Until the beginning of last year, transaction fees on the Bitcoin network tended to be well below $1, and often less than $0.10. Bitcoin supporters liked to point out that fees on the Bitcoin network were often a lot smaller than the fees merchants paid to accept credit card payments. But in the last year, with the giant growth in popularity, the network has not been able to cope with the growing demand. As a result, today, the Bitcoin network is radically different. Fees are remarkably expensive — an ordinary transaction costs approximately $9, and that is producing huge implications for the way Bitcoin is being used and the types of projects being developed on top of it.
What is Stellar?
Stellar is an open-sourced distributed payments infrastructure, built on the premise that the international community needs a worldwide financial network open to anyone. The company’s main objective is to make monetary transactions cheaper, faster, and more reliable than they currently are under our outdated systems. In addition, the Stellar protocol aims to connect people from all over the globe by creating more efficient cross-border payment services.
The project runs on a network of decentralized servers backed by a consortium of individuals and entities. The servers support the distributed ledger that keeps track of the network’s data and transactions. Stellar also uses an anchor system, similar to a bank or PayPal, the anchor will hold the user’s money and issue credit to the user’s virtual wallet in its stead.
Anchors serve as a bridge for any given currency and the Stellar network. The swap allows anyone to convert their funds into the Stellar public ledger. This integration means that anyone can send funds instantly on the network without having to wait for a bank transfer, as with PayPal, and without having to pay significant fees.
The decentralized nature of the Stellar network allows peers to run independently of each other. The power to broadcast information is shared by a network of servers, instead of being delivered from mainly one individual source.
The goal is to have an extensive network of independent servers so that the network will still operate successfully even in case of failure from some servers.
The Stellar ledger registers all the balances and transactions belonging to every account on the network. A copy of the global Stellar ledger is hosted on each server that runs the Stellar software, and the servers sync and validate the ledger by a mechanism known as consensus.
The Stellar servers communicate and sync with each other to ensure that every transaction is valid and gets applied successfully to the global ledger. The «Stellar Basics» explains:
“For example, if you want to send $5 to a friend on the network, a list of trusted servers will begin a process to agree on the validity of your $5 payment to your friend. The majority of these servers will have to agree that you do in fact own $5 worth of credit on the network before they will mark the transaction as valid. This entire process of coming to a consensus on the Stellar network occurs approximately every 2-5 seconds.”
To better understand the consensus protocol read the «Federated Model for Internet-level Consensus» by David Mazieres.
Anchors, Trust and Credit
Anchors are entities that users trust to secure their deposits and issue credits into the Stellar network for those deposits. They are essentially the connection between different currencies and the Stellar network. All monetary transactions that occur in the Stellar network (except the native currency: XLM) are in the form of credit, that as mentioned before, is issued by anchors. Anchors just do two simple things:
- They take a user’s deposit and issue the corresponding credit to the user’s account address on the Stellar ledger.
- Users can make a withdrawal by bringing them credit they issued.
The «Stellar Basics» explains:
“To use Paypal, you deposit money in from your bank account. Paypal then gives you credit in your Paypal account. You can now send that Paypal credit to anyone that trusts Paypal (anyone with a Paypal account). Someone that received your Paypal credit can convert it to real money using Paypal by withdrawing it to the bank. Anchors perform the same function in Stellar. The difference is, all the “Paypals” and other anchors are operating on the same network so they can all transact with each other now – this makes the system way more powerful. People can now easily send and exchange all these different anchor credits with each other.”
The Stellar ledger is capable of storing offers that users have made to buy or sell currencies. Offers are public commitments to exchange a credit for another one at a predetermined rate. The ledger basically becomes a global marketplace for offers, that all together form what is called an order book.
“There is an order book for each currency/issuer pair, which allows users to not only buy and sell currencies in a foreign exchange like manner but also to convert currencies seamlessly during transactions.” — The «Stellar Basics» reads.
Stellar allows users to send any currency they hold to anyone else in a different currency through the built-in distributed exchange. Users are able to receive any currency through an anchor they added. The «Stellar Basics» explains:
“Amy wants to send Bob euros, using her USD balance. Stellar automatically submits an offer to the distributed exchange selling USD for EUR. The network finds the best exchange rate for the transaction. Here are a few possible ways the transaction can happen:
Conversion through an offer
Stellar finds an offer on the internal USD/EUR exchange for someone wanting to buy EUR for USD and automatically makes the exchange between the two parties.
Using XLM as an intermediary currency
Stellar Lumens looks for offers on the network asking for USD in exchange for XLM (the native — purely digital — currency). It simultaneously looks for an offer asking for XLM in exchange for euros. The network makes those exchanges and sends Bob the resulting euro credit.
Chain of conversions
If there is no explicit relationship between offers to buy and sell, Stellar tries to find offers from the network that will lead a chain of conversions from EUR to USD. For example, EUR to AUD, AUD to BTC, BTC to XLM, XLM to USD.”
In the Stellar network, there’s a nominal fee associated with each operation in a transaction. The fee functions as a deterrent, as it discourages users with malicious intentions from flooding the network with transactions (otherwise known as a DoS attack). The fee is currently set to .00001 XLM—a fraction of a fraction of a penny. The sender of the transaction incurs the fee. No one profits from the base fee since the ledger collects the fees and redistributes them in the process of inflation.
The recent announcement of a partnership between Stellar Lumens and IBM has caught the attention of the mainstream media, that is now keeping a closer eye on the company.
Furthermore, the company introduced in Singapore the concept of a network ATM which could also bring a lot more visibility for the project. Jed McCaleb, Stellar’s Founder, also announced that more than 30 banks would join Stellar/IBM blockchain project.
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