What Is the Stellar Blockchain and What Are Their Benefits?

by Arjun

Photo by Bill Oxford on Unsplash

With the increase in the popularity of cryptocurrencies, the need for applications based on these technologies has also increased. Cryptocurrencies are decentralized in nature and promote the development of decentralized applications. These applications are created with the sole intent of bringing privacy and complete control for end-users to already existing business models.

Traditional financial technology applications are not always efficient when facing market fluctuations. There are many loopholes in which large investors (or whales) can take advantage of the centralized nature of some applications. Centralized Finance (CeFi) Exchanges users have to deal with institutional fees, server failures — due to bloated networks and intermediaries, and the promise that their funds are safe under their custody. This is where Defi comes to the rescue. Decentralized Finance aims to solve these issues by pushing adoption and trustless networking.

Decentralized Finance (DeFi)

The implementation of Defi has been increasing day by day. Powered by a blockchain, operations are fast, efficient, and trustless by nature. Defi works with the support of smart contracts, which are pre-made transactions signed and approved between the parties involved. Smart Contracts batch many operations in one single transaction fast-tracking the disbursement of different assets. Example: A smart contract deploying a transaction on a specific date and signed only by participating parties.

What Is Stellar?

Stellar is an open-source blockchain-based distributor ledger that allows transactions between banks, payment systems, and everyday people. Stellar is fast, comparatively cheaper than other networks, and built with a globalized economy in mind.

Stellar was founded after Bitcoin but before Ethereum. Stellar helps with remittances all over the globe without needing a controlling entity to serve as an intermediary between asset types. Stellar’s PathPayment operation allows the exchange of one asset to another in just one transaction. So, a private account can send funds in US dollars, and a receiving account in Argentina can receive those funds in Argentinian Peso with no external swaps. The best part is that there is no need to go to the bank to use these assets. Stellar’s anchor providers make all this possible. Anchored assets are pegged 1:1 to local fiat and have built-in rails to enter and exit local banking systems. Stellar ability to create tokens within their network helps institutions adopt the blockchain with their internal logic and use anchors to enter or exit the crypto space.

Some of the benefits and advantages of Stellar over other blockchains are:

  • Anchor functionality for on-off banking rails
  • Stellar allows P2P transactions
  • Stellar has its Defi solutions and Decentralized Exchanges (SDEX)
  • Seamless interoperability between assets
  • Compliance friendly
  • Unbelievably cheap transactions

What Are Stellar Anchors?

Cross-border payments are subject to different countries’ policies. These policies introduce many problems to achieve a globalized network of remittances. Anchors are a part of the Stellar network and hope to solve this problem by associating local financial institutions to the Stellar blockchain. Anchors are fintech companies or their financial institutions with the function of releasing tokens interoperable with other currencies. Banking institutions back anchored assets and fit compliance needs specific to each country. Anchors facilitate the incorporation of established financial actors in local economies and aid the transparent exchange of stable coins between countries with little extra effort or hidden fees.

Anchor’s functions:

Issue Fiat Tokens: Issue stable coins backed to local fiat currency and maintain fiat reserves of the value issued for easy liquidity whenever needed by the user.

Provide a Fiat On/Off Ramp: Connects the stellar network to the countries’ banking service and carries basic regulations like KYC/AML, helping in a seamless transaction of funds.

Some examples of anchors currently in the Stellar Ecosystem are:

  • Anclap (ARS)
  • Tempo Money Transfer (EURT)
  • Cowrie Integrated System (NGNT)
  • Settle Network (ARST)

Turing Complete Signing Servers (TSS):

Turing Complete Signing Servers (TSS) is a parallel network of servers aiming to deploy, sign, and store Stellar Smart Contracts (SSC). TSS servers are known as Turrets and facilitate the use of Smart Contracts in the Stellar blockchain. Users can upload SSC to any Turret to conduct an automatic transaction.

Consider an example of a weekly payment to a user of 100$, which needs to be automated. In contrast to other blockchains like Ethereum, Stellar cannot automatically perform this transaction within its blockchain. The sender will have to verify and sign the transaction every time the payment needs to go through. Using TSS, transactions can be automated and validated through the same network, saving time and adding a second layer of logic to the blockchain.

Once a smart contract is created for the transaction, it is saved in TSS in exchange for a public key. The public key is then used to facilitate funds transfer in a separate account where the contract is stored. Learn more from this video here.

Ethereum Vs. Stellar

Ethereum is one of the most famous blockchains, focusing on bringing smart contract capabilities to their userbase and developing decentralized applications (DAPPs) being stored, deployed, and run on the blockchain. Stellar, on the other hand, is used to facilitates financial transactions. Since Stellar is open source, developers are encouraged to build within their network, yet Stellar’s does not support some of the capabilities of the Ethereum Blockchain.

Ethereum, when compared to Stellar, has the technology to store, deploy, and run smart contracts within their blockchain like a giant computer (Ethereum Virtual Machine). Ethereum also has a larger userbase and utilizes Solidity for smart contract writing. As a result, Defi applications on Ethereum suffer from high fees, long transaction times, and vulnerabilities in their contracts. Stellar tackles this issue by providing SDKs for developing languages already established in the programming community. In addition, Stellar will use a TSS network, where contracts live separately from the updated ledger, creating a compartmentalized way to transact in the blockchain without losing speed, atomicity, or decentralization.

Stellar allows its users to benefit from built-in features like KYC and AML, which are necessary for successful adoption in local financial systems.

Many wallets support Ethereum, and the tokens built on the Ethereum blockchain are available on many exchanges. On the other hand, Stellar has a unique decentralized exchange protocol to exchange Stellar tokens and stable coins using “trustlines.”

Run By The Community:

Stellar is an open-source network for currencies and payments, and it is considered a public entity. The Stellar Development Foundation (SDF), which works and supports the Stellar blockchain, is a non-profit company based in the US. Since the foundation has no shareholders, the success of Stellar depends on its users and developers willing to utilize this technology.

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