Crypto investors often struggle with cross-border transactions, as they require a lot of time and are expensive. To combat this challenge, Stellar, a blockchain-based integrated system, is designed to facilitate quick transactions at an affordable cost. In this article, let us explore more about its functions and challenges in revolutionizing global finance.
History of Stellar
In 2014, Stellar was founded by Jed McCaleb, an American programmer. McCaleb also co-founded Ripple and served as its CTO till 2013. The Stellar Development Foundation handles the network operations and is a non-profit organization. Stellar is a peer-to-peer (P2P) decentralized network and was officially launched in 2015. The network was created to link payment systems and users and to enhance global transactions. Lumen (XLM) is the native cryptocurrency of Stellar network.
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Cross-Border Transactions: Stellar enables quick cross-border payments at affordable rates which is not possible with standard methods. Bank wire transfers or remittance is time-consuming and expensive. Using Stellar, money can be transferred from one country to another within a few seconds, at a low rate. For instance, if a person transferred euros to someone in the United States, the recipient can get the payment in US dollars.
Currency Conversion: The Stellar network has the unique function of internal exchange. This enables a buyer and seller to exchange their currencies during the transaction. To explain in layman’s terms, a user can transact in one currency and the other party can receive it in another currency of their choice. For example, if a person transfers euros to another person, who requires dollars, it can be done effortlessly on the platform. Without involving any costly currency exchange services, this process can be completed.
Asset Tokenization: Stellar allows its users to create digital tokens representing assets in the real world. They can create either stablecoins or asset-backed tokens. The stablecoins can be pegged to either dollar or euro while the tokens can represent a bond or share of a company. These digital tokens can be later exchanged or used as currency in the network.
Engaging intermediaries: Steller uses intermediaries to act as a bond between the traditional financial world and its network. This helps to strengthen the digital world with the traditional economies. These intermediaries are also called anchors. By using fiat currencies, they provide tokens on the Stellar protocol which can be swapped or redeemed in the Stellar network.
Decentralized Exchange (DEX): Stellar has an integrated decentralized trading platform. This allows users to exchange assets directly in the Stellar blockchain. This feature allows users to swap their money or tokens without contacting other exchanges.
Strengths of Stellar
Low Transaction Fees: A prominent feature of the Stellar network is its transaction fees. Compared to other cryptocurrencies, it is quite low. Each transaction in the network costs only 0.00001 XLM. This is equivalent to less than a fraction of a mint. This makes it suitable for minimal purchases. It is especially beneficial to members in developing nations, which charge high fees for financial services.
Fast Transaction Speed: In Stellar network, it takes only 3-5 seconds to process transactions. Compared to other competing blockchain technologies, it is quite faster. Also, this option challenges bank transfers, which takes a longer period for completion.
Target audience: The primary objective of the network is to make financial services accessible to everyone. It is highly targeted to areas where there are no proper credit union. By reducing charges, and increasing the speed of transactions, the network enables users in neglected markets to actively engage in the economy.
Decentralization: Being a decentralized network, Stellar cannot be controlled by jurisdictions, unlike centralized financial systems. This feature strengthens its security and provides a transparent outlook for users.
Challenges Facing Stellar
Competition: The network faces a lot of competition with other blockchain platforms, including Ripple, for its cross-border payments. Also, Ethereum and other such blockchains have been gradually improving to provide such features. The crypto space is heating up with new startups, meaning Stellar needs to be considerably innovative to stay current.
Regulatory Issues: Like other cryptocurrencies, Stellar has the risk of regulatory issues. While some have supported it, the network faces a gray space in most areas. Any shifts in the laws in this industry will have severe implications on its operations and future business models. Further, the network could change based on the ability of its financial institutions.
Adoption Barriers: A major challenge looming in Stellar network is its adoption. Despite the company having a powerful technology, many show low response to its adoption. One of the main reasons for low adoption is its operations. The volume of operations in Stellar is not as high as before. The market must attract more financial institutions, companies, and users. However, this process would take time as implementation of new technology into institutions would pose risks on its security, scalability, and regulation.
Scalability: Being a developing network, Stellar needs to acquire more users and organizations. This will help it to navigate and grow efficiently without compromising on the volume. Although the network has grown popular for its fast transactions, it faces challenges in its growing demand. As demand increases, it could slow the performance of the network or become overloaded with too much activity.
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Overall, Stellar is designed to enhance financial services by providing better and faster cross-border transactions. Although it faces risks in competition, regulatory environments, and adoption, it has the potential to ease accessibility for financial services. Further, with low transaction fees and a decentralized network, it maintains a key position in the cryptocurrency landscape.
