How Does Stellar Work?

Before it is even possible to interact with its network, we need to understand how does stellar work. First, the creation of an account is required. Each account is equipped with a public key and cryptography is then used in order to confirm the transaction security.

Let’s say that you are interested in trading USD for EURO and there’s no pair that is available. The network will trade USD for XLM and will make XML for the Euro exchange. In some cases, none of the pairs are liquid so the network has to take another path. For example, the path could look something like USD for ETH, ETH for XLM and XLM for EUR. This network will always find the least expensive and fastest path to deliver the funds.

Stellar is constructed based on the idea of the gateway which represents entities that allow people in and out of the network. In order to use the network, the trust in gateways you use is required rather than trust the other members in the entire network. The concept is comparable to have trust in your bank that keeps your deposit and in the network, you choose the trust level assigned to the gateway by setting the needed policies and putting deposit limits on the gateway.

Currency balances are represented as the credits from the gateway so if a user deposits 100 EUR into the gateway, it will issue XLM credit equivalent to 100 EUR. The credit issuance will be successful if the user has the trusted gateway for 100 euros or more. When you are cashing out, the credits will be returned to the gateway and then it sends you your currency of choice. Since it’s a distributed and open network, anyone can start their own gateway and take their pick of the trust gateways. An API is a combination of tools and building blocks that will assist in the creation of software applications.

Stellar’s Github page described it as:

 “Horizon is the client-facing API server for the Stellar ecosystem. It acts as the interface between stellar-core and applications that want to access the Stellar network. It allows you to submit transactions to the network, check the status of accounts, subscribe to event streams.”

The Stellar network consists of servers that run the Stellar core software and are later maintained by various entities and individuals. The core preserves a copy of the ledger and stays synced with other elements of the Stellar core on the network. Stellar uses a consensus protocol which is referred to as a ‘’federated byzantine agreement.’’

Basically, it works on the idea of an open membership system which means that users can take the function of the validation node and can allow other nodes without having to rely on a central authority recommendation. This makes the network very decentralized and there are now more than 140 active nodes working on the network. The low participation number is very common because there are no incentives for nods to maintain the blockchain.

In Stellar, the validators receive no rewards and maintain the network based on the free will. The network utilized its own ledger and is maintained by consensus and not on mining. Each node is in communication with the other nodes and in trust that they will not collude to produce the same result.  Lumens is the native token that is used in the Stellar Network and one of its functions is as a mediator currency that can be used in multi-currency transactions in cases when a bigger market for currency pairs does not exist. So how does stellar work actually?

It is extremely versatile which makes it appropriate for different types of transaction and it works perfectly in assisting with micro-payments because it can handle remittances without the issues of forex exchanges and settle payments almost instantly. It is possible to think that XLM is a faster version of Bitcoin and is more scalable and does not require mining. It is also tradable anywhere across the world in about 5 seconds, therefore, it is suitable for cross-border transactions.

This is mainly true if your goal is to conduct transactions in parts of the world where there are not a lot of banks and financial institutions. When sending money abroad, the fees are negligible with XLM compared to other companies such as Western Union. Transaction costs reach 0.0001 XLM which is less than $0.01. There’s another reason why the network has its own token and the token acts as a tool that prevents spamming the network which is interesting how does Stellar work.

Since every transaction has a fee that is paid in XLM, this acts as a foolproof way to prevent the users from performing an attack on the platform such as the Denial of Service attack in order to flood out the network. XLM also acts as a security feature that stops the attacks from happening. XLM is able to process 1,000 transactions per second at less than a penny. This fee is in place to prevent the network from undergoing attacks. Stellar’s consensus protocol allows the payments to be made fast and securely which enabled a number of business solutions powered with Stellar.

Stellar can be used in the Mobile Money sector. For example, the financial technology developer in Africa Parkway Project uses Stellar in order to connect to Niagara’s five biggest telecom companies and allows the customers to deal with mobile money to send and receive money with one another. Deloitte as well, being one of the largest financial consulting firms in the world, uses Stellar for a prototype which reduces the costs by 40%. The prototype resolved an average transaction time of 5 seconds and will be used for clients that reside outside of the US. For many who asked how does stellar work, it seems to be quite confusing but once you learn all about it, it will make so much sense.