Stellar (XLM), explained: What it is and how it works
2025-02-04
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 What is Stellar? 
Stellar is a decentralized payments network designed to offer fast, secure and cost-effective cross-border transactions. Established in 2014, Stellar facilitates near-instant global payments and currency exchanges.
The platform connects individuals, banks and payment systems to transfer currencies reliably and almost instantaneously at a fraction of traditional costs. It has positioned itself as a robust cross-border remittance tool, enabling the transfer of all forms of money and value, whether a fiat currency like the US dollar or euro or a cryptocurrency such as Bitcoin BTCUSD.

Stellar is a decentralized, open-source blockchain run by independent validators. The Stellar Development Foundation (SDF) is a nonprofit, non-stock organization founded by Jed McCaleb. It maintains the Stellar protocol’s codebase, supports technical and business communities within the ecosystem, and engages with regulators and institutions on policy matters. 
The SDF’s operations are funded by a reserve of digital assets, known as lumens XLMUSD, which were allocated at the protocol’s inception. The use of these holdings is governed by specific mandates.
On Oct. 15, 2020, the SDF announced that Stellar will be an official USD Coin USDCUSD blockchain. USDC is a stablecoin issued by Circle.
This led to the October 2021 collaboration between the SDF and MoneyGram, a global financial technology company, transforming settlement flows by facilitating near-instant settlement in USDC. This partnership allowed users of digital wallets connected to the Stellar network to access MoneyGram’s global retail platform, creating a bridge between digital assets and local currencies.
In September 2023, EURC, Circle’s euro-backed digital currency, became available on the Stellar Network, enabling real-time, global payments.
The network enabled full-featured smart contracts in 2024. It aims to transform international payments and remittances, making them safer, faster and more affordable, as well as to connect real-world assets to decentralized finance to support products offering the full range of everyday financial services.
 How Stellar works 
The Stellar network is an open-source, public blockchain that facilitates seamless and cost-effective interoperability between global financial systems and currencies. 
Stellar’s unique proof-of-agreement (PoA) consensus mechanism is called the Stellar Consensus Protocol (SCP). This algorithm makes Stellar a better option for representing real-world value by securing the network through reputation rather than through computing resources or staked crypto tokens. It is also more energy-efficient and cost-effective than most blockchains.
The Stellar network comprises computers, called validators or validator nodes, that agree on the transactions to be added to the blockchain. The SCP is the rule those validators follow to keep a common ledger and validate and finalize transactions to update their state.
This is how blocks are added to the Stellar blockchain:
The Anchor platform, an open-source set of tools built on Stellar, makes it straightforward for existing banking systems to connect to the Stellar network, allowing for smooth cross-border transactions. 
Anchors serve as trusted entities, depositing fiat currency and issuing digital tokens of equivalent value on the network, providing seamless interoperability between fiat and tokenized assets. Anchors also play a key role in enabling quick, low-cost payments and remittances worldwide by combining financial institutions with the Stellar blockchain. 

 Role of Lumen in Stellar 
The Stellar network uses its native token, Lumen (XLM), to maintain efficiency. Without a nominal fee, the ledger could become overloaded with spam or misused, affecting its performance as a fast and reliable payment system.
XLM is used to denominate network costs, helping prevent any bias toward specific fiat currencies and maintaining independence from economic or political factors. It allows users to access various Stellar features, such as payments, asset tokenization and the development of decentralized finance (DeFi) applications.
Unlike many other cryptocurrencies, XLM is not mined or distributed as rewards. When Stellar launched, 100 billion XLM was created, with an initial annual inflation of 1%. 
However, this inflation mechanism was eliminated by a community vote in 2019, and the total XLM supply was subsequently reduced to approximately 50 billion. Of these, 28.9 billion are in circulation, while the SDF holds the remainder for network development and promotion as detailed in the public SDF mandate.
Stellar requires each account to hold a minimum balance of one XLM and requires transaction fees, at the network minimum of 0.00001 XLM per operation, and increase dynamically based on network demand and smart-contract resource consumption. This ensures the network remains accessible and affordable.
To buy XLM:
 How to set up a Stellar validator 
Stellar is an open-participation network, meaning anyone can install Stellar Core on a server and connect it to the network to validate transactions and participate in network governance. 
Here are the steps to set up a Stellar validator:
Step 1: Choose your node type — Stellar Core has the following kinds of validators:
Step 2: Meet computing requirements — Stellar Core doesn’t require specialized hardware and can be run on many consumer machines, including Raspberry Pi. The specs suggested in the Stellar docs are 8x Intel Xeon vCPUs at 3.4 GHz, 16 GB RAM and 100 GB NVMe SSD (10,000 iops).
Step 3: Network access — Stellar Core relies on a peer-to-peer (P2P) network to maintain a synchronized ledger. This necessitates that a validator has specific TCP ports open for incoming and outgoing connections.
Step 3: Install Stellar Core — Download and install the Stellar Core software package for your operating system.
Step 4: Configuration
 Use cases of Stellar 
Stellar offers many features, such as cross-border transactions, asset issuance and more, making it suitable for various applications. 
Let’s explore Stellar’s key use cases, from global remittances to decentralized finance (DeFi) and beyond, in a bit more detail.
Payments
Stellar supports cross-border financial applications, including remittances, peer-to-peer (P2P) payments, payroll, supplier invoices, government transactions and e-commerce payments. 
Depending on the costs involved, payment service providers set their own fee structures, with some charging for transactions or forex. Stellar’s transaction fees are exceptionally low and cost a fraction of a cent on average. 
Fees are dynamic, meaning they start at the network minimum and switch to an auction-based system when network usage is high and block space is under contention. In addition, smart contract transactions use a fine-grained fee structure that calculates fees based on resource consumption for read, write, compute and storage designed to keep pricing fair and optimize block efficiency.
As for compliance requirements in payments, businesses using Stellar must address their obligations based on their services and operating regions. Financial institutions offering on-/off-ramps ensure compliance with Know Your Customer (KYC), Anti-Money Laundering (AML), Combating the Financing of Terrorism (CFT) and sanctions regulations, helping maintain secure and legal operations across the network.

Asset tokenization
Stellar has built-in features that allow issuers to tokenize real-world assets efficiently and cost-effectively. The platform facilitates tokenization without a role for smart contracts, thus simplifying tokenization and reducing development time, counterparty risk and errors. Moreover, users get controls for approving, revoking and freezing assets, which ensures accurate distribution. 
You can tokenize fiat currencies as stablecoins pegged to their value. Assets like money market funds, private bonds, stocks, commodities and others are convertible into tokens reflecting the value of the original asset. The Stellar Asset Sandbox enables issuers to explore the tokenization process on the Stellar testnet without coding.
Here is the asset tokenization process on Stellar:
Decentralized finance (DeFi)
Develop DeFi applications on the Stellar network, leveraging its infrastructure and access to a global ecosystem of on-/off-ramps, stablecoins and assets. 
You can use Soroban, a Rust-based smart contracts platform designed for scalability to build applications. Soroban forces developers to use only a narrow subset of the Rust language and specialized libraries for most tasks. 
You can also invoke a Soroban contract by submitting a transaction containing the new operation:

You can build various DeFi applications, including borrowing, lending and staking protocols. To enhance the functionality of your smart contract, you may integrate it with wallets, bridges and oracles.
Notably, projects looking to build on top of Stellar can launch with the Stellar Community Fund (SCF), an open-application awards program for supporting developers building on the Stellar network.
 Stellar’s role in CBDCs and tokenized assets 
Stellar’s efficient, low-cost and scalable blockchain architecture makes it a viable option for issuing central bank digital currencies (CBDCs). These same qualities have attracted financial firms like Franklin Templeton and WisdomTree, which have used Stellar to launch tokenized assets.
The network’s compliance-friendly design, asset control features and fast settlement times align with regulatory requirements, making it an option for institutions seeking approval from the US Securities and Exchange Commission. Its ability to support regulated financial instruments positions Stellar as a platform of interest for financial firms and regulators.
Franklin Templeton established a tokenized money market fund on Stellar, leveraging its transparency and programmability, while WisdomTree explored blockchain-based financial products using its interoperability and compliance framework.
As the industry debates tokenized assets and the adoption of blockchain in institutional finance, Stellar’s experience with regulated financial instruments remains highly relevant.
Did you know? CBDCs are programmable. Organizations can issue CBDCs to their employees for specific purposes and locations. As digital assets, CBDCs are also vulnerable to unauthorized access and cyberattacks.
 How does Stellar compare with other blockchain networks? 
What sets Stellar apart from other blockchain networks is Stellar’s emphasis on the financial inclusivity of individuals. 
While blockchain projects usually focus on corporate and business solutions, Stellar aims to build a global digital economy that benefits individuals, especially in underserved regions. It achieves this with a fully interoperable financial ecosystem, offering developers various application programming interfaces (APIs) and software development kits (SDKs) to integrate seamlessly.
Stellar is an efficient solution for global fund transfers. Transactions are processed quickly, within two to five seconds, and fees are very low. On Stellar, the minimum balance for users is 1 XLM, and the minimum per-transaction fee is 0.00001 XLM. This makes it much more affordable compared to international wire transfers, which can cost as much as $75, depending on the bank and transfer amount.
Stellar combines affordability, speed and inclusivity to emerge as a transformative force in international finance. The following table illustrates how Stellar compares with major blockchain platforms: 

Did you know? The United Nations utilizes the Stellar network to disburse humanitarian aid to Ukrainians.
 Stellar vs. Ripple — A comparison 
Stellar and Ripple are often compared because of two common factors — focus on payment networks and ties to Jed McCaleb, the founder of both projects. While both projects have similarities, their goals, target markets and technologies differ greatly.
Ripple focuses on institutions looking to collaborate with global banks to transform remittance processes by replacing established networks such as SWIFT. On the other hand, Stellar aims to promote financial inclusion by focusing on individuals and encouraging global financial literacy.
Initially, the two projects had greater similarities in terms of functionality and codebase. However, Stellar has evolved to adopt the Stellar Consensus Protocol (SCP), which employs a Federated Byzantine Agreement model. Ripple, on the other hand, uses a Ripple Protocol Consensus Algorithm (RPCA) mechanism.
Furthermore, the token models of both projects also vary. Ripple’s XRP (XRP) has a fixed supply of 100 billion tokens and a deflationary mechanism driven by token burning. Stellar’s XLM started off with the same total supply, but the SDF burned 50 billion XLM in 2019, reducing XLM supply to just over 50 billion XLM.

 Can Stellar achieve mass adoption? 
Stellar has the potential to achieve mass adoption through its fast, low-cost cross-border payment solutions, strategic partnerships and focus on financial inclusion, but it must overcome competition, volatility and awareness challenges to succeed.
Stellar has long been hailed as a promising blockchain platform, focusing on fast, low-cost cross-border payments and financial inclusion. Yet despite its strengths, the question remains: Can Stellar truly achieve mass adoption, or will it remain a niche player in the crowded blockchain space?
One of Stellar’s most compelling features is its energy-efficient SCP, which allows for thousands of transactions per second at minimal costs. This scalability, combined with its focus on regulatory compliance, makes it an attractive option for institutions and individuals alike. 
Moreover, its integration with stablecoins like USDC addresses the volatility of its native token, XLM, making it more practical for everyday use. 
Stellar’s commitment to financial inclusion is also commendable, as it aims to empower the unbanked by providing affordable financial services — a mission that could drive adoption from the ground up.
However, Stellar is not without its challenges. For instance, Stellar faces competition from Ripple, which shares a similar use case but has a more established presence in the financial sector. In addition, while Stellar boasts impressive partnerships, mainstream financial institution adoption has been slower than some anticipated.
Furthermore, Stellar’s decentralized nature has been called into question due to the SDF controlling a significant portion of the XLM supply (over 40%), raising concerns about potential influence.
The blockchain space is evolving rapidly, and Stellar’s ability to adapt and innovate will determine whether it will become a global payment solution or remain a promising yet underutilized platform. The stakes are high, and the world is watching.