The Stellar network is a distributed ledger technology that facilitates financial transactions. Stellar was launched by the nonprofit organization, the Stellar Development Foundation, in 2014. Since then, it’s processed more than 2 billion operations made by over 6.5 million individual accounts on the Stellar network.
Stellar allows users to create, send, and trade digital representations of currency. It’s a decentralized system that is great for trading every kind of currency, including cryptocurrency and traditional fiat currency. In fact, Stellar was designed to make traditional forms of money more accessible. It’s designed to allow all of the world’s financial systems to work in unison on a single network.
Stellar is extremely well suited for finance. The transaction confirmation time is 3–5 seconds, facilitated by its consensus mechanism. It can support thousands of transactions per second. Stellar also supports Multi-signatures and Smart Contracts.
Stellar was always been intended to enhance the world’s financial systems instead of overthrowing them. Stellar connects banks, payment systems, and people. It allows all these entities to move money quickly, reliably at a very low cost. The transfer of cryptocurrencies and/or fiat currencies is swift and cheap through Stellar.
You can create a digital representation of a U.S. dollar (dollar token) on Stellar. This essentially, sets up a 1:1 relationship between your digital token and a traditional dollar. This sounds relatively straightforward, but this unlocks new possibilities for the dollar.
No matter how a token moves through the economy, the underlying dollars never leave that bank account in the United States. If someone were to loan their tokens to someone else:
- No bank has to settle the purchase or approve the loan.
- It doesn’t matter if the borrower lives in Mexico or Singapore or anywhere, they can still own the tokens and can trade them however they please
Digital dollar tokens also mean people all over the world can own, buy, and sell the value of a dollar without a U.S. bank account. The dollar token example already exists on Stellar through USD stablecoins like USDC.
Stellar’s token XLM is used to pay transaction fees and manage accounts on the Stellar network. At the inception of the Stellar network, 100 billion XLM/Stellar Lumens were created. There is a fixed 1% annual inflation on XLM.
A seamless decentralized foreign exchange is a unique feature of Stellar. Transactions can occur in one of several ways. For simplicity I’ll use USD/EUR to explain:
- Direct Exchange: USD is directly exchanged for EUR.
- Indirect Exchange: USD is exchanged for XLM, then this XLM is exchanged for EUR.
If none of these conversions are available, Stellar can use a conversion chain, like USD/EUR, EUR/BTC, BTC/XLM, XLM/EUR.
At present, the base fee on the Stellar network is .00001 XLM. The sender of the transaction incurs the expense. The fee is collected by the ledger and subsequently redistributed in the process of inflation. This fee acts as a deterrent for malicious activities (such as DoS attacks).
Stellar’s consensus algorithm is based on the Federated Byzantine Agreement (FBA). The “Stellar Consensus Protocol,” (SCP) allows Stellar to facilitate fast transactions at low costs. Agreements on the network are reached within seconds. In SCP, nodes are organized into mini-networks. Each node within such mini-networks knows its essential participants. When a transaction initiates, a node waits for most participants within its mini-network to agree on the transaction before considering the settled transaction. Eventually, a sufficient number of participants in the network accept a transaction making it impossible for a hacker or an attacker to roll it back.
Stellar is doing a great job at being a global exchange. Unlike most of DeFi Stellar aims to support the existing financial model. Stellar does a really good job intertwining crypto and traditional currency.