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The Stellar Network (XLM): What You Should Know?

November 22, 2021
by Leon Marshall,

Article Recap

Stellar is a decentralized, open-source payment solution that aims to bridge users and financial institutions.

Stellar is a decentralized, open-source payment solution that aims to bridge users and financial institutions. In 2014, Jed McCaleb – the co-founder of RippleNet – set up the Stellar Development Foundation as a non-profit organization. With Stellar, banking services are now available to those who previously had no access to them.

Stellar transactions are facilitated by their own cryptocurrency, lumens, or XLM, which acts as a bridge between fiat currencies. Usually, tokens are called ‘stellars’, in lowercase, while the network or organization is capitalized.

For example, if someone wants to exchange euros for dollars at a specific exchange rate, they can make an offer on the network. When a corresponding counterpart is found, the money is exchanged. This results in the network being used as a global trading platform. 

These orders are summarized in a list called an order book. The Stellar network searches for the best exchange rate when individuals want to exchange currencies. Afterward, Stellar Lumens (XLM) are used to facilitate the exchange.

In any case, when an appropriate offer is not available, Stellar forms a chain of exchange offers and trades them until it exchanges the desired currency. As a reminder: Stellar Lumens are coins or digital fiat issued in a blockchain environment. As cryptocurrencies, XLMs are the ‘fuel’ in the Stellar network.

Key features of the coin

Like most cryptocurrencies, Stellar provides decentralization to inspire confidence in the network. Following the Stellar Consensus Protocol, it contains the following features:

  • Control is decentralized. Everyone is eligible to use Stellar, and the consensus is not controlled by a central authority.
  • Fast transactions. The confirmation time is 3–5 seconds, facilitated by its consensus mechanism.
  • Security oriented. A digital signature and hash family provides security, whose parameters can be configured to protect users from hackers with high computing power. 
  • It has a 1% fixed annual inflation. 
  • High capability. It can support thousands of transactions per second.

What is the Stellar blockchain?   

As with any blockchain platform, Stellar transactions are added to a shared and distributed ledger. The Stellar Consensus Protocol uses a consensus algorithm based on the Federated Byzantine Agreement (FBA) allowing the ecosystem to run correctly.

SCP enables fast and low-cost transactions, and everyone on the network agrees on a transaction’s validity within seconds. In the global ledger, each participant (called a node) selects its mini-network of trusted participants. They are known as Quorum Slices. The extensive Stellar network can reach a consensus on valid transactions and add the same to the ledger quickly as long as Quorum Slices overlap.

Difference between owning Stellar and trading crypto CFDs

There are fundamental differences between buying cryptocurrency and trading  CFDs in a crypto market. With cryptocurrencies, you are buying the asset which gets stored in a wallet. You aim to buy when the price is low and then sell it when the price rises, earning a profit. When trading CFDs, however, you do not own the underlying asset but are speculating on whether you think the price will or fall in value instead. Since you don’t own the asset, you do not require a wallet. CFDs can benefit traders when cryptocurrency prices drop as it allows them to go short, capitalising on the fall in value of cryptocurrency.

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Trading Stellar

To capitalize on changes in stellar’s value, two options exist: to buy it or trade on its price movements. To buy Stellar, you would pay the full price upfront, with the hope that it will rise in value, thus making a profit when you decide to sell. The transaction will happen through a cryptocurrency exchange, which can be a lengthy process and you will need to hold the tokens in your wallet.

In order to trade on stellar’s price, you do not take ownership of the underlying coin, but instead, speculate on its price. The best way to do this is to use a leveraged trading account. In other words, you only need a small deposit – known as a margin – to have full market exposure. It is important to understand the risks associated with leverage as it can magnify both profits and losses.

CFDs are financial instruments in which one party agrees to pay the other the difference between the opening and closing price of an asset. One can either hold a long or short position (speculating that the price will rise or fall). As CFDs are used within short timeframes, this is considered a short-term investment. XLM/USD is an example of a pairing that can be traded as CFDs. 

Final thoughts

This vast financial network is composed of closed systems. Increasing transaction costs and slow money movement have been caused by the inter-system gaps. Thus, the financial services sector has not been able to reach its full potential, leaving many communities underserved financially.

Building a financial infrastructure that supports massive organic growth and ensures the integrity of financial transactions is one solution.

To maintain integrity, established institutions rely heavily on entry barriers and regulation. By contrast, this approach conflicts with the prerequisites necessary for organic growth, which requires new, innovative participants equipped with the bare minimum of financial and computing resources.

Such a scenario illustrates how Stellar blockchain may prove beneficial for creating a global decentralized financial network for everyone. The system assures that transactions are correctly recorded and that the integrity of transactions is maintained by agreeing on one another’s authenticity. A network like this enables new organizations to quickly gain entry and extend financial services to underserved communities.

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Trading on margin is high risk.

All times are AEDT.