How Does Stellar’s Consensus Protocol Work: Best Guide

So how does Stellar’s consensus protocol work? In this post I explain all you need to know.

Stellar Lumens is one of the most popular crypto digital currencies in the world today. It is the native coin that is minted on the Stellar network using the Stellar consensus protocol.

Stellar Lumens (XLM) popularity is derived from the fact that it was designed to be a cross-border payment alternative to fiat currencies.

So, how does Stellar’s consensus protocol work? This is the answer that I am going to provide to you through the course of this post.

The key elements of the Stellar consensus protocol

Both the fiat currency protocols and the cryptocurrency protocols do share a lot in common – their monetary properties. The following are the key elements of a monetary consensus protocol:

• Exchange value
• Medium of exchange
• Transaction generation
• Exchange markets
• Proofing and validation
• Record keeping

1. Common exchange value

For a monetary system to be effective, there should be a common exchange value that other values are measured against.

In the case of the Stellar’s consensus protocol, this common exchange value is the Stellar Lumens (XML).

2. Medium of exchange

In our case, a medium of exchange is simply a system through which transaction flows from the sender to the recipient. Thus, the entire Stellar Payment Network is a medium of exchange, not just the XML alone. On this cryptocurrency network, an exchange of value can take place.

3. Transaction generation

Financial transactions are triggered by an exchange of value. In this case, buyers and sellers meet to exchange value that is measurable in monetary terms.

These transactions take place through Stellar decentralized exchange.

4. The exchange markets

A market is simply a place where buyers and sellers meet to exchange value. The Stellar Network works as a linkage between various cryptocurrency markets.

Since Stellar Network is a global decentralized financial network, there is no single market but rather a myriad of interconnected markets operating through Stellar decentralized exchange.

5. Proofing and validation

The lack of a centralized market governed by a central authority means that proofing and validating transactions cannot be done by a single entity. Rather, it is done by a multitude of entities on the Stellar blockchain network.

6. Record keeping

Just like banks keep records of fiat currency transactions, cryptocurrencies also need to have proper record-keeping. Luckily, blockchain technology ensures that the record keeping of cryptocurrency financial transactions is immutable.

This blockchain ledger is a public register available on Stellar nodes on the global exchange network. Since this register resides on a decentralized network, anyone can download it and view it. This ensures the transparency and integrity of the records.

How Stellar’s consensus protocol works

Unlike Bitcoin and similar blockchain networks that use the Proof of Work consensus algorithm, or Ethereum and similar networks that use the Proof-of-Stake consensus algorithm, Stellar’s consensus protocol (SCP) uses the Proof-of-Agreement (PoA) consensus algorithm.

1. The rationale

SCP is a subset of the Federated Byzantine Agreement (FBA) that arose out of the desire to make proofing as fast as possible so that applications that require fast transaction processing and speeds can be implemented. Coupled with the ability to handle different currencies – both fiat currencies and cryptocurrencies, this makes SCP ideal for cross-border payment systems.

2. The concept

The conceptual framework of the Stellar’s consensus protocol is explained in detail in its SCP whitepaper as authored by Jed McCaleb, the founder of Stellar Network and co-founder of the Stellar Development Foundation.

In summary, SCP seeks to overcome major problems encountered by the Proof of Work (PoW) consensus algorithm. Some of these bottlenecks include:

• High gas fees – Bitcoin’s high fees is due to the network’s difficult factor that requires huge amounts of computing power thus increasing the cost of proofing.
• Low transaction speed – the PoW protocol can only process a few transactions per second.
• Lengthy proofing period – the PoW protocol takes a very long time to proof a transaction.
• Incompatibility with fiat currencies – Bitcoin, Ethereum, and similar networks are designed to work specifically with cryptocurrencies.
• Wasteful energy consumption – PoW, such as that of Bitcoin requires a massive amount of computing power. This unnecessarily consumes lots of energy thus over-draining the grind and hence denying critical users such as hospitals and schools the required amount of energy. Increased demand for power artificially hikes electricity prices thus punishing other users on the grid.

All the above bottlenecks mean that the PoW protocol cannot be effectively used to process financial transactions.

SCP is not only fast but also cheap due to its much lower costs of proofing. The biggest advantage is that it is designed to work with other digital currencies including fiat currencies.

3. The mechanism

In explaining the Stellar consensus mechanism, I am going to demonstrate how Stellar works to achieve its purpose and objectives.

I am going to analogously illustrate this in a simplified and less technical way.  It is important to get the gist of it first. Thereafter, you can easily process the technical aspects.

This mechanism includes the facilities, processes, phases, and the entities involved.

The facilities

The following are the key resources that enable SCP work:

• The Stellar software – This comprises the main software that runs the SCP plus the API (Application Programming Interface) and SDK (Software Development Kit). Both the SDK and API are used by application developers to extend the functionality and applicability of the SCP.
• The Stellar servers – These are used to host the main software.
• The Stellar nodes – These are used to run the PoA algorithm thus validating transactions on the Stellar Network
• Stellar tokens – the Stellar Lumens (XLM) are the native Stellar tokens used to execute transactions on the Stellar Network. This XLM token serves as the network’s native digital currency. The XLM token is also a governance token used to facilitate node votes.
• The Stellar network – this is a connection or linkage between Stellar servers, Stellar nodes, and user nodes. It connects the core node with different nodes on the network. Finally, it connects various user interfaces with Stellar servers and Stellar nodes – depending on the user type (e.g., Application layer developer, full validator, crypto broker, etc.)

The process

The SCP is trust-based. Thus, the entire process is about finding trust validators. The Stellar consensus process involves the following key steps:

1. Establish a Stellar node – anyone can create a node on the Stellar network. This node becomes a Stellar node once it achieves a quorum set.
2. Build a quorum set – The Stellar node invites trusted nodes to form a quorum set. This quorum set will be under the leadership of the Stellar node.
3. Create a quorum slice – A quorum slice is a trusted group dedicated to performing a certain task or function within the quorum set. A quorum slice is free to interact with other quorum slices outside their parent quorum set. Several quorum slices can also join to form a new quorum set independent of their parent quorum sets.
4. Connect quorum intersections – The point at which several quorum slices concur becomes a quorum intersection. This point can be a point of agreement or a consensus point.
5. Vote – A vote is a decision-making power. It is based on the federated voting system.

4. The voting

Since SCP employs an open network membership model with no central authority, voting is the only way decisions can be made on this decentralized network.

The process of federated voting is similar to that of a Referendum voting in a political system. It involves the following phases:

(a) Statement formulation

Any node can formulate a statement. A statement is an expression of an idea, point of view, or decision. This is similar to a Referendum statement.

(b) Declaration

In this phase, a node declares a formulated statement and thus becomes the initiator node of that statement.

(c) Nomination

In this nomination phase, the following happens;

• Statement endorsement: the initiator node listens to responses until it finds one vote that endorses the declared statement
• Statement confirmation: After endorsement or seconding, the initiator node seeks a quorum set. Nodes in this quorum set become proposed nominees.
• Candidate nomination: the proposed nominees are voted either in or out. This is an opportunity to weed out untrusted nominees and bring in trusted nominees. This process continues until a clean quorum of trusted nominees is formed. This is more like a sorting, filtering, and purification process.

(d) Campaigning

Once a clean quorum set is formed, a quorum slice is created to seek more endorsements and acceptance of the statement across the network. This campaigning aims to achieve a bigger and more significant quorum enough to influence the balloting outcome and hence a majority decision. Each nominee can form their own quorum slice. And the formation of each quorum slice also undergoes the nomination process.

(e) Balloting

After successful campaigning, the initiator prepares a ballot. Functionally, this is just similar to the conventional ballot in a political referendum.

(f) Voting

Once the ballot is prepared, it is subjected to network-wide voting. Several rounds of federated voting can take place until a sufficient network-wide quorum is achieved.

(g) Adoption

After the network-wide quorum is achieved, that is, a majority quorum, the statement is adopted as having passed.

Stellar features, applications, and benefits

The Stellar Network has several features, applications, and benefits that distinguish it from other blockchain networks.

1. The features

The following are key features that characterize the SCP:

• Distributed – Stellar is a distributed network protocol with many servers and nodes.
• Decentralized – SCP is a decentralized network protocol with no single entity controlling it.
• Global – SCP is not only distributed and decentralized but also a global exchange network that facilitates the functioning of the global economy.  
• Multicurrency support – SCP supports different currencies including both the cryptocurrencies and fiat currencies.
• Multi-custodial – SCP supports both custodial providers such as conventional financial institutions (such as commercial banks) and non-custodial providers such as cryptocurrency exchanges.
• Byzantine fault tolerance – this system ensures that erroneous instructions do not get executed and false information does not compromise the outcome of any given process.
• Federated Byzantine Agreement System – This is a consensus system that has Byzantine fault tolerance embedded in it.

2. The entities involved

While SCP is uniquely different from conventional blockchain networks, the entities involved are not much different from those of other decentralized and distributed blockchain networks. These entities include:

• Developers – core developers, application layer developers, etc.
• Validators – The full validators ascertain the validity of transactions taking place on the Stellar network. Through this validation, false information is discovered and expunged from the entire process.
• Transaction parties – These are mainly the senders and recipients in a financial transaction.
• Voters – participate in governance and key decision-making through node votes

3. The applications

The SCP has several use cases. The following are some of the major ones:

• Cross-border payment systems
• Bank account transfers
• Federated Byzantine Agreement System
• Facilitating a secure way of making cross-border remittance of real money at an extremely low fee

4. Benefits

The actual and potential benefits of SCP are many. The following are just but a few of them:

• Quick transactions – SCP transactions are several times faster than Bitcoin transactions and even bank transactions.
• Low transaction fees – It is cheaper than traditional fiat payment gateways such as Western Union. This low fee is due to the extremely low transaction cost that is made possible by the SCP architecture.
• Integrated with global payment systems – global financial services across both fiat and crypto financial systems are facilitated.
• Facilitates global economy – migrant workers can affordably make remittances back to their countries in small amounts.
• Interlinks financial institutions across the globe – this cross-border financial access brings global financial services closer to the users.
• Highly affordable global financial services – This enhances financial inclusion by providing financial services to those who would have otherwise been marginalized by the expensive traditional global financial networks.

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