Stellar Architecture: How It Works

Author: Okereke Innocent
December 30, 2020

 |6 min read

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Stellar Architecture

Overview

Stellar is an open-source protocol that allows users to exchange money or tokens using the Stellar Consensus Protocol. The Stellar architecture supports a distributed ledger network that connects banks, payment systems, and individuals. The goal is to facilitate low-cost and cross-asset transfers of value.

Stellar’s open-source payment technology possesses a few similarities with Ripple, a real-time gross settlement currency used for remittance and payments. Jed McCaleb, the co-founder of Ripple, and Joyce Kim are the founders of the Stellar network. At first, both Ripple and Stellar shared the same protocol. However, when Stellar created the Stellar Consensus Protocol (SCP), it resulted in foundational differences between the two platforms. The SCP made Stellar an open-source system, while Ripple remained a closed system. 

Stellar has a native asset called Lumen (XLM), which powers the Stellar network and its operations. This article will provide you with a deep dive into Stellar architecture and how it works. 

The Basics of Stellar Blockchain

Stellar is a decentralized network distributed among interconnected nodes (servers) in the Stellar network. Using the Stellar Core, anyone can set up a verification node (server). Stellar Core acts as a backbone to the Stellar network. It is responsible for carrying out verifications using the Stellar Consensus Protocol (SCP). The Stellar Consensus Protocol serves as the algorithm to verify transactions on the Stellar network. 

Unlike the Bitcoin network, where miners verify transactions, the trusted nodes known as verification nodes run the Stellar Core and verify transactions. Therefore, the Stellar network consists of a series of Stellar Cores that work together to verify transactions and ensure everything is up-to-date. 

The Features of Stellar Blockchain  

Before we go further to explore the Stellar architecture, let’s do a quick run-through of Stellar’s features.

  • It has a decentralized and open database.
  • Transaction confirmation time is between 3-5 seconds.
  • Stellar can enable thousands of transactions per second. 
  • It adopts the unique Consensus Protocol. 
  • Used Multi signatures and allow Stellar based Smart Contracts. 

The Stellar smart contract is an open-source network for storing and moving money, whereas the Ethereum smart contract is an open-source network for decentralized applications. Ethereum is more decentralized and slower, while Stellar is less decentralized but faster. 

  • Stellar token (Lumen denoted by XLM) powers the network. There are 100 billion XLM already pre-mined. 
  • It has a 1% fixed yearly inflation. 

Stellar Architecture and How it Works

Nodes that help in the smooth functioning of the Blockchain and the ledger’s publishing make the Stellar network. Before we go any deeper, let’s do a brief overview. Let’s say that Shinzo wants to send money to Nakamura. Shinzo lives in the United States, and Nakamura lives in Japan. Consider that Shinzo needs to convert from USD to Yen for Nakamura to receive and spend the money in Japan. The rigorous process resonates with a question- how will this transaction work?

Assuming Shinzo belongs to Bank “A” based in the US and Bob belongs to Bank “B” based in Japan. Both banks are connected to the Stellar network. Once Shinzo sends the $100 through his bank connected to the Stellar network, the transaction intent is sent to Bank B (on the same Stellar network) within seconds to ascertain if Nakamura is compliant or not. 

Immediately Bank “A” gets the green light from Bank “B,” they deduct the funds from Shinzu’s personal account. The USD will be moved to Bank “B” pool account and then moved into the Stellar network in the form of credits (Lumens), the native token of Stellar. Once inside, the network searches for the best exchange rate to use in order to convert the Lumens into Yen. The money will then be moved to Bank B’s base account, credited to Nakamura’s account. 

This is the general overview of how the Stellar network works. Now, let’s go deeper into the architecture of Stellar. Different components make up the Stellar network. These components come together to ensure the network is up and running. These components include the following.

A Decentralized System

The Stellar system is decentralized and peer-to-peer. Therefore, there is no centralized entity that makes all the decisions in the system. 

  1. The Ledger System

The Stellar architecture incorporates an open ledger system. The Blockchain that acts as a transparent and open ledger system stores the transactions. All users on the network can look at the ledger and see all the transaction details. 

  1. Stellar Consensus Protocol  

Every decision carried out on the Stellar network is done through consensus. The process of reaching consensus on the Stellar network happens every 3-5 seconds. 

  1. Anchors And Credit

In the Stellar architecture, Anchors hold deposits and issue credits when they are required. They act as a bridge between different currencies and the Stellar network. The Stellar network is heavily dependent on Anchors. The work of the Anchors includes:

  • Holding deposits for users
  • Issuing credits to users
  1. Multi-currency Transactions

This is arguably one of the biggest features of the Stellar architecture. It means Shinzo can send his USD to Nakamura in the form of Yen. The beauty of Stellar is this seamless decentral forex. Transactions happen in many ways, but we will focus on the USD/EUR exchange for the sake of convenience. 

  • Direct Exchange 

The Stellar network looks in the USD/EUR exchange to know if someone wants to purchase EUR for USD. If there is someone available, the transaction takes place instantaneously. 

  • Indirect Exchange 

The Stellar also searches for people looking to get USD in exchange for Lumens. They can connect the person to someone searching for Lumens in exchange for Euros and then ensure the transaction pulls through. 

However, if none of the conversions are available, the network can go through a conversion chain. Examples of such conversions include BTC/XLM, XLM/EUR, etc. 

The Aim Of Stellar Architecture

Stellar is designed to solve the following problems:

  • The architecture is designed to help users transcend their local economy so they can be able to interact with the global market. 
  • It is designed to handle any asset.
  • Transactions are almost free; hence it can be used for micropayments. 

Conclusions

The Stellar architecture has made Stellar useful and valuable as a global exchange network. The Stellar network has the capacity to host thousands of exchanges between currencies and tokens. Although exchanging between crypto and fiat or vice versa can be expensive, Stellar makes it swift and cheap. 

Also Read Stellar Payment Network: Detailed-Explanation

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