Thoughts on Stellar

A little over two weeks ago, Stellar was introduced.

The promise — a decentralized protocol for sending and receiving money in any pair of currencies.

The set up — as a non-profit. Employee compensation — setting aside an establishing grant (of stellars) for people creating and making stellars more valuable (you should read John Lilly’s post for more on that front).

You can read the details on how it all works over at the Stellar website. The purpose of this post is really just to call out my initial thoughts on a new financial transport layer:

Positives

• Fast — I sent ‘missionbit’ 50 stellars. It was lightening fast. This is because transaction confirmations happen with a consensus algorithm not mining. More on this topic…
• Developer friendly — I’m not a developer, but the docs are clean; and, from what my developer friends claim, it’s very easy to use. You can expect that from a project backed by the folks from Stripe.
• Distributed exchange built-in — THIS. I love this piece. Anyone can submit or accept an offer for currency exchange (I’ll trade $100 for £59 with no fees please! Well, you might get hit with some fees from a gateway to get the actual, physical GBP but let’s see where the ecosystem starts to price such transfers). In my opinion, this is the most powerful and important part of Stellar. You can now create custom currencies, trade your professional time, or just exchange dollars for pounds directly with another peer.
• Network effects and team — lots of technologists. Lots of digital currency experts. Lots of people who know how to scale and build companies that last and know how to do it quickly. According to Stellar’s week 1 wrap up, they already hit 240,000 Facebook auths.

Now, with the good, come some questions and things I don’t like.

Negatives

My main criticisms of Stellar actually deal with its two major distinctions when compared to Bitcoin:

• Stellar uses a distributed ledger maintained by a consensus algorithm rather than mining. Now, you don’t have to trust each individual node — you just have to trust that these “good actor” nodes (they list universities, governments, and companies) won’t collude. Stellar is basically structured as to incentivize so-called good actors to collude. This point is worth hammering home; even an entity that has been a ‘good actor’ in the past, it might be swayed to act unethically, if it is put in a situation in which it is prudent to do so. Have we seen companies collude for their own respective benefits (and at times with governments involved)? Sure, there was the whole hiring collusion thing. And how about price fixing? Also this. I’ll let you dig up other examples on your own.
• Stellar creation is also inflationary (at a 1% annual rate). The more interesting piece is the voting mechanism for how the newly minted Stellars are distributed. From the brief section on this, it appears that those “rich” with Stellars have significant influence. So, does this just benefit early adopters and large holders?

This is clearly very different than Bitcoin, which is deterministic due to its Proof of Work algorithms. It also fully removes one of Bitcoin’s biggest selling points — the fact you can prove and transfer ownership of something without the need of a trusted third-party. That said, Stellar is not meant to be a Bitcoin killer in any fashion.

What a time to be working in the financial technology space…