Since its inception, Stellar has always been on top of the charts. It is a unique project that is aiming to redefine the cross-border money transfers.
ChangeHero brings you a series of articles which would give you some useful insights about this interstellar of a project. This first article introduces you to Stellar, how it works and resolves the issues faced by the protocol for enabling instant money transfers.
Stellar and its perks
To begin with, Stellar is an open-source payment protocol built to connect banks, businesses and people. Stellar aims to provide frictionless, quick and cheap transactions anywhere in the world at a fee costing less than a penny.
Jed McCaleb and Joyce Kim developed Stellar in July 2014 after a rift with the Ripple. The project is completely decentralized and a non-profit organization, Stellar Development Foundation, was set up to support the development and growth of the Stellar Network.
Ripple and Stellar appear to be identical twins but have fundamental differences. The former is a closed system whereas the latter is an open-source protocol. Lumen is the network’s native digital currency and stands among the most valuable cryptocurrencies. As of writing, Lumen was being traded at a price of $0.078407 with a total market cap over 1.5 Billion Dollars.
Unique features which give Stellar an edge over the rest.
- Transfer money across the world
- Usage of real currencies
- In-built decentralized exchange
- Cheap and nearly free transactions
- Confirmation times ranging from 3–5 seconds
- Capable of processing thousands of transactions per second
Gone are the days when you would stand in a queue for a Wire Transfer
Here’s a simple example of a real-life event where Stellar can be used.
Let us assume that Mr.X is a developer in the hustle and bustle of New York. He has to send $100 to his mother in Vietnam. Sounds simple but there’s a catch, their banks are not connected. Neither he has the time to stand in a queue nor the strength to pay the heavy fees laid by the money transfers.
This is where Stellar comes into play. Suppose, those two banks are connected to the Stellar Network then Mr.X can simply open an account in Stellar and send money through the protocol. His mother would receive the total amount in the local currency within seconds.
The same can be used by the banks, business entities or financial institutions to transfer money across the planet.
But how do they do it?
In order to bridge the gap and enable instant money transfers across the world, Stellar has to overcome three major issues.
Firstly, representing all the assets and currencies digitally, then exchanging these currencies on-the-go to enable interchangeability. Finally, resolving the double-spend problem.
Stellar uses a three-layered protocol to tackle these issues.
An anchor to hold your boat
To solve the issue with the representation of the currencies and assets digitally, Stellar protocol uses Anchors. Any business entity or financial institution can issue tokens on the Stellar platform and these issuers are called Anchors. For instance, a bank in New York can use the real-world assets like dollars, euros etc and convert them into Stellar tokens. Similarly, blockchain firms can issue crypto on the network. These tokens can be transferred from one person to another, stored and can be traded too.
Cash in your chips
Stellar protocol features an in-built decentralized exchange to overcome the interchangeability issue. The DEX permits trading of one token to another which are represented in an order book in the Stellar ledger. The in-house DEX is capable of performing direct exchanges by simply swapping one currency to another. In-direct exchanges by the incorporation of Lumens in the exchange process. And also by Conversion Chain, in which a series of conversions take place to reach the final required currency at the best rates. For instance, if we consider the case of Mr.X again, USD can first be converted to INR and then to BTC and later BTC to Yuan and finally Yuan to the Vietnamese Dong.
Stellar uses the Stellar Consensus Protocol (SCP) to prevent the double spending of the tokens issued on the network. SCP requires significantly less amount of energy and charges a very small fee. It also has the capability to sign thousands of transactions per second which is a major leap over Bitcoin and competitors. Besides, consensus doesn’t have a centralized entity and user have the facility to pick the validators.
These three layers form the core of the Stellar protocol and enable seamless money transfers among different parties across the planet.
What does Lumen actually do?
As explained earlier, Lumen is the official cryptocurrency of the Stellar network. It is abbreviated with XLM and unlike the rest, it is an inflationary currency.
To send or hold money on the Stellar network, a user has to hold Lumens. For every transaction, Stellar charges a small fee which is way smaller the traditional banks and money transfers. This fee can be paid only in Lumens. It also functions as an intermediate asset, aka bridge asset to perform the indirect and chain exchanges.
Discussion about Lumen, its performance and factors affecting it would definitely deserve a separate article. Watch this space for the next article in this series of stellar articles, pun intended. 🙂
On the whole, Stellar seems to be a very promising project. The protocol has backing from big names in the business such as IBM, Deloitte and Wanxiang Group. Decentralization and extremely fast transactions are the biggest crowd-pullers of this project. ChangeHero believes that Stellar network is on its path changing the way we transfer money across the borders and in the near future instant money transfer will be cheaper and easier than emails.