Revolutionizing the financial system may start with the technicalities of product development, but bringing instant global payments to fruition in its entirety requires the belief of people outside the realm of developers, engineers and field experts. In order to further the adoption process, we would like to explain why we trust the Stellar network as the foundation for a radically modernized payment infrastructure.
The traditional payment industry is composed of multiple entities, most notably banks, scheme providers and money transfer services. When payments are initiated within this framework of fragmented financial institutions, fund custody moves from one financial institution to another. Each time custody changes, the corresponding institution takes a percentage, incrementally increasing the fee for the sender. Depending on the transfer amount and destination country, fees will be calculated accordingly. Not only is this process costly but incredibly time-consuming.
In the omnipresence of services like email, instant messaging and same-day delivery, “instant” is not only normalized but expected. One may think payments would replicate the functionality of email instead of mirroring the traditional mailing process (which it does). Although the reasons for this underdevelopment are expansive, a solution is here: the Stellar network. This blockchain-powered system provides the framework and infrastructure needed to support the execution of instant payments. Here are 5 main reasons the Stellar network is not only changing the traditional payment industry but revolutionizing it.
Stellar functions on a network of decentralized servers called validator nodes also known as Stellar Cores. These nodes enable certain decisions to be reached, in this case validating transactions made on the Stellar distributed ledger. Stellar’s distributed ledger technology (DLT) is a database that consists of consensually replicated, shared and synchronized data spread across different nodes on the Stellar Core software.¹ In order to reach a global consensus between nodes, the Stellar Consensus Protocol (SCP) was developed to standardize the validation process. SCP is incredibly efficient due to its ability to arrive at a decision without every node needing to validate a transaction. This is possible as each node has a defined group of nodes it must agree with, called “quorum sets”.
The traditional payment industry is built on centralized networks, where each institution has to validate and approve transactions based on their regulatory standards. As you can imagine and have most likely experienced, this is especially ineffective. Although you would think your money would be sent ‘non-stop,’ in reality it has several layovers in different places until it finally makes it to its destination (no one like layovers, let alone several). Decentralization allows money to move quickly and efficiently, bringing coherency to the validation process by standardization.
The Stellar network is not bound by geographical borders. The combination of the distributed ledger and SCP allows Stellar to operate independently from the regulations governing each financial institution. To further complicate the long-established legacy system, these institutions are also bound by localized standards. This prohibits uniformity in processing systems and payment gateways.
As Stellar is naturally built to overcome existing complexities, it needs to be able to connect to traditional currencies and banking systems. In order to achieve this, compliant entities called anchors connect the world’s traditional currencies to the Stellar network by issuing digital representations of established currencies that can be sent and received on Stellar. Think of anchors as they secure a ship to the sea floor, just now the term ‘anchor’ represents different banks, the chain fastening the ship is the Stellar network and the ship carries people, connecting the conventional payment infrastructure with Stellar to allow them to function harmoniously. No matter the currency or location, Stellar is the one of the first unified monetary systems that seeks to take the best aspects from the traditional financial system and enhance them with technology.
3. Fast transaction times
Global instant payments could be the new norm with the Stellar network. Operating on DLT and independently from standard banking regulations, transfers can be completed within seconds… and we mean seconds. As previously discussed, the reasons prohibiting instant transactions in the current financial infrastructure is due to fragmentation. Each bank abides by rules on both, an international and local level that may not always coincide resulting in extreme latency. This results in transfer times averaging around 1–3 days (more if it was initiated on a holiday or weekend).
Although certain banking systems already facilitate instant transactions, they are not unified on a global scale. In an increasing globalized world, the need for individuals, businesses and organizations to send payments quickly from one country to another is vital. It can empower businesses to operate efficiently on an international level or allow individuals, governments, and NGO’s to send funds in case of emergency to quickly initiate relief strategies.
4. Low fees
What if we paid for every email we sent? Communication would look a lot different than what it does today. As global payments continue to fall behind the innovation curve, people continue to experience high fees. However, Stellar transaction fees have remained fixed at $0.00001 XLM (The native stellar currency call lumens), occasionally rising relative to XLM value. Even if the XLM market price goes up, transaction fees will continue to remain low,* that is, a maximum of 1/200th of a penny (excluding third party service fees).² Current financial frameworks are impractical. For example, a user sending money from the US to Mexico is likely to pay more in fees than what they are sending depending on the transfer amount.
Of course money doesn’t mirror emails and there will always be compliance expenses but the costs are disproportionate and often attributed to the financial system lacking the necessary competition and technological infrastructure to drive down cost. In open, modernized environments where innovation is ever-present, evidence suggests prices (and slow transaction times) go down.¹ As the Stellar network is open source, this encourages innovation and development. Sending money can almost feel like sending an email.
An inclusive financial system is one that doesn’t disable individuals or locations from accessing proper money infrastructures. Several countries around the world still struggle to integrate due to the limitations in their monetary systems. Whether due to inflation or inadequate infrastructure, the Stellar network provides stability for both currency exchange and transfer services. In the future, many of the world’s countries struggling to keep up with global economic growth can significantly benefit from the inclusive, democratic system Stellar provides.
There are only a few groundbreaking innovations every few centuries that propel humanity forward in a revolutionary way. As we continue to operate in an outdated monetary infrastructure, it’s time we begin to rethink our financial system. Globalization doesn’t truly materialize until every individual and country can transact with the other seamlessly. The Stellar network and its underlying DLT provides the necessary elements to push humanity another gigantic step forward, removing barriers and creating a global community.
Visit the Stellar Development Foundation if you want to learn more about Stellar’s vision, technology and its global ecosystem. Go to www.dtransfer.com to find out about our Stellar-powered payment solutions.
¹ Lokhava, Marta, Giuliano Losa, David Mazières, Graydon Hoare, Nicolas Barry, Eli Gafni, Jonathan Jove, Rafał Malinowsky, and Jed Mccaleb. “Fast and Secure Global Payments with Stellar.” Proceedings of the 27th ACM Symposium on Operating Systems Principles, 2019. https://doi.org/10.1145/3341301.3359636.
² BlockEQ. “Transaction Fees on Stellar.” Medium. Medium, July 11, 2018. https://medium.com/@blockeq/transaction-fees-on-stellar-3d5e442fc00a.