Stellar: Next-Generation Payment Network | by Maximilian Perkmann – DataDrivenInvestor

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Stellar: Next-Generation Payment Network | by Maximilian Perkmann – DataDrivenInvestor

DataDrivenInvestor
Jun 28
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Stellar Lumens (XLM) is an open-source protocol that is mainly used for cross-country payments. It takes a similar approach to Ripple (XRP), although the focus is not exclusively on the banking sector. Rather, the intention is to provide organizations, financial institutions, and people with a fast and inexpensive payment method.
Stellar is an open network for storing and moving money. — stellar.org
The network promises a low-cost and fast transfer of values, without borders or country-specific restrictions. Founded in 2014, the project enables users around the world to digitize and transfer assets cheaply. The project is being watched with great interest by numerous big players in the market, as it promises to provide a bridge between fiat currencies and cryptocurrencies where both can exist in parallel. In this network, the Lumens token serves as a transfer currency within the network. Funds, but also proprietary currencies such as miles or bonus points, can be converted into Lumens and sent using the blockchain.
The focus is on markets where people and businesses do not have unconditional access to financial infrastructure. The so-called “unbanked” markets. Stellar is similar to Ripple in many ways but still has some unique features.
Stellar is an open-source network for currencies and payments. Stellar makes it possible to create, send and trade digital representations of all forms of money — dollars, pesos, bitcoin, pretty much anything. It’s designed so all the world’s financial systems can work together on a single network. — stellar.org
The Stellar network was founded in 2014 and had risen to one of the top 20 cryptocurrencies at some point (currently #24). The non-profit organization behind the project is Stellar.org, also called Stellar Development Foundation. The foundation is responsible to ensure that new tools are developed on the Stellar network and it also manages social initiatives with other companies.
Stellar (XLM) was developed by Jed McCaleb and Joyce Kim to allow people to convert their fiat currencies into crypto, thus making cryptocurrencies mainstream. Jed McCaleb is also one of the founders of Ripple.
Today’s payment landscape is fragmented — each region has its own payment scheme (ACH, SEPA, SPEI, etc.) and they’re not interoperable. That’s why we’re stuck with outdated systems like SWIFT and the correspondent banking model.
To bridge these disparate local payment systems, Stellar makes it possible to represent the world’s currencies — in the form of digital fiat tokens — on one decentralized ledger where they can all interoperate freely. This allows currencies to interoperate not only among each other, but also among all the wallets and apps that leverage the Stellar network to provide users a wide variety of cost effective financial services. — stellar.org
Stellar is, at its core, a cross-border currency transfer system. The Lumens token is used as a means of transfer in this setting. This means that when a payment is made, the outgoing currency is first converted into Lumens. Then the Lumens are sent through the network to be finally converted into the target currency at the recipient’s end.
Each transaction gets stored in Stellar’s central ledger. A consensus mechanism always guarantees the correctness of the entire blockchain.
Stellar uses the custom-developed Stellar Consensus-Protocol (SCP) to operate the network. The SCP consensus itself operates using the Federated Byzantine Agreement (FBA). The technology behind the network has been developed as open source and is owned by the community and thus decentralized. In this regard, the Stellar network consists of two core components, the Horizon API + Stellar Core payment network and the Lumens (XLM) digital currency.
Larger institutions such as banks and service providers can also easily access the Stellar network via Anchors, which act as an interface between existing financial systems and the Stellar network.
Stellar anchors are regulated actors, fintech companies, or financial institutions that perform the following tasks:
To be able to process transactions within the network quickly and cost-effectively, each participant (node) in the network can select its own “mini-network” (also called quorum slices) from other participants. These in turn transmit the result to the Stellar network in the event of an overlap of valid transactions.
Stellar-Whitepaper
The main part of the system is Stellar’s exceptionally fast network. To be suitable for the intended use, Stellar offers transactions in a wide range of currencies. In addition to fiat currencies (US dollar, euro, yen, …) and cryptocurrencies (BTC, ETH, LTC, …), users can also send their currencies with Stellar. Own currencies can be, for example, air miles or bonus points, which can be converted. Stellar constantly searches for the best exchange rates to make transactions as cheap as possible.
Users can also, for example, create a digital representation of any asset (e.g. gold, stocks, and even consulting time) and offer it in exchange for the physical good. When this digital asset is later returned, it can be exchanged back for the real good. Thus, cryptocurrency always has a 1:1 relationship with the underlying asset and can be traded worldwide.
Stellar manages several thousand transactions per second (TpS) in test environments. Exact figures are hard to provide, as the performance of individual nodes and the overall load has a significant impact on performance. Jed McCaleb himself stated in a podcast that the network can achieve 4,000 TpS under the right conditions. In a test scenario, they even reached 10,000 TpS explained Stephen van Coller, CEO of Barclays Africa for Corporate and Investment Banking. Under normal conditions, 1,000 TpS on the mainnet is quite realistic.
As explained earlier, Lumens serve as a transfer currency in the network. Stellar Lumens (XLM) allow sending money, as well as converting to other currencies within the Stellar network. The token is also responsible for initializing new accounts on the network and conducting transactions.
However, this rarely involves a direct transfer from the sender to the receiver. Rather, the transaction goes through a series of exchanges — so-called swaps. These are mapped via the company’s own Stellar Decentralized Exchange (SDEX). On the SDEX, Lumens is the key token for the entire transaction exchange. This also means: that the value of Lumens is closely linked to the success of the entire project. If Stellar is successful, the XLM price will also rise.
It is also the deep integration into the network that makes Lumens so valuable. If Stellar plays an important role in the global financial market in the future, the limited supply of tokens could drive up the price.
In the beginning, a total of 100 billion XLM were created. This amount will be increased annually by a fixed inflation rate of 1 percent and distributed to its investors through a direct voting process.
Stellar has originally been developed on top of the Ripple protocol. However, despite the common features, Stellar offers some significant advantages over XRP. The main advantage of Stellar (XLM) is the community-owned open-source asset transfer network and the management by the non-profit Stellar.org. In addition to Lumen (XLM), the network allows any token to be exchanged with any other token on the network via a decentralized exchange (DEX) built into Stellar’s ledger system.
Stellar’s best-known partner is probably the software company IBM. Together, the two companies created World Wire to enable blockchain banking in several countries. Among numerous other financial service providers, the consulting firm Deloitte also joined the Stellar project in a partnership. The goal of this collaboration was to provide a fast and affordable payment system via the Digital Bank.
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Stellar is not just another “blockchain for banks”, rather it is a project for the so-called “unbanked”. These are people, businesses, and organizations in countries that do not have direct access to a stable and secure banking system.
For these people, Stellar provides a fast and robust platform to send money cheaply, even across borders.
Thanks to its strong partners, such as IBM, the network has managed to establish a brand in the world of payment providers. The cooperation with Flutterwave also enables Stellar to offer another cross-border payment and remittance service between Europe and Africa. In addition, there is a promising roadmap that predicts more interoperability and could lead to many exciting projects for developers and investors.
Enjoying the content? If you’d like to support me as a writer, please make sure to become a Medium Member. It’s just $5 a month and you get unlimited access to Medium. Sign Up here
With much love,
Maximilian
The article includes the personal opinion of the author. It should not be considered Financial or Legal Advice. All data and numbers have been sourced the 2022–06–27. Changes may apply.
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