How Does Stellar Work?

Stellar Consensus Protocol (SCP) — Federated Byzantine Agreement where each node selects its own quorum slices (trusted validator sets). Consensus emerges from overlapping quorum slices without a fixed validator set. Currently tolerates 2 tier-1 organization failures, expanding to 4.

SCP has been in production since 2015 with formal academic proofs. The federated trust model is well-understood. While architecturally distinct from PoS, it has 10+ years of production stability.

Native SDEX (Stellar Decentralized Exchange) — built-in order book DEX supporting any asset pair issued on the network. Pathfinding enables multi-hop trades through XLM as a bridge asset.

The native DEX has been part of Stellar since launch. On-chain order book matching is well-understood. Similar in concept to XRPL's native DEX.

Soroban smart contracts — WebAssembly-based smart contract platform written in Rust, launched on mainnet February 2024. Supports programmable assets, DeFi applications, and decentralized identity. 5-second finality, 150 TPS. $100M Soroban adoption fund.

WASM-based smart contracts are a standard pattern (Cosmos SDK chains, Near, Polkadot). Soroban is relatively new (2024) but follows well-established design patterns.

Minimal transaction fee burn — transactions require a base fee (currently 100 stroops = 0.00001 XLM) that is collected and partially burned. Fees are designed to be near-zero to support high-volume payment use cases.

Standard fee burning for spam prevention. The near-zero fee design is intentional for the payment use case but limits fee-based value accrual.

Fixed supply of 50 billion XLM — originally 105 billion, reduced to 50 billion after a community vote in 2019 when SDF burned 55 billion tokens. Inflation mechanism permanently disabled. No new XLM can be created.

Fixed supply with no inflation is a clean design. The 2019 burn was a significant governance event that improved tokenomics.

Anchor system for fiat on/off ramps — regulated entities (anchors) issue fiat-backed assets on Stellar and handle compliance (KYC/AML). MoneyGram serves as a major anchor enabling cash in/out across 170+ countries. SEP (Stellar Ecosystem Proposals) standardize anchor operations.

The anchor model is a well-established pattern for fiat-crypto bridging. The MoneyGram, PayPal, and Franklin Templeton integrations demonstrate institutional adoption of the pattern.

SDF holds 46% of total XLM supply and distributes tokens for ecosystem development, anchor onboarding, and Soroban adoption fund ($100M). These distributions function as effective emissions despite the fixed supply, and SDF's discretionary control over distribution timing affects supply dynamics.

Soroban smart contracts interacting with the native SDEX create new composability vectors. A bug in Soroban contract logic could manipulate SDEX order books or exploit the pathfinding mechanism for multi-hop arbitrage that extracts value from liquidity providers.

SCP's quorum-slice-based consensus was designed for simple payment transactions. As Soroban smart contracts increase transaction complexity and execution time, the consensus mechanism may face new performance constraints or state management challenges.

Near-zero transaction fees combined with Soroban smart contract execution could enable spam attacks or resource exhaustion if contract execution costs are not properly metered. The fee model was designed for simple payments, not complex smart contract interactions.

If institutional anchors (MoneyGram, Franklin Templeton) also run validators, they gain dual influence over both consensus and the fiat on/off ramp layer. A regulatory action against an anchor could simultaneously affect validator availability and fiat connectivity.