Making international payments has been one of the most problematic aspects of the finance sector for a very long time. Long delays and transaction fees are typical of most payment platforms and institutions including banks.
What if there was a way to reduce transaction costs and shorten delays? How? By using technology that can process transactions in minutes, rather than days.
Now you are probably thinking about blockchain technology. And you might not be wrong. While cryptocurrencies seem like a suitable alternative, many issues have prevented the technology from replacing the traditional finance system.
Now, what if I told you there was a blockchain network designed to handle the exact problem of making international payments? One with unique technology that gives it more stability than many cryptocurrencies.
What is Stellar?
Stellar is an open-source decentralized network with one aim – making everyday payments simple, fast and cheap – worldwide. To do that, Stellar aims to unite the world’s payment systems by creating an ecosystem where all finanicial systems can interact. The Stellar ecosystem enables currency conversions for cash transfer, online shopping, and trading of stocks and currencies.
As some of you might know, making international transactions is quite difficult. This is because the present payment systems are inadequate. Especially when the money is being moved from developed countries to developing and underdeveloped countries. The problem becomes worse because banks around the world don’t don’t find it easy communicating with each other. This contributes to the delays and the fees associated with making international transactions.
Most banks use something called SWIFT which stands for Society for Worldwide Interbank Financial Telecommunication. While SWIFT is the largest mainstream banking messaging platform that exists, it’s still not sufficient for millions of people around the world. Even worse, many people in underdeveloped countries don’t have access to traditional banking services like me and you. These people are called the unbanked. The unbanked have a much harder time moving money to developed countries. The high fees and the network delay are enough to discourage them.
Cryptocurrencies, particularly stablecoins, have been touted as a possible solution to the problem of making international transactions because they are easier to access than foreign currencies, especially in developing and underdeveloped nations.
As some of you know, stablecoins are digital currencies whose value is tied to a fiat currency. Stablecoins help to bring price stability to the crypto ecosystem. However, many blockchains have been unable to the replace traditional banking system in this regard because of that same price stability.
Now that’s where Stellar comes into the picture. Stellar aims to make currency exchange smooth and simple for anyone everywhere in the world. Like we said earlier, this would require a platform where different financial systems around the globe would have access and would be able to communicate with each other seamlessly. So how does Stellar aim to do this?
The Stellar ecosystem is an open source network that allows people to easily switch between different types of currencies including fiat and digital currencies like Bitcoin. Users can do this through XLM which acts as a bridge between two different currencies.
In regular finance, a person would need to wait awhile while their money is being converted before transfer. With the Stellar network, however, users simply need to convert the present currency to XLM which will then be sent to the receiver in their preferred currency.
For example, say I wanted to send $10 thousand to Mexico, instead of waiting days for the money to pass through the regular financial system, I could simply turn to the Stellar network.
I would only need to convert the dollars into XLM, the Stellar network would then search out the best dollar to peso rates and do the conversion on my behalf, before sending it to the receiver in Pesos. The best part is that all this happens within seconds, and for a very small transaction fee.
The Stellar network acts like a stablecoin issuer that allows you to mint stablecoins in exchange for fiat and even digital currencies. Dollars, euros, pounds, bitcoins, Mexican pesos, Argentinian pesos, and Nigerian naira are some of the currencies that have stablecoin equivalents on the Stellar network.Stellar is very similar to Ripple, another crypto project that is aimed at improving payment systems globally.
Interestingly, unlike many other cryptocurrencies, Stellar doesn’t claim to be a replacement for the world’s traditional finance system. Rather, Stellar says it wants to improve and enhance traditional finance. The key difference between Stellar and Ripple is that Ripple focuses on large institutions like banks, investment houses, and hedge funds. Stellar on the other hand focuses on small regular everyday users, especially in developing and underdeveloped countries.
Stellar is open-source meaning that people and companies can contribute to the network’s development. Stellar has a variety of apps and third-party services that are live on the network.
Stellar is more centralized than many cryptocurrencies. Usually, blockchains have governance systems that allow token holders to vote on projects to be carried out by the network.
Stellar operates differently. The Stellar Development Foundation is a non-profit that manages the network. The foundation is responsible for designing and implementing the network’s roadmap. While users can contribute to the network, most of the development and partnerships is overseen by the Stellar Development Foundation.
Who created Stellar and when?
Stellar’s history began in 2014. Jed McCaleb had just left the Ripple network which he co-founded. Together with former lawyer Joyce Kim, McCaleb formed the Stellar Development Foundation in July 2014. The Stellar Development foundation would coordinate the activities of the network. Stripe was one of the first to partner with Stellar, giving the project $3 million in seed funding.
To understand more about how the Stellar ecosystem works, let’s take a deeper look at its technological features.
What is the Stellar consensus mechanism?
So how does the Stellar network achieve consensus and confirm transactions are valid? Stellar is unique in its consensus mechanism. The Stellar consensus protocol relies on the Federated Byzantine Agreement (FBA). It works by having multiple nodes vote on what transactions are correct. A group of such voting nodes is known as a quorum slice. The nodes are verified by the network before they can be allowed to participate in the consensus mechanism. No new tokens are created so nodes are rewarded from the money generated from transaction fees.
The Stellar network can support smart contracts and multi-signature wallets. Smart contracts are pieces of code that execute specific commands when certain conditions are met. They are important for decentralized finance activities like borrowing and lending. Stellar can process 1000 to 5000 transactions per second with a block finality of 3-5 seconds.
The Stellar network also serves as one huge decentralized marketplace and exchange platform. It has a built-in order book that keeps track of ownership of all Stellar assets. These include crypto, forex, and other securities.
What role does the native XLM token play in the Stellar ecosystem?
XLM has two main functions on the Stellar network. It serves as an intermediary currency in currency conversions on the network. This grants people easy access to different currencies without other routine procedures like owning a foreign bank account. For example, people can easily save a portion of their family wealth in dollars or pounds via the Stellar network. The benefit of using XLM for currency transactions is higher speed and lower transaction costs.
When the Stellar network went live, 100 billion Stellar tokens were created. The supply continued to increase by 1% for 5 years until November 2019 when the overall supply was cut down. Presently, there are about 50 billion Stellar lumens. 20 billion coins remain on the open market while the remaining 30 billion tokens are kept with the Stellar development foundation.
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What are the benefits of using Stellar?
Stellar focuses on making payments and financial transactions easier, faster, and cheaper for common individuals. Stellar focuses on users who are not beneficiaries of mainstream banking services. These include regular users from developing countries.
Stellar removes the bottlenecks associated with making multi-currency transactions. Usually, currency transactions are only easy if the currency pairs are widely traded. For example, USD/GBP.
In cases where the currency pairs are not widely traded, the cost and difficulty of making such transactions are usually significant. With Stellar, such currency transactions are easy because Stellar is a marketplace for swapping of currencies. People don’t have to worry about how widely a currency pair is traded since they can just convert a currency to XLM, and let the network do the final conversion.
Stellar has several distributed exchanges that provide multiple offers for currency swapping and trading. Users can select from a range of currency swapping options including direct, indirect, and conversion chains.
This allows people to buy currencies at negotiated prices instead of market prices. This can be a great option for people looking for different rates on cryptocurrencies.
How is Stellar evolving?
Stellar is a rapidly developing ecosystem. It’s one of those crypto projects that has been gaining mass adoption since its launch. Since 2014, it has handled over $2 billion in transactions from 6.5 million individual accounts.
The Network has also seen major partnerships with big organizations. One of those partnerships includes a deal with technology manufacturer, IBM.
IBM was looking for a way to make its payment structure more transparent, and so it turned to blockchain technology. Specifically the Stellar network.
IBM and Stellar are partnering to build a stablecoin named USD anchor. USD Anchor will be a fiat-backed stablecoin meaning that for every usd anchor, there is a dollar backing it kept in an FDIC-insured bank. This is huge for Stellar because IBM is the kind of organization that Ripple was designed to serve.
Another big project on Stellar is a partnership between IBM and Veridium. The project is aimed at tokenizing the carbon credit market around the world. As some of you know, tokenization is not a new concept. It involves creating digital token equivalents of real-world assets like lands, houses, cars, etc.
The project is looking to bring VERDE, a native token that would allow companies easily offset their carbon emissions by trading the token on exchanges. This would allow companies and individuals to pay a fee to cover their carbon use. This could be a great option to help corporations with large carbon footprints achieve carbon neutrality.
Another noteworthy project on the Stellar network is Open Garden. Open Garden allows people to turn their mobile phones into wifi-hotspots in exchange for Lumens. This allows people in underdeveloped countries to make the most out of scarce internet connectivity. Remember that Stellar targets people in developing and underdeveloped countries.
All these partnerships show Stellar’s increased adoption among large corporations and individuals caused by a wide range of utilities of the Stellar network.