Project Name: Stellar
Project Ticker: XLM
Website: stellar.org
Twitter Account: twitter.com/stellarorg
Whitepaper: Click here for the whitepaper.
What Is Stellar (XLM)?
Stellar is an open-source decentralized protocol that allows the creation, transfer, and trading of digital representations of currencies such as USD, Euro, and Bitcoin. Stellar was founded in 2015 by the Stellar Development Foundation with the aim of enabling all financial systems in the world to run on a single network.
Stellar describes itself as “owned by the public” because of its decentralized nature. Although blockchain is used to synchronize the entire system, the product that the end user receives is cash. Stellar is a cheaper, faster, and energy-efficient alternative to many blockchain-based systems.
What Does Stellar Offer?
Although it is seen as part of the cryptocurrency ecosystem, as a software, Stellar aims to improve the existing financial system rather than displace it. Stellar aims to realize transparent and efficient trading of not only cryptocurrencies, but also all currencies, and is designed to increase the accessibility of traditional forms of money.
For example, through Stellar, a user can issue a digital dollar token and distribute it to other users. This digital dollar token has a one-to-one reserve equivalent. This system somewhat resembles the daily operations of banks. However, with Stellar, this transaction can also be carried out between states, just like local transactions. Moreover, the process is handled much faster and cheaper than banks.
Each token on Stellar can be exchanged for another token on the network. The Stellar protocol matches buyers and sellers in the most efficient way possible. Users can easily place a buy order, and a transaction can be made within seconds. This transaction does not involve any intermediaries or individuals. Therefore, we can say that Stellar has a decentralized exchange within Stellar’s registry system. Stellar’s interface also resembles a trading platform, but assets are stored in users’ wallets, not in one center.
Stellar allows a user to send X currency to a recipient, and the recipient gets it as Y currency of equal value. The novelty behind this transaction is called Path Payment, a method that allows the transaction to take place without any delay and risk with a single action.
The following is an example between a user in Germany and a user in Nigeria:
- In Germany, the user who sends the money buys Euro Tokens and notifies the network that he wants to send Nigerian Naira Tokens to a recipient.
- The network searches the decentralized exchange we mentioned above and finds the best price for the sender.
- The network fixes the price and amount.
- The sender confirms the transaction, and the Euro Tokens leave his account.
- The transaction is executed, and the recipient gets Nigerian Naira Tokens. This payment is recorded on the network as a single transaction, with neither party left with tokens they don’t want.
Stellar aims to make a significant difference in cross-border remittance transactions. Disadvantaged groups, such as migrant workers sending money back to their hometowns and citizens of developing countries, face difficulties such as high commissions that traditional intermediary institutions charge for slow transfers. Within this traditional system, fintech companies and various businesses that provide these services faster and cost-effectively also must work with local banks.
Stellar resolves this issue through a network of authorized institutions called anchors that accept and distribute fiat currencies.
Anchors are licensed and regulated financial institutions and fintech companies. These institutions can issue stablecoins and one-to-one backed tokens that users can exchange for fiat money at any time. They are also subject to KYC and AML processes.
Remittances via anchors are carried out as follows:
- The sender funds the transaction in his country.
- The money is received by an anchor and shown on Stellar in the form of fiat token.
- Fiat tokens are converted into the recipient’s currency through path payment according to the index on the Stellar Decentralized Exchange or market makers.
- The fiat tokens arrive in the destination country, is transmitted to the end user’s wallet and bank account.
Stellar’s Technology
Stellar is a decentralized system. Instead of conventional protocols such as Proof of Work (PoW) or Proof of Stake (PoS), it works with its unique Stellar Consensus Protocol (SCP). Stellar Consensus Protocol is based on the principle that the system is always synchronized. With SCP, which is based on the Federated Byzantine Agreement, Stellar can ensure the integrity of financial networks and its decentralized control feature can promote organic growth, in other words, this protocol eliminates the need for a closed system to record transactions correctly.
Therefore, transactions are verified with an alternative and innovative method to the traditional mining approach. This mechanism promises the user:
Decentralized control: Anyone can join, and there is no central authority to decide whose approval is needed for consensus.
Low latency: Validators can reach consensus in a short time (within a few seconds).
Flexible trust: Users have the freedom to trust any combination created by any party they deem appropriate.
Asymptotic security: Digital signatures and hash families with parameters that provide security even against attackers with huge computing power are used.
The Stellar Team & Company
The Stellar network was founded by Jed McCaleb, founder of Mt. Gox and Co-Founder of Ripple, and former lawyer Joyce Kim. Prior to its official launch, McCaleb conducted alpha tests under the name “The Secret Bitcoin Project”. Stellar was founded by the Stellar Development Foundation with the participation of Stripe's CEO Patrick Collison and received a $3M seed investment from Stripe. As we mentioned in the previous section, the Stellar Consensus Protocol, one of Stellar's biggest innovations, was developed by Stanford University professor David Mazières in 2015.
Stellar Development Foundation is a non-profit organization that aims to facilitate the circulation of money, make markets more open, and empower people economically, thereby unlocking the economic potential of the world. It was founded in 2014 in San Francisco, California, USA.
Stellar’s Digital Asset Economy
Lumen (XLM) is the native token of the Stellar network. In the absence of any costs or barriers, problems such as filling books with spam or arbitrary use are likely to arise. Lumen acts as a deterrent to prevent these problems. The amount of Lumen used as a modest transaction fee, which should only also be present in a minimal amount on each account, is small enough to make Stellar accessible but large enough to prevent abuse of the system. Each account must have 1 Lumen (XLM), and the minimum transaction fee is 0.00001 Lumen (XLM). The use of XLM is also considered a requirement of being at an equal distance from all traditional currencies.
The distribution of Lumens is not carried out through mining or rewards due to the nature of the protocol. Instead, 100 million Lumens were created when the Stellar network started working, and the supply increased by 1% each year due to the design of the network. However, in November 2019, with the vote of the community, this inflation mechanism was abolished, and the supply of Lumens was reduced. There is currently a total of 50 billion Lumens and the supply of Lumens will not be replenished. As of late December 2020, there are 12.9 billion XLMs in circulation, and the total volume has reached $2.8 billion, valued at $0.13 billion each.
Stellar Collaborations
Offering an open financial infrastructure, Stellar can be accessed by anyone without the need for permission or application. Stellar covers a wide range of businesses, from large companies such as IBM and Franklin Templeton to single-person start-ups. Also, in late 2020, the World Bank announced a partnership with Stellar to increase the visibility and traceability of its loans. Similarly, the Government of Ukraine has announced that it has chosen the Stellar infrastructure for its planned digital currency.
Let's look at some of the many platforms built on top of Stellar:
Tempo: Tempo is an institution operating in the European Union as a part of the Stellar network. Offering electronic payments service, Tempo aims to be much faster and more advantageous than local markets in terms of pricing, exchange rates, and customer services.
Cowrie: Cowrie Integrated Systems is a fintech company that aims to create added value through electronic payment networks. Cowrie generates NGNT Token pegged to the Nigerian Naira and allows users to trade these tokens on the global market and exchange them for other currencies.
SatoshiPay: SatoshiPay provides a Stellar wallet widget that digital content creators can easily integrate into their websites. With the widget, content creators can decide how much they will charge for their content and receive micropayments without waiting or any interruptions.
Saldo: Saldo, which produces tokens pegged to the Mexican peso, helps migrant workers support their families in their home country by paying their bills. Thanks to its simple interface, a person working in the United States can transfer money to the account of a service provider in Mexico.
Stellar is also recognized as an important partner by governments for its expertise and payment technologies. The Ukrainian Ministry of Digital Transformation has recently announced that it has partnered with Stellar for its blockchain-based CBDC project. Settle Network, the largest digital asset network in Latin America, has also developed ARST and BRLT, the stablecoins it has issued in Argentina and Brazil, in collaboration with Stellar.
Evaluation of Stellar
At first glance, Stellar seems to offer services already provided by the traditional banking and financial system. In fact, the Stellar protocol handles transactions much faster than traditional finance and even large blockchains like Ethereum and charges minimal fees. Thus, Stellar appeals to a wider audience and makes a substantial difference. Unlike many crypto projects aimed at corporate structures and businesses, it has set out to create an individualistic and inclusive digital economy and has a complementary quality to existing traditional financial systems. Stellar also has a social purpose by prioritizing the development of applications on which disadvantaged groups such as immigrants can directly benefit.
Similarly, Stellar offers a platform where it is easier to generate tokens and perform ICOs compared to its counterparts. With its transparency about how Lumen, its native token, is stored and used within the foundation mechanism, it aims to instill confidence in users.
At the same time, Stellar's activities in Ukraine and Latin America signal that Stellar will be an important partner for countries and central banks that want to issue digital currencies such as stablecoins in the long term.
