What is Stellar?

Even as bitcoin garnered headlines last year, there were other cryptocurrencies and cryptocurrency platforms which racked up more impressive gains and traction among developers. Stellar was one of them.

With its price shooting up by approximately 41,900 percent in 2017, the Lumen, Stellar's cryptocurrency, was among last year’s star performers. It has continued the sterling performance this year. In a market marked by steep declines, the cryptocurrency has eked out gains of 5.26% since the start of 2018 and had a market cap of $7.5 billion, as of this writing.

Stellar might offer an interesting opportunity for traders looking to diversify their holdings away from bitcoin. Here is a brief introduction to the coin and its business prospects.

What Is Stellar?

Stellar is an open-source payment technology that shares several similarities with Ripple. Its founder, Jed McCaleb (pictured), also co-founded Ripple.

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Much like Ripple, Stellar is also a payment technology that aims to connect financial institutions and drastically reduce the cost and time required for cross-border transfers. In fact, both payment networks used the same protocol initially.

How Does Stellar Work?

Stellar's basic operation is similar to that of most decentralized payment technologies. It runs a network of decentralized servers with a distributed ledger that is updated every 2 to 5 seconds among all nodes. The most prominent distinguishing factor between Stellar and bitcoin is its consensus protocol.

Stellar’s consensus protocol does not rely on the entire miner network to approve transactions. Instead, it uses the Federated Byzantine Agreement (FBA) algorithm, which enables faster processing of transactions. This is because it uses quorum slices (or a portion of the network) to approve and validate a transaction.

Each node in the Stellar network chooses another set of “trustworthy” nodes. Once a transaction is approved by all nodes within this set, then it is considered approved. The shortened process has made Stellar's network extremely fast and it is said to process as many as 1,000 network operations per second.

How Does Stellar Expedite Cross-Border Transfers?

The current process for cross-border transfers is a complicated one. It requires domestic banks to maintain accounts in foreign jurisdictions in local currencies. Their correspondent banks must operate a similar account in the original country.

The Nostro-Vostro process, as it is known, for cross-border transactions with fiat currencies is a lengthy one involving conversion and reconciliation of accounts. Because it enables simultaneous validation, Stellar’s blockchain can shorten or eliminate the delays and complexity involved.

Stellar’s Lumens cryptocurrency can also be used to provide liquidity and streamline the process. According to some reports, banks will use their own cryptocurrencies to facilitate such transfers in the future. According to David Mazières, a Stanford University professor and SCP creator, the protocol has “modest” computing and financial requirements. This enables even organizations with minimal IT budgets, such as nonprofits, to participate in its network.