Introduction
I was working in a team that was building a crypto payment gateway and have been going through a lot of reading regarding the Stellar blockchain. I used to think payments were a solved problem across the world, but now it seems I know so little about the world.
If you were to travel to another nation for tourism or education, you'd have a problem where you'd have to exchange your native currency with the new nation's legal tender. This issue is more serious if your earnings are from your native country. For example, if you have parents or a business at home that finances your lifestyle in the new country, every time they send you money, you will have to withdraw it and look for a local exchanger who will give you an equivalent value in the local currency.
This exchange of currency is usually manual and expensive, as the local exchanger applies a large spread on the exchange due to the low liquidity or demand for your currency. This has been a persistent issue, but the Stellar Blockchain is creating the groundwork for startups to resolve the problem.
What is the Stellar Blockchain?
The Stellar Blockchain is an open, decentralized blockchain platform designed to facilitate cross-border payments. It was founded in 2014 by Jed McCaleb (co-founder of Ripple) and the Stellar Development Foundation (SDF).
The blockchain attempts to bring real-world usage for cryptocurrencies. It has partnered with MoneyGram and enables users to send Stellar tokens (XLM) and USDC and then receive cash in the real world.
This is a great step towards having some of the activities of traditional banks (withdrawals and deposits) mirrored by cryptocurrencies.
Why Stellar?
Stellar supports multiple currencies, with support for fiat-to-cryptocurrency exchange and support for issuing custom tokens. Exchanging African currencies like the Kenyan Shilling (KES) to Nigerian Naira (₦) without using the US dollar is now difficult.
If the central banks of such countries create digital money on blockchains such as Stellar, it will be less expensive than getting all African countries to unite to create an exchange through which they can trade with each other. Doing the same on Stellar facilitates trades between respective countries, enabling cross-border trading - one of the fundamental properties needed for the product that I described in the introduction.
Finally, one of the most important features of the Stellar blockchain is the Stellar Consensus Protocol (SCP).
Stellar Consensus Protocol (SCP):
The Stellar Consensus Protocol (SCP) is a consensus protocol used by the Stellar network to confirm transactions quickly and efficiently. Unlike traditional Proof-of-Work (Bitcoin) or Proof-of-Stake (Ethereum) systems, SCP uses Proof-of-Agreement, a network of trusted nodes which agree on the state of the blockchain, enabling quick transaction confirmation.
SCP relies on the Federated Byzantine Agreement (FBA) protocol model, which provides nodes with a choice of what other nodes to trust and that promotes open membership in the network as well as decentralization. The trust mechanism is flexible in that any participant can be used as a validating node without drawing on large computing resources.
Stellar Use Cases
Cross-Border Payments
Stellar is widely used for remittances and international money transfers due to its speed and low cost.
Tokenization
Stellar allows the creation of digital tokens representing real-world assets, such as stablecoins (e.g., USDC), security tokens, or even NFTs. Asset management firms like Franklin Templeton, WisdomTree Gold, and ABN AMRO issue representations of real-world assets (RWAs) on the Stellar blockchain. These efforts are paving the way for a more inclusive investment environment, enabling people to access assets that were once out of reach due to geographical barriers or limited brokerage options.
Conclusion
The potential of Stellar to really improve cross-border payments and tokenization is tremendous. Stellar employs proof of Agreement rather than proof-of-work or proof-of-stake for transaction validation. Proof of agreement is a network of trusted nodes agreeing on the blockchain state. Stellar's partnerships with big financial institutions and its ability to enable real-world assets (RWAs) on the blockchain reflect its reach in offering financial inclusion.
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