Analysis of Stellar: A Decentralized Network for Creating a New Standard in Global Cross-Border Payments

Source: Cryptopedia

Author: Denelle Dixon, CEO of Stellar Development Foundation

Compiled by: Chain Catcher

Summary

Stellar is a decentralized, open blockchain network that connects global financial infrastructures. As a mature chain, its real-time use cases easily bridge the digital and fiat worlds, with Stellar boasting over 4.8 million accounts—having processed over 1.5 billion operations since its launch in 2015. On the Stellar payment network, businesses and developers benefit from instant settlement and transaction fees that are just a fraction of a cent.

Stellar Network: Setting a New Global Payment Standard

Every year, billions of dollars in value are transferred across borders, with personal remittances being the most significant. In most cases, these remittances are sent monthly from foreign workers to their family members back home. Remittances not only support millions of families but also constitute a significant portion of GDP in low- and middle-income countries.

However, in today’s financial system, sending these vital remittances is far from simple and is not a borderless experience. Historically, the processing time for these payments has been long and the costs high—typical transaction costs range from $200 to $300, with average retail costs around 7% to 8% of the total remittance amount (up to 15% for sending money to developing economies), and it can take days to settle. In short, today’s systems are plagued by slow speeds, cumbersome processes, and high fees, marginalizing millions.

The design and construction of the Stellar network aim to reduce the friction present today, promoting financial inclusion and setting a new global payment standard, so that where you live—and what you own—no longer prohibits you from participating in the financial system. Using the Stellar network, sending payments anywhere in the world can be as simple as sending an email.

This is made possible by the speed and scale of the Stellar blockchain. It allows users to transact between fiat and digital currencies through anchors, which issue 1:1 fiat-backed stablecoins and provide fiat on- and off-ramps into local payment systems. Anchors help create a world where the existing financial system is connected to and interoperable with Stellar. This enables users to send and receive funds quickly and transparently while avoiding the fees and delays traditionally associated with cross-border and cross-currency remittances. This is already happening in real-time on the Stellar network. Using Stellar anchors like Saldo, when an unbanked person needs to send foreign currency back home to family members who need it as local currency, they can do so using a simple app. All of this is possible without prior knowledge or familiarity with blockchain.

It is equally impactful for business-to-business (B2B) cross-border payments. For example, Cowrie Integrated Systems, a fintech company based in the UK with an office in Nigeria, provides value-added services through an electronic payment network. Cowrie is acutely aware of the friction their business clients face when remitting to suppliers and partners, so they designed a payment channel to leverage USDC, one of the world’s leading dollar-collateralized stablecoins, as a bridge currency to facilitate payments to and from Europe. In collaboration with Tempo, a French electronic payment institution, and the issuer of EURT (a euro-backed stablecoin also pegged 1:1 to fiat reserves), Stellar is establishing a two-way channel for customers to quickly redeem and transact these stablecoins.

Powered by the Stellar Consensus Protocol (SCP)

How does Stellar achieve this? Part of the reason lies in Stellar's underlying consensus mechanism, the Stellar Consensus Protocol (SCP). The fast, transparent, and seamless transactions on Stellar are processed and verified by the protocol, which allows network participants to reach consensus through voting rather than mining. Nodes that support and validate the network work together to maintain the public distributed ledger and verify and add transactions to it. To do this, they rely on SCP, which is neither proof of work nor proof of stake, but uses a system of federated Byzantine agreement to reach consensus. Nodes choose other nodes they consider trustworthy and work with them to create and approve a set of valid transactions that change the state of the ledger. These, in turn, identify other reliable nodes, ultimately reaching network consensus through a quorum.

Another distinguishing feature is that SCP provides users with a decentralized and efficient network. The typical mining process is associated with high financial costs and energy demands, some of which rely on servers to an unsustainable extent. Transactions verified by SCP are processed quickly—on average within 3 to 5 seconds, with the potential for thousands of transactions to occur simultaneously—making the Stellar network a fast, sustainable, and convenient payment solution for cross-border transactions.

Enhanced by the Built-in Features of the Stellar Network

SCP, combined with Stellar's application programming interface (API) Horizon and the growing array of tools and products available in the ecosystem, creates an environment where businesses and developers can easily build on the network and leverage its most compelling features, such as:

• Speed: Transactions on the Stellar blockchain are confirmed within three to five seconds.

• Cost: The cost per transaction (regardless of transaction size) is negligible, averaging slightly above 0.00001 lumens, or XLM (the cryptocurrency of the Stellar network), by 2021. The fees set by the protocol are burned, as their existence is solely to deter bad actors.

• Asset Issuance: Stellar's supporting code is reliable, reviewed, and fast, allowing tokens to be issued with just a few lines of code.

• Decentralized Exchange: Stellar has a universal built-in order book known as the Stellar Decentralized Exchange, making every token interchangeable, with the Stellar protocol itself connecting buyers and sellers.

• Compliance: Stellar is a leader in compliance, with built-in features that allow for unified Know Your Customer (KYC) and Anti-Money Laundering (AML) processes, protocol-level asset control, and issuer-enforced finality.

• Developer Tools: Stellar's open-source developer resources provide comprehensive documentation, software development kits (SDKs), and tutorials.

• Sustainability: Due to Stellar's consensus mechanism, network costs are comparable to running servers, and unlike mining, resource demands are low.

• Native Token: Stellar created the native network currency XLM as a non-discriminatory solution to prevent network spam. Anyone using Stellar must maintain a small amount of XLM in their accounts, and everyone can use it equally. The requirement for XLM tokens is low enough to keep Stellar accessible while deterring reckless and malicious actors from participating on a large scale.

Stellar Blockchain: An Interoperable Interconnected Financial World

Stellar strives to set a new global payment standard. To this end, it is built for interoperability, connecting existing financial systems and payment rails with new digital systems so that value can flow seamlessly across borders.

The current financial system has been modernizing for decades. Blockchain technology is challenging us to think about money and value in new ways, providing opportunities to make it more effective and efficient. Much like the internet democratized access to information, blockchain technology democratizes access to financial systems.

Wherever you are, Stellar blockchain technology can connect financial infrastructures so that systems and forms of value can interoperate. This brings greater access and inclusivity, building a world where fair access is not a privilege but a right. This is the power of Stellar.