Stellar is an open platform for building financial products that connect banks, people, and payment networks everywhere. Founded by an accomplished crypto entrepreneur and backed by an impressive group of advisors, is Stellar capable of changing the way we make international payments?
In this beginner’s guide to Stellar, we’ll cover:
Stellar is a distributed payment network which aims to make sending money internationally as cheap and easy as sending an email. While Stellar does offer a native cryptoasset called Lumens (XLM), the currency serves only a complementary role in the network’s design. Stellar’s primary use cases revolve around remittances and banking the unbanked, and the network prioritizes accessibility, security, and low transaction fees above all else. The ultimate goal is to create a financial network that is inclusive to everyone, including the poor, who are currently being underserved by expensive and outdated financial institutions.
Stellar was founded in early 2014 by Jed McCaleb — the same Jed McCaleb responsible for founding P2P file sharing network eDonkey, Bitcoin exchange Mt. Gox (which he sold to French developer Mark Karpelès before the infamous security breach), and Ripple. Notable members of Stellar’s advisory board include Keith Rabois, Matt Mullenweg, Sam Altman, and Naval Ravikant.
The Stellar name is given to two entities:
- The Stellar network refers to the distributed payment network responsible for processing financial transactions. Lumens (XLM) are the tokens native to the Stellar network; primarily serving as a bridge currency.
- Stellar Development Foundation (SDF), also referred to as Stellar.org, is a nonprofit responsible for maintaining the Stellar network. Operational costs are covered by the 5% cut of total Lumens supply retained at launch, in addition to tax-deductible donations from the public.
Stellar began as a fork of the Ripple protocol after Jed McCaleb left the project citing philosophical differences. McCaleb’s breakup from Ripple was a messy affair, ending with him attempting to sell the entirety of his 9 billion ripples, a move that would have had significant impact on the XRP market. McCaleb later settled with Ripple in a court deal that would limit the amount of XRP he could sell at one time.
Though originally based on code borrowed from Ripple, Stellar underwent a complete network upgrade in November 2015 after claiming there were flaws in the underlying Ripple consensus mechanism. Ripple’s chief technology officer Stefan Thomas responded with a blog post titled, “Why the Stellar Forking Issue Does Not Affect Ripple”, concluding “there is no threat to the continued operation of the Ripple network.” Stellar is no longer considered a fork of Ripple as it uses completely different code since the 2015 revamp.
Stellar, like Ripple, is a payment network first and a cryptocurrency second. Stellar uses its native cryptoasset, XLM, as a means to better transfer fiat currencies rather than attempt to replace them.
Stellar: PayPal on the Blockchain
On the surface, the Stellar payment network functions similarly to PayPal. First, users deposit money onto Stellar through a trusted intermediary like a bank. Stellar then credits their account with the appropriate amount, and users are then free to send those funds to anyone on the network.
Stellar’s payment network differentiates itself from PayPal by its use of blockchain technology. Blockchains provide numerous benefits to traditional servers, including decentralization, transparency, and security. Perhaps the most enticing reason to choose Stellar over PayPal is Stellar’s extremely low transaction fees. Transaction fees exist within Stellar for the sole purpose of preventing network spam, and are therefore very cheap. Base fees are currently set to .00001 XLM — a fraction of a penny.
Stellar can maintain these low fees because all transacting parties reside on the same network. This is in contrast to transactions through traditional financial systems, which are often subject to a long series of detours, racking up multiple conversion and processing fees along the way to their destination. Stellar is cheap, even compared to other cryptocurrencies, because there are no miners to pay. Transaction fees collected on Stellar are later redistributed back onto the network via inflation — more on that later.
Stellar makes international payments easy with their multi-currency transactions. For example, say you want to send me euros using your USD balance. This transaction can be completed a few different ways:
- Currency conversion. The Stellar ledger features a native orderbook for each currency/issuer pairing to deal with foreign exchanges. In this case, Stellar would look for someone wanting to sell EUR for USD and automatically complete the trade.
- Use Lumens. Lumens (XLM) are the native cryptoasset of the Stellar network. XLM can act as a bridge currency in situations where there isn’t an active market between two currencies. If nobody wants to sell EUR for USD, Stellar will instead look for a USD -> XLM offer, as it simultaneously seeks a XLM -> EUR offer. The network then makes those exchanges and completes your USD -> EUR conversion.
- Finally, if the previous options have been exhausted, Stellar seeks out offers available on the network that eventually lead to the desired conversion. Here’s an example path of what this process can look like: EUR to AUD, AUD to BTC, BTC to XLM, XLM to USD.
Stellar Consensus Protocol: How Transactions Get Validated
Stellar may not reward its validators for maintaining the blockchain, but they still have a job to do. Stellar nodes use a modified ‘federated byzantine agreement’ form of consensus, called the Stellar Consensus Protocol, to determine if transactions are valid or not. In this system, every node maintains a list of other nodes it wants to listen to, resulting in a chain of nodes essentially saying, “I trust this transaction so long as X amount of my friends also trust it”.
The Stellar Consensus Protocol is considered an open membership system: anyone is free to become a validation node, and nodes can choose which other nodes they wish to follow instead of being fed a list from a central authority. This makes Stellar’s network design more decentralized than similar networks using delegated byzantine fault tolerance (dBFT) such as Ripple or NEO.
That being said, at this point in time Stellar only has 20-30 nodes powering its network. This lack of participation is a common side effect of systems choosing to forego economically incentivized consensus mechanisms. Validators exist on Stellar solely because they are willing to dedicate their resources for the sake of the network.
Inflation On the Stellar Network
New lumens are added to the Stellar network at a rate of 1% each year. The inflation mechanism runs on a weekly basis, distributing the inflation pool to any account on the Stellar network receiving over .05% of total votes. The size of the inflation pool is determined by the following formula: (number of lumens in existence)*(weekly inflation rate) + fee pool. Votes are weighted based on the amount of lumens you hold; 1 lumen is equal to 1 vote.
Every account has the option of participating in this voting process, but the lucky winners will need to earn a minimum of .05% of total votes — that’s 9,233,901 votes based on today’s circulating supply. Winners are paid out their share of the inflation pool; earn 5% of total votes and you’ll get 5% of the total pool. Some XLM holders have formed groups in which they combine their voting power to a designated account and split the earnings among all participants.
Stellar’s XLM is available on a variety of different cryptocurrency exchanges, including Binance and Bittrex. These two exchanges handle a combined daily volume of over $16 million in XLM alone; putting them behind only Korean cryptocurrency exchange Upbit.
There are a healthy selection of wallets capable of holding your XLM securely. Stellar.org lists a total of 11 compatible wallets, including 4 desktop wallets, 4 mobile wallets, and 8 web wallets. The safest place to store your XLM is in a hardware wallet. The Ledger Nano S is a good option that is compatible with XLM.
It’s worth pointing out the disclaimer on Stellar’s wallet page: “Stellar.org does not own, maintain or operate any of these wallets.”
Stellar wants to become the standard method of sending money around the world. The team is taking a bottom up approach, focusing on money transfer and remittance companies instead of large, risk-averse banks. Stellar believes banks need to see the protocol succeeding elsewhere before they actually begin using the network. IBM has declared they are a believer, which is a pretty good start.
It’s Stellar’s opinion that the fees associated with moving money, especially across borders, have a disproportionate impact on the poor. Working families, for example, spend $44 billion every year on Western Union or similar middleman fees. Stellar sees this massive number as an unnecessary expense being taken from people by an outdated financial architecture.
Stellar finds itself standing alone in a middleground: not quite in the cryptocurrency crowd, and not quite in the legacy payment network crowd. Stellar is significantly more decentralized than PayPal, but with no incentive mechanism for validation nodes, it is unclear just how decentralized Stellar will remain. Stellar’s ultimate success will depend on its adoption by legacy financial institutions, and how the network will be able to scale. Assuming it succeeds, however, Stellar has the potential to revolutionize the way people transfer money.
LEVERJ, Brave New Coin Partner for New Swap Futures Product
LEVERJ, the self-described “world’s first scalable decentralized derivatives exchange,” has announced the launch of a swap futures product put into place by Brave New Coin, a “digital asset data infrastructure company,” according to a press release from the company.
Users on the platform can initially trade ETH-USD and BTC-USD swap futures, which offer up to 100x leverage, the release notes.
It continues, stating:
“LEVERJ is powered by Gluon.network, a purpose-built sidechain created for scaling Ethereum. Its native token, also announced today, is the $L2 governance token. The $L2 governance token is a key piece in helping Gluon become fully decentralized and community-owned over the next few months.”
LEVERJ is run by J.P. Morgan and Goldman Sachs veterans, and have built the platform to “perform like traditional financial exchanges while maintaining the critical function of security,” the release also notes.
Speaking on the matter is Fran Strajnar, the CEO of Brave New Coin, who has partnered with the group before. Strajnar states:
“Decentralized exchanges have until now lacked the sophistication, speed and security to draw big-time investors — that all changes with LEVERJ and Gluon. We’re pleased to collaborate with LEVERJ to provide perpetual swaps and other products which will help demonstrate Gluon’s groundbreaking technology for traders.”
Why is this decoupling a great sign for Bitcoin in the coming days?
For most of the year, the world’s largest and most dominant cryptocurrency, Bitcoin, has noted a strong correlation with the world of traditional finance. In fact, over the course of 2020, the S&P 500, Gold, and Bitcoin have been the focus of the market, given the growing uncertainty and some speculation with regard to Bitcoin’s robustness as a store of value and safe-haven asset.
Interestingly, market data provided by Santiment has highlighted a fairly new development for Bitcoin, as to its correlation with the S&P 500, with the same falling to zero – A radically different move given how the rest of the year has played out. In fact, this is the first time this has happened since May. However, what does this mean for the cryptocurrency market?
Bitcoin’s price has always benefited when it has exhibited low correlation stats with the world of traditional finance. At press time, Bitcoin was continuing to trade just below the $13K price level, after having surged by over 14% over the previous week.
While the correlation between the S&P 500 and BTC falling from 57 percent to close to 0 percent came as a welcome surprise, the reason behind it still seems to induce much debate. Santiment noted,
“This is a great sign for crypto after having an all-time high correlation in August. BTC has historically thrived when its reliance on world markets, and other asset classes & industries, is minimal, and trading can operate independently without interference from non-crypto events as distractions.”
The price hike definitely has played a part in the 30-day rolling average. However, there is also the possibility that this is just a momentary drop on the back of a fairly positive week for the crypto-market, one that saw one of the world’s largest payment service providers, PayPal, announce that they are extending support to cryptocurrencies like Bitcoin in 2021.
With Bitcoin’s growing independence in relation to other non-crypto assets established, is a bull run likely? Interestingly, while the correlation with the S&P has changed radically, its correlation with gold, one of the key assets of traditional finance, continues to be quite strong. Market data provided by Skew noted that after having exhibited a negative correlation earlier in the month, BTC-XAU’s 1-month correlation has now risen back to over 23 percent. This implies that Bitcoin is still tied to the traditional market to a certain degree.
While an independent Bitcoin is the best-case scenario for its price and by extension the altcoin market, the realized volatility for BTC as per data from Skew continues to fall – A finding that may point to the inevitability of a period of consolidation for Bitcoin.
Bitcoin’s 1M realized volatility fell from 58 percent to close to 38 percent over the past few weeks and can signal a bit of stagnancy for its trading price. As of now, the coin is still trying to breach the $13K resistance. While much of the community has been eagerly waiting for a 2017-esque bull run as the year comes to a close, it may still be a bit out of reach. However, given the larger scheme of things and the overall economic environment, BTC’s present price point is fairly positive.
Curv Receives Series A Funding Lead by Franklin Templeton
Franklin Templeton, a top investment firm, has become an investor in Curv, a self-described “trusted digital asset security infrastructure that is delivered as a fully scalable, enterprise-grade and compliant cloud service,” according to a press release from the group.
The investor is part of a Series A funding round joined by Coinbase, Digital Currency Group, Team8, and Digital Garage, among others.
Curv is “driving traditional institutional and crypto native demand for digital assets through its multi-party computation (MPC) security technology, a critical requirement to safely transfer, store and manage any digital asset on any blockchain or DLT.”
Many of the investors use that service themselves, and the funding round will go toward improving and scaling the project even more.
Speaking on the matter is the Chief Risk and Transformation Officer at Templeton, Joe Boerio, who said:
“Curv’s cloud-based service and tech stack eliminates the concept of private keys through multi-party computation (MPC), allowing for blockchain transaction signing in a secure, distributed way to protect against cyber breaches and insider collusion. We are excited to participate in Curv’s journey as it sets a new standard for digital asset security and scales its business across major financial institutions across the globe.”
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