5 Ways the Stellar Network is Changing the Global Payment Industry

Rethinking Payments

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.

1. Decentralization

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”.

2. Global

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.

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).

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 the what they are sending depending on the transfer amount.

5. Inclusivity

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.

Conclusion

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.

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