Stellar network. So it inherits all of the benefits of an immutable ledger and the SCP. All of your trades are also reflected on your account, where YOU own the private key. So you are always in control of your finances. All operations (trading functions) are similar to that of any other exchange so I will not go into the details of how that works.

What I would like to do now is explain the SDEX and different platforms. Think of the SDEX as the server. There are a growing number of Stellar exchanges springing up such as StellarX, Stellarport, Stronghold, etc. These are nothing more than frontend clients which tap into the network. They give endusers (you) a nice interface for you to perform your trades. The coolest thing is, you can use one or more of these exchanges simultaneously, without the need to transfer funds. All you need to do is log in via your private key, ledger, trezor, or other hardware device and begin trading. If you no longer wish to use their services, no worries. You have the keys which means you are in control.

Use Cases

With all of this elegant information, you may be wondering what is possible with Stellar. What can I do with all of this functionality. Well here are somethings to give you an idea.

  1. Create a video game which has its own economy. Say an RPG, you want your game to have a fixed number of resources in the economy. You could realistically, create assets for: Wood, Coal, Iron, Stone, Fiber, etc. and issue them on the SDEX. Then within your game, you could have the game tap into the SDEX where players could purchase these items using XLM. Where they would never even know they are using crypto. They could also purchase these items on the SDEX then transfer them into their game account. Something similar to buying gold for WoW from some sketchy chinese website.
  2. Say your from a small village in Cameroon. Every saturday everyone goes into town to purchase their food, fuel, etc. Since cell phones with internet access are readily available. You (being a merchant) could tokenize the items you are selling, where members from other villages could purchase the tokenized asset and redeem it when they arrive to the town. Guaranteeing them that item when they arrive. You will have 100% confidence that they have purchased that item and they will recieve it.

Conclusion

As I have gone over, the Stellar network is an extremely powerful and functional blockchain. It provides fast, reliable transactions with an immutable ledger. The functionality is similar to Ethereum but is more suited to asset tokenization and payments. I am an avid supporter of Stellar and everything they have in their pipeline. In the future I will post some basic Java and Python tutorials of how to use their API wrappers to create applications yourself. If you have any projects you are interested in developing and want some support, shoot me a message or comment and lets see what we can do! If you have any comments drop a comment below!

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