Introduction

I joined a team building a crypto payment gateway and have been doing a lot of reading on the Stellar blockchain. I thought payments were a solved issue all over the world, but apparently, I know so little about the world.

If you migrated to another country for tourism or study, you’d encounter a problem where you have to exchange your local currency for the new country’s legal tender. This issue becomes more prominent if your source of income comes from your home country. For example, if you have a business or parents that fund your lifestyle in the new country, every time they send you money, you have to withdraw it and find a local exchanger to give you an equivalent amount in the local currency.

This currency swap is usually manual and expensive, as the local exchanger places a high spread on the transaction due to insufficient liquidity or low demand for your currency. This has been a long-standing issue, but the Stellar Blockchain is creating the groundwork for startups to address the problem.

What is the Stellar Blockchain?

The Stellar Blockchain is an open-source, decentralized blockchain platform designed to facilitate cross-border transactions. It was created in 2014 by Jed McCaleb (co-founder of Ripple) and the Stellar Development Foundation (SDF).

The blockchain aims to extend the use of cryptocurrency to the real world. Through its partnership with MoneyGram, users can transfer Stellar tokens (XLM) and USDC and then receive cash in the real world.

This is a major milestone in enabling cryptocurrencies to mirror some of the activities of traditional banks(deposits and withdrawals).

Why Stellar?

Stellar offers multi-currency support, enabling fiat-to-cryptocurrency conversions and the creation of custom tokens. Today, it’s difficult to exchange African currencies like the Kenyan Shilling (KES) for the Nigerian Naira (₦) without going through the US dollar.

If central banks of these countries create digital versions of their currencies on blockchains such as Stellar’s, it would be less expensive than bringing all African countries together to create an exchange to mutually trade with each other. Doing this on Stellar facilitates trades among respective countries, enabling cross-border transactions -a major feature needed for the product I described in the introduction.

Finally, one distinct feature of the Stellar blockchain is the Stellar Consensus Protocol (SCP).

Stellar Consensus Protocol (SCP):

The Stellar Consensus Protocol (SCP) is a consensus mechanism used by the Stellar network to validate transactions quickly and efficiently. Unlike traditional Proof-of-Work (Bitcoin) or Proof-of-Stake (Ethereum) systems, SCP relies on Proof-of-Agreement, a network of trusted nodes that agree on the state of the blockchain, enabling fast transaction confirmation.

SCP is built on the Federated Byzantine Agreement (FBA), a model that allows nodes to choose which other nodes they trust, promoting decentralization and open network membership. This trust-based system ensures flexibility, as anyone can participate as a validator node without the need for significant computational power.

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 greatly improve cross-border payments and tokenization is significant. Stellar utilizes proof of Agreement rather than proof-of-work or proof-of-stake in validating transactions. Proof of agreement relies on a network of trusted nodes that agree on the state of the blockchain. Stellar’s partnerships with major financial institutions and its ability to support real-world assets (RWAs) on the blockchain show its range in ensuring financial inclusion.