Cryptocurrencies have invoked a disruptive change to the global financial industry. The idea of a digital asset, which is not tied down to a particular institution, government, or country has intrigued and resonated with a large number of people around the world.
The emergence of blockchain based payment networks, in particular, is seen as an extremely positive development by many, as it has challenged the traditional notion of payment transfers and has offered a new and radical way for people to send and receive money.
Stellar is one such network, which is becoming increasingly popular with individual users as well as institutions across the globe.
The Stellar Network
Stellar is a distributed, blockchain based, open source network designed for instant payment transfers. Founded by Jed McCaleb, who is also the co-founder of Ripple, Stellar aims to offer financial services at extremely low cost, particularly to those who are outside the ambit of traditional banking.
The Stellar network allows you to send and receive any currency, including cryptocurrencies, to and from any part of the world. The payments can be sent and received instantly – the average transaction on the network only takes about two to five seconds. The network is extremely safe to use as the transactions are protected cryptographically.
The Stellar network has its own cryptocurrency called Lumen and currently has a market cap of over $5 billion.
The Way It Works
The Stellar platform – just like any other blockchain based platform – runs on a series of decentralized servers. It consists of a distributed ledger which keeps a record of every single transaction that takes place on the network. The ledger is updated every two to five seconds – which is the average time required for a transaction on the network.
Stellar has entities known as Anchors, who issue lines of credit for anyone who wants to send or receive payments through the network. For instance, if you want to send $100 to someone, you need to deposit the money to an Anchor first. The Anchor, upon receiving your money, will credit the amount in your Stellar account.
The money in your account now can be sent to anyone you want who also has a Stellar account. The person who receives the money in their Stellar account can cash it out any time they want.
You can also send money to someone in a different part of the world using the same method. Only in this case, the money will go through an Anchor in that particular part of the world, who will credit the receiver’s Stellar account with the money.
The currency conversion process during cross-border transactions takes place through a decentralized exchange, which is a part of the Stellar network. If you want to send $100 to someone in France, the network automatically looks for Anchors who are willing to exchange their euros for dollars as well as the best exchange rate available.
Once the conversion process takes place, the money is sent to the receiver’s account in euros. Through the exchange, you can send, trade, or exchange any currency for any other – including other cryptocurrencies.
What Makes Stellar Different?
First, the transactions are extremely fast. The reason is that unlike Bitcoin, Stellar does not require each transaction to be verified and validated by the entire network. A small set of nodes, known as a quorum, can validate a transaction under what is called the Federated Byzantine Agreement.
Each node on the Stellar platform has a set of their own trustworthy nodes. A transaction only needs to be validated by the nodes in this particular set, not by the rest of the network.
So, the whole process is much faster and the network can handle up to 1,000 transactions per second. Each transaction has its own sequence number, which allows the network to verify the order of transactions and makes it easier to keep a record of the same.
Stellar is also a salient choice for making micropayments, as the transaction fee is extremely low. On a fee of $0.01, you can make up to 600,000 micropayments.
Stellar vs. Ripple
Stellar is currently seen as a competitor to Ripple, which is a more established platform that has already made huge inroads into the financial industry by partnering with a number of major banks. There are, however, a few factors that work in favor of Stellar.
Stellar is truly decentralized. It is an open source, nonprofit network. Ripple, on the other hand, is a product of Ripple Labs, which is a private company that seeks to monetize the platform to the extent possible. The company has a certain amount of control over the Ripple network, which makes you question just how ‘decentralized’ the network truly is.
For example, in 2015, the funds of Jed McCaleb, the co-founder of Ripple, were frozen by the company, which made everyone associated with the network wonder if the transactions were controlled by a central authority, which goes against the very concept of a decentralized network.
Trajectory of Growth
Some people believe that Ripple has already made its mark in the industry by associating with a number of banks and has reached a saturation point in terms of growth. Stellar, on the other hand, is on an upward trajectory and could grow much larger in the coming years.
Collaboration with IBM
Stellar’s partnership with IBM could prove to be a game changer for the network. Last year, IBM set up a 12-currency corridor to facilitate cross-border payments between countries in the South Pacific. Lumen was chosen as the cryptocurrency of choice to conduct these transactions.
Stellar is a part of the Hyperledger Fabric, a key project of IBM which deals with the development of blockchain based tools to improve payment infrastructures.
Recently, IBM partnered with Stellar and Stronghold to launch a new token called Stronghold USD, which is a stable coin pegged to the US dollar. As of now, the tokens can be used by hedge funds, financial institutions, and multinational corporations.
In the coming days, it could be opened up for retail usage as well. Jed McCaleb has stated that the collaboration with IBM and Stronghold could facilitate the mass adoption of the Stellar network.
You Actually Need XLM (Stellar’s Cryptocurrency)
Ripple has been under fire recently because it’s been said that XRP (Ripple’s cryptocurrency) is not actually being used by banks. xCurrent, Ripple’s flagship product, which helps banks settle cross-border payments cheaper and faster using real-time messaging and end-to-end tracking, is being used by banks like Santander to build international money transfer services. However, xCurrent does not require XRP.
XLM, or Lumens (Stellar’s cryptocurrency) is actually necessary for the Stellar network to function. For example, in the above example of IBM setting up a 12-currency corridor to facilitate cross-border payments between South Pacific countries, XLM is required for those types of transactions as a bridge in transactions involving different currencies.
To illustrate, if you, as someone living in Samoa, wanted to pay your friend in Fiji cheaper and faster using Stellar, you would use Samoan tala (Samoa’s currency) and Stellar would convert the tala into XLM then convert the XLM to Fijian dollar for your friend.
The Future of Stellar Network
While Stellar still has a long way to go to dethrone Ripple as the preferred blockchain based payment network, it certainly seems to be on the path to do so.
Stellar’s built-in advantages, its rising popularity in the developing part of the world, and its partnership with various big names in the industry indicate a bright future for the network as well as the currency.