Challenges and Limitations for Global Payments

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In today’s globally connected world, the ability to transfer value quickly and affordably across borders and asset types is becoming increasingly important. However, the traditional financial system is often slow, opaque, and costly when it comes to international transfers. Fees can eat up a significant portion of smaller remittances, and it’s common for payments to take several days to settle. This friction hampers commerce, inhibits economic empowerment, and leaves the underbanked facing worse financial access.

Blockchain technology was conceived initially as the foundation for cryptocurrencies like Bitcoin to allow decentralized, trustless value transfer without third-party intermediaries. However, many have realized that blockchain’s capabilities extend far beyond just digital money. By providing a global, distributed, and immutable ledger, blockchains open up new possibilities for rethinking how we transfer and represent assets.

One of the most promising blockchain projects for innovating in this space is Stellar. Launched in 2014 by Jed McCaleb and Joyce Kim, Stellar is an open-source protocol designed from the ground up to facilitate low-cost financial products and services for cross-border payments, remittances, mobile money interoperability, and tokenized asset issuance.

Stellar’s Foundations

At its core, Stellar uses the Stellar Consensus Protocol (SCP) to maintain a decentralized,ryptographically-secured ledger that records all transactions. This ledger is replicated across a global network of distributed node operators who cooperatively validate updates in a decentralized manner. This gives Stellar key properties like irreversibility of transactions, pseudonymous public verifiability, and no centralized failure points.

Stellar’s native digital currency is the lumen (XLM). Lumens serve two primary functions:

  1. Facilitating multi-currency transactions by acting as an intermediary currency that can be exchanged for other asset types.
  2. Paying nominal transaction fees to support the network’s integrity and deter bad actors.

Stellar’s built-in decentralized exchange functionality allows entities on the network to make markets between any two asset types, with the network automatically handling the multi-currency conversions using lumens as an intermediate. This exchange capability combined with lumens as a bridging currency is what enables seamless cross-currency payments.

Beyond just payments, a key innovation of Stellar is its ability to represent and transfer essentially any type of asset or unit of value as a token on the network, from real-world currencies to stocks, bonds, commodities, loans, and more. Asset issuers like banks, fintechs, investment firms, etc. can use Stellar’s built-in token capabilities to tokenize virtually anything that has ownership and can be transferred.

This opens up exciting possibilities for new forms of asset exchanges, real-world investments represented as tokens, tokenized derivative products, and various other blockchain-based financial instruments and capital markets innovations built on top of Stellar’s infrastructure. The low fees and fast settlement times make Stellar well-suited for such use cases.

Stellar vs Other Blockchains

The most commonly known blockchain is Bitcoin, which was conceived as a decentralized electronic cash system. While Bitcoin is quite robust for its intended purpose of being hard money, it has limitations that make it less ideal for scalable payments and asset tokenization.

Bitcoin’s core design priorities were centered around scarcity, security, and being a robust store of value. Features like a fixed maximum supply, mining-based proof-of-work consensus, and lack of token issuance capabilities make Bitcoin well suited for being “digital gold.” However, these same properties hamper things like scalability, low fees, fast settlement times, and the ability to represent other asset types as tokens.

The more payment-focused cryptocurrencies like Bitcoin Cash, Litecoin, etc. improved upon Bitcoin’s limitations in areas like scalability and fees. However, they still rely on relatively inefficient mining-based consensus models and lack first-class multi-asset and token issuance capabilities.

In contrast, Stellar takes a fundamentally different architectural approach optimized specifically for fast, secure payments and tokenization. It uses a more scalable and efficient consensus model based on the Stellar Consensus Protocol that allows fast confirmations and high throughput. The built-in decentralized exchange and multi-currency/asset payment pathfinding gives Stellar key differentiators compared to single currency-focused blockchains.

Another major blockchain contender is Ethereum, which pioneered advanced smart contract and tokenization abilities. While quite powerful, Ethereum is aimed at being a general-purpose blockchain platform and virtual machine for executing arbitrary on-chain code and logic.

This flexibility gives Ethereum impressive capabilities, but also makes it more complex, with higher fees, and less optimized for specific use cases like fast secure payments and representing real-world assets. Stellar takes a more streamlined and specialized approach focused squarely on secure cross-currency payments and tokenization without the need for general smart contract execution.

Additionally, Stellar utilizes more energy-efficient consensus mechanisms like Byzantine fault tolerance rather than mining-based proof-of-work, giving it much lower environmental impact compared to blockchains like Bitcoin and Ethereum.

The Stellar Ecosystem

At the center of the Stellar ecosystem is, a non-profit organization that oversees the protocol’s development and facilitates onboarding projects and driving adoption. has given away billions of lumens to subsidize the growth of the network and incentivize anchor projects building applications and services utilizing Stellar.

Anchors are entities like banks, money services, wallets, exchanges, etc. that facilitate on-ramps and off-ramps between Stellar’s digital representation of assets and the real-world analog assets they represent.

For example, a bank that issues Stellar tokens representing US dollars in its deposits can act as an anchor and custodian for the tokenized real-world USD. Users can deposit USD at the bank, which will issue an equal number of tokenized USD on Stellar. Those tokens can then be transferred cheaply and quickly within Stellar’s network or converted into other assets. When users want to withdraw, they can return the Stellar tokens to the bank, which burns them and disburses the equivalent amount of USD from its deposits.

In essence, anchors provide the mapping between assets on Stellar’s digital ledger and their real-world analogues. This model allows participation from existing financial institutions to represent assets on Stellar, utilize its advantages, and maintain proper oversight.

Beyond anchors, Stellar has an ecosystem of wallets, applications, tools, and various entities building products and services taking advantage of Stellar’s capabilities. For example, companies like Circle leverage Stellar as the infrastructure for their payment services. Several projects are also exploring use cases around tokenized securities, real estate, and other novel blockchain-based financial products.

Key Use Cases and Benefits

The key benefits and value propositions that Stellar aims to deliver include:

  • Fast, affordable cross-border payments and remittances
  • High throughput and scalability
  • Multi-currency and multi-asset support
  • Enabling tokenization of assets like securities, commodities, loans, etc.
  • Financial inclusion and better access for the underbanked
  • Reducing costs and friction for payments, remittances, and commerce
  • Censorship resistance and open financial interoperability
  • More transparent financial infrastructure and data

One of Stellar’s major focus areas is facilitating faster, cheaper global payments and remittances. The traditional system for these often relies on corresponding banking relationships, clearinghouses like SWIFT, intermediary fees, and long settlement times. Stellar can handle these payments directly, near instantly, and at a fraction of traditional costs.

This can open up more affordable options for migrant workers sending remittances home or people making routine low-value international payments. The lower costs also facilitate things like micropayments that are uneconomical in traditional payment rails. The fast settlement times improve cash flow and working capital.

For the underbanked lacking access to traditional financial services, Stellar can enable more affordable and open money transfer and remittance services accessible via mobile devices and without needing to rely on bank accounts. This facilitates greater economic participation and financial inclusion.

Looking beyond just payments, Stellar has significant potential in areas like tokenizing other asset types on its platform, ranging from real estate to commodities to loans to securities. These tokenized assets have the potential to be more liquid, tradable, and fractionable than traditional vehicles.

For example, tokenized real estate could allow fractional ownership and more efficient division and transfer of property rights. Loans originated as tokenized assets on Stellar could facilitate automated payments, more efficient loan sales/securitization, and other efficiencies. Securities like stocks and bonds tokenized on Stellar could help reduce settlement times and unlock new liquidity channels and trading capabilities.

Overall, Stellar aims to provide open and affordable infrastructure for moving value globally with less friction while also unlocking the potential of representing novel asset types in tokenized form.

Challenges and Limitations

While Stellar has many compelling attributes, it’s not without its limitations and challenges. From a technical architecture perspective, Stellar opted for a more opinionated and streamlined design compared to more generalized and flexible blockchains like Ethereum.

This narrow specialization gives Stellar advantages like scalability and efficiency for its specific use cases. However, it limits Stellar’s programmability and its ability to support more advanced smart contract logic and functionality beyond basic multi-currency payments and asset tokenization.

There are also open questions around how well Stellar’s approach of anchors mapping tokenized assets to real-world ones will scale globally. Will it be able to solidify partnerships and adoption with enough mainstream financial institutions to achieve critical mass? Regulatory frameworks will also be important to facilitate more open and compliant models for tokenization and exchange of assets on Stellar’s platform.

Achieving mainstream adoption and retaining network effects as cheaper, faster, and more scalable payments and asset transfers becomes more viable may also prove challenging. Just as the internet disrupted information transfer, and Bitcoin disrupted value transfer, projects like Stellar may face the risks of being disrupted themselves by new innovations in the field of open financial infrastructure.

Additionally, Stellar’s environmental impact, while relatively low compared to proof-of-work blockchains like Bitcoin, isn’t zero. As adoption scales globally and validator nodes grow, the carbon footprint is an area that will need to be managed and made as efficient and sustainable as possible.

The Road Ahead

Stellar presents a novel vision and a powerful set of capabilities for democratizing access to affordable payments, asset tokenization, and open financial infrastructure. While challenges remain, the promise of what Stellar can unlock is intriguing.

As the world becomes more globalized and demand grows for seamless value transfer across borders and asset classes, projects like Stellar that utilize attributes of blockchain technology in innovative ways will become increasingly important.

Enhancing financial inclusion and access, reducing friction and fees, accelerating settlement times, and facilitating more liquid and efficient capital markets all have immense potential. Could Stellar’s infrastructure ultimately revolutionize how we conceive of payments, remittances, asset ownership, and financial products?

It remains to be seen whether Stellar and similar decentralized protocols can achieve the network effects and adoption necessary to make seismic impacts. However, the big ideas and possibilities they introduce make Stellar a project well worth following as blockchain-powered finance continues to evolve.

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