Cryptocurrencies like bitcoin have revolutionized the way we move money across the globe. It can be done without the intervention of a banking facility and it can be made at a very low cost. Since 2014, there have been numerous innovations for blockchain projects, one of which was Stellar. Released in April 2015, Stellar serves a very specific niche. It primarily exists to bring together big and small financial institutions like banks, payment aggregators, fintech companies and ordinary users into a single platform within with money may be moved like email. Stellar is also an ideal alternative to Ethereum as an ICO platform since it does not require complex smart contracts.
What is Stellar?
Stellar is a blockchain network and protocol for moving and exchanging assets almost instantaneously, peer-to-peer, in one decentralized ledger and platform. It is paving the way for a more inclusive global infrastructure for payments. To better understand what Stellar is, let us ponder on these:
- Imagine being able to withdraw your money in a foreign country’s local currency without the exorbitant bank charges. Imagine the convenience of an ATM-like facility that requires only a few cents as a transaction fee.
- Imagine a cheaper alternative for OFWs to send their money to their families in the Philippines.
- Imagine facilitating micropayments online with very little to no overhead on transaction fees.
- Imagine a rural bank having the capacity to move money cross-border even without the presence of complicated resources – such as SWIFT network – which bigger banks generally have.
- Imagine being able to tokenize your asset and selling them in an exchange instantly.
- Imagine the ability to pay for your coffee with only a token representing an asset.
The list can go on, but all of these can be done in Stellar.
What is an anchor?
Stellar is a bank-friendly platform. The ledger and the network are decentralized, but there are entities that hold deposits and issue credits. These entities are called anchors. Typically, anchors can be banks or any company that facilitates financial transactions.
Anchors are your link between the real world and the Stellar world. You go to an anchor if you want to convert your fiat to cryptocurrencies or tokens, then the anchor credits the asset to your account. They can give you credit for any type of asset that they issue. Anchors also have the authority to freeze the asset that they issued to your account. On this note, it is important to trust the anchor that you are dealing with.
What is a Stellar account?
A Stellar account is a public-private key pair that allows you to send and receive Stellar assets using cryptography. Sending an asset would require an authorization from the owner of the account. This involves signing the transaction with the owner’s private key. It is very important to keep your private key as safely as you can.
If you are launching an ICO or you are venturing to be an anchor, you should maintain at least two accounts:
Issuing account. Used only for creating assets
Distribution account. Used for distributing the asset to other accounts. Issuing account sends the asset to the distribution account.
The advantage of having these two accounts is to protect your assets as an anchor or as a holder of ICO. You can store your issuing account in a cold wallet and hold your assets in there while your distribution account handles the transactions for your assets. Likewise, when engaging in an ICO, you can freeze the issuing account after creating a specific number of tokens. This will ensure that your existing tokens will not be inflated.
You can create an account using any of the Stellar wallets available or through the Stellar laboratory. A minimum balance of 2 XLM is required to be able to send and receive assets in your account.
Aside from Stellar’s native asset lumens (XLM), anyone can create their own asset and trade it within Stellar’s network. To own an asset, you have to trust the issuer by creating a trustline from your Stellar wallet or from Stellar laboratory. A trustline is an operation that an account performs to allow trust to a specific account. This is usually the issuing account of an asset. The account’s minimum balance will increase to 0.5 XLM per trustline.
One of Stellar’s unbeatable feature is having its own decentralized exchange. It has an on-chain orderbook for all the buy and sell offers of Stellar users. This means all trades are done and recorded on-chain. Anybody who has a Stellar account can trade on the exchange. Likewise, anybody who creates an asset or issues an ICO token can sell it on the exchange in a peer-to-peer manner.
Transaction speed and fees
A Stellar ledger closes every 3-5 seconds, this is equivalent to creating a new block in bitcoin, hence, transactions are processed very quickly. Transactions involve operations. These operations are actions that an account performs in a transaction. A transaction can have one or more operations. It can be any of the following:
- Create Account
- Path Payment
- Manage Offer
- Create Passive Offer
- Set Options
- Change Trust
- Allow Trust
- Account Merge
- Manage Data
- Bump Sequence
Transaction fees are computed per operation. When your wallet signs and submits a transaction to the network, the fees vary on the number of operation the transaction has. Currently, the fee is 0.00001 XLM (or 100 stroops) per operation. Stroops is the smallest unit of XLM.
Inflation and Incentive
Stellar has an inflation mechanism that allows accounts to earn from the new lumens (XLM) that are added into the network at the rate of 1% per year, on a weekly basis. Transaction fees collected from the network are also added to the distribution. Every week, these new lumens are distributed to the account who gets the 0.05% or 52MM votes of the total existing lumens.
Voting is done by setting an inflation destination in your account. The inflation destination is the public key of the account where you wish to give your vote to. If you have 100 XLM in your account, you will also give 100 votes to your inflation destination. This is the incentive mechanism in Stellar, you don’t earn from validating the ledgers but you earn from inflation distribution. In practice, people will join an inflation pool to vote for a specific account as their inflation destination, if that account wins the 0.05% vote, the new XLMs will be shared amongst the members of the pool. This is similar to joining a mining pool in bitcoin.
Consensus algorithm, nodes, and validators
Stellar uses its own consensus algorithm called Stellar Consensus Protocol (SCP). It is a variant of the Byzantine Fault Agreement (BFA) consensus which is the Federated Byzantine Fault Agreement (FBFA). FBFA does not require a computational puzzle to solve in order to create a new block like in bitcoin’s PoW.
It uses a voting process to confirm a ledger – a ledger is confirmed or closed if 66% of the validators agree on that ledger. In the standard BFA, there is a validator list being maintained by a central authority, usually the company behind the project. You must be added to that list before becoming a validator.
In SCP, on the other hand, anybody can be a validator and participate in a voting process as long as an existing validator adds you to a quorum slice. Quorum slice is a list of node validators. A validator node can belong to more than one quorum slice. The SCP is a collection of quorums or groups of nodes which reached a consensus and is composed of overlapping quorum slices.
Think of quorum as your friends, those who can influence your decision. Next, think of quorum slices as your acquaintances, perhaps a schoolmate or a neighbor. All of them make up your entire quorum.
There are two types of nodes in the Stellar network – a watcher node and a validator node. A watcher node is a node that submits transactions to the network. This is similar to a bitcoin node that broadcasts transactions in the bitcoin network. A validator node participates in the voting process to close a ledger. It is similar to a bitcoin miner that creates new blocks.
Stellar vs Ripple
When talking about Stellar, a comparison to Ripple is pertinent. Stellar and ripple are similar in the sense that they both aim to be a global network for payment settlement. However, Stellar is being favored more in the developing world. As we all know, Jed McCaleb, founder of Stellar, has a passion for helping the unbanked, while Ripple has a niche of bigger banks and financial institutions. Stellar is run by a non-profit organization, Stellar Development Foundation, while Ripple is run by a profit enterprise, Ripple Labs. There is a general perception that Stellar operates in a decentralized fashion, while Ripple, on the other hand, is centralized. Stellar’s native asset (XLM) is inflationary at 1% per year. It means that more XLMs are being created at the rate of 1% per year, and the amount of circulation increases every year. Invertedly, Ripple is deflationary. Transaction fees are burned and over time the amount of circulation will go down.
What is next for Stellar?
Stellar is building a frictionless financial ecosystem with low barriers of entry to promote financial inclusion. Stellar’s partnership with IBM has earned them a strategic position to get the banks on board to their platform. In the Philippines, companies like Coins.ph and Bloom Solutions are the first to use Stellar’s platform in their remittance products. Acudeen and TagCash are also jumping on board Stellar.
This year, Stellar also became the first DLT to obtain Sharia certification which caused XLM’s price to surge up to almost 50%. Stellar is also working on their lightning network with an interoperability to other lightning network channels on other blockchains such as bitcoin, targeted to be released by December 2018.
With all these good news and partnership involving Stellar, the future is definitely looking great.
What do you think about all the Stellar projects in the Philippines? Let us know by commenting on the comment section below.