Introduction to Stellar Network and Stellar Lumens XLM. Part 1

Stellar and Ripple. The XLM Token.

Stellar is a decentralized financial platform. It is similar to Bitcoin and Ethereum in that the network uses a decentralized ledger (also known as blockchain) that has a copy of all the balances and transactions on the network.

Another similarity between Stellar, Bitcoin and Ethereum is that all these networks consist of independent nodes (a node is a computer that has a full copy of the ledger), and are open-source, meaning that any person or entity could run a node.

Stellar was founded in 2014 by Jeb McCaleb, the creator of a series of projects that include peer-to-peer exchange platform eDonkey, cryptocurrency exchange Mt. Gox and Ripple protocol. McCaleb created Stellar after leaving Ripple in 2013. Before that, he created Mt. Gox and sold it to Mark Karpeles. The hacks of Mt. Gox have occurred after McCaleb exited the project.

McCaleb has built Stellar by modifying the Ripple protocol.


Differences between Stellar and Ripple

Because Stellar and Ripple have the same founder and are similar in that they both are financial protocols, one of the most common questions is the question about differences between Stellar and Ripple.

The first difference is that Stellar is run by the Stellar Development Foundation (SDF), which is a non-profit organization. The foundation doesn’t derive a profit from the transactions that occur on the Stellar network. It is funded via 5% fund of the originally created Stellar tokens.

In 2014, the foundation has also received a USD$3 million loan from Stripe, a global payment processing company. SDF has repaid the loan with 2 billion Stellar Lumens, which are the native token of the Stellar network. When the network launched in 2014, the token was called Stellar. In 2015, the network went through an upgrade and the token changed its name from Stellar to Lumen (or Stellar Lumen), so that there’s a difference between the name of the network itself, which is Stellar, and the token of the network, which is now Stellar Lumen.


Stellar Lumens XLM

The main role of the token on the network is to serve as a fee for transactions that occur on the network. As of the beginning of 2018, the fee is equal to 0.00001 Stellar Lumens. The presence of the fee serves as an anti-spam tool and protects the network from transaction flooding attacks.

During a transaction flooding attack, hackers would overload a network with spam transactions and delay the processing times of regular good faith transactions. However, when transactions come with fees flooding attacks become expensive and risky for the hackers. To further protect the network, every account on the network needs to have a minimum balance. As of the beginning of 2018, the balance has been equal to one Lumen. In addition to being an anti-spam tool, Stellar Lumens can serve as a bridge between currencies that do not have a big exchange market.

Transaction fees that the network collects go into inflation pool. The members of the network can vote on how the network spends the funds. Voting power is distributed based on stake, meaning that users holding more lumens get more voting power. All accounts get to vote weekly on who gets the inflation addition tokens. For example, if account 1 has 100 lumens in it and votes account 2 as inflation destination, account 2 gets 100 votes in the voting process.

The rate of inflation on the Stellar network is 1% per year. The distribution of new coins on the network occurs once a week. Any member of the network can submit a request for inflation operation to the network, but the request will be rejected if the time that has elapsed since the previous request is less than one week. If the time is more than one week, then nodes on the network compute the number of coins in the inflation pool by multiplying the number of coins in circulation by the weekly inflation rate and adding the fees since the last voting round. They then multiply the number of coins in circulation by 0.0005. Next, members of the network vote for who gets the inflation reward and the winners get their share of the funds from the inflation pool according to the votes they collect.