Layer 1 Blockchain: Stellar — A Move towards facilitating Multi-Currency Transactions
Blockchain technology resulted in a new wave of cryptocurrency. While the consensus mechanism is widely adopted by blockchains which are also the basis of various cryptocurrencies, the core issue faced was still the time spent in reaching the agreement on the transaction validity. This, in turn, increased the block creation times, making transaction processing slower.
To overcome this problem, several innovative attempts were made. One such instance is the prominent Layer 1 blockchain — Stellar.
So far we’ve looked into several Layer 1 blockchains including Solana, Avalanche, and Klaytn. In the fourth article of the Layer 1 series, we will take a look into the Stellar blockchain, from how it works to the benefits it brings, and finally, how it is different from other blockchains in the crypto space.
What is Stellar?
Stellar is a blockchain-based payment protocol that enables cross-border payments and transactions between any pair of currencies. Similar to other blockchain-based networks, the transactions on the Stellar network are added to a public distributed ledger. It uses a consensus mechanism known as Stellar Consensus Protocol(SCP), based on the Federated Byzantine Agreement (FBA).
The Stellar Consensus Protocol processes transactions at a faster rate and lowers costs, allowing everyone on the network to reach a consensus on the transaction’s validity within a few seconds. Each node that adds transactions to the public ledger chooses its mini-network of trusted participants. In addition, it enables Multi-signature and the use of smart contracts.
Stellar’s native cryptocurrency, Stellar Lumen (XLM), powers all its operations. The requirement of transaction fees and minimum amount in each account protects the system from DDoS attacks and maintains network efficiency.
Benefits Stellar brings
Stellar offers several benefits; some of the key ones are discussed below:
- Decentralized Exchange:
Stellar acts as a distributed exchange that allows users to convert assets on the network. Users can create orders to buy or sell assets through ‘Offers’. In the case of Stellar, an offer refers to a public promise to exchange one form of credit for another at a predetermined price. All the offers in the Stellar network constitute an orderbook, and the Stellar network holds an orderbook for every currency/issuer pair. Thus, Stellar acts as a marketplace for users to buy and sell different currencies.
- Multi-currency Transactions:
Another key advantage of Stellar is multi-currency transactions, users can trade tokens peer-to-peer with the inbuilt decentralized exchange. Transactions can happen in several ways. In the case of direct exchange, for example, the Stellar network can check the USD/EUR exchange to see if there is a buyer who wants to purchase EUR for USD. If someone is immediately available, the transaction occurs instantly.
In a scenario of indirect exchange, Stellar looks for someone willing to get USD for XLM and connect to someone who is looking for XLM in exchange for EUR and completes the transaction.
- DeFi and NFTs:
The Stellar network also enables multiple DeFi projects. The unique consensus protocol of Stellar speeds up the transactions, thereby making DeFi applications faster. Stellar blockchain also supports NFTs. The high speed and scalability that it offers to make it convenient for NFT creators to mint their artwork.
How is it different from other blockchains?
● Speed and Transaction fee: Stellar allows users to trade at high speed while keeping the cost low. For example, take the transaction in Ethereum and Stellar for comparison: It takes several minutes to process transactions on Ethereum, however, Stellar completes the transactions in seconds. Aside from the processing time, the average transaction fee on Stellar is much more cost-effective with a price of $0.0000013 only, compared to the cost of $3.01 on Ethereum.
● Compliance: Regulations like AML and KYC are essential that business providers need to follow to provide services to users. The Stellar network has built-in compliance features that allow financial institutions to perform AML and KYC checks and unified AML and KYC compliances across parties, which also makes it different from other blockchains.
The bottom lines
The Stellar streamlines operations and improves the efficiency of transactions, enhancing liquidity in both the finance and crypto space. With its unique features, it also brings a strong potential for the future of digital assets.
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DisclaimerThis content is not financial advice and it is not a recommendation to buy or sell any financial instruments, FX trading, cryptocurrency or engage in any trading or other activities. You must not rely on this content for any financial decisions. Acquiring, trading, and otherwise transacting with financial instruments or cryptocurrency involves significant risks.We strongly advise our readers to conduct their own independent research before engaging in any such activities.GMO Trust does not guarantee or imply that any cryptocurrency or activity described in this content is available or legal in any specific reader’s location. It is the reader’s responsibility to know the applicable laws in their country.