The Stellar network is used to facilitate trading cryptocurrency by providing an open-source protocol that allows its users to make trades between digital currencies and traditional payment currencies (such as US dollars or Euros). The Stellar payment network allows users to store and transfer money without limitation, essentially existing as a resource for financial systems throughout the world to operate on its network.
In addition to being a ubiquitous storage and transfer system for digital and fiat currencies throughout the world, Stellar also has its own currency token, called a lumen, that can be traded through various tokens that are built using the Stellar protocol.
Stellar's unique blockchain implementation is more efficient and more powerful than other cryptocurrency blockchains, including the one used by Bitcoin, currently the largest and more widely used cryptocurrency.
To learn more about how the Stellar payment network functions, we will take a look at the details of the concepts used by the Stellar protocol. Lumenauts.com, the unofficial user guide for the Stellar network, has created some very useful instructional videos that make Stellar consumable by both highly technical people and those who just want an overview understanding.
What is the Stellar Network?
The Stellar protocol and payment network was invented to solve the problem of exchanging money, which often involves friction and overhead, especially when the money is being stored in separate banking institutions. The money exchange problem gets even worse when more than one currency is involved.
Explaining the purpose of the Stellar network can be done using a comparison to messaging between people, which is analogous to money exchange. Just as the Simple Mail Transfer Protocol (SMTP) was created to send messages through the internet, Stellar created a protocol that allows money to be exchanged between people throughout the world without the overhead and inefficiencies that currently exist with many of the methods for sending money, especially when a currency change is involved.
Although it solve a similar problem, Stellar's approach to money is naturally much more sophisticated than SMTP. The Stellar network protocol has to solve three different problems that exist with trading money:
- Digitally representing all currencies and other assets in their native forms
- Create a way to make all of these currencies and assets interchangeable, regardless of which digital or fiat currencies are being used
- Prevent double-spending, which is the ability to send the same chunk of money more than once.
Stellar has created a 3-layered protocol to solve these three problems.
To solve these three primary problems, Stellar provides a three-layered protocol that involves:
- anchors for representing an asset; the anchors are tokenized to exist on the Stellar network
- a built-in decentralized exchange (DEX) for matching up offers to sell with offers to buy
- Stellar's consensus mechanism - Stellar Consensus Protocol - provides a more efficient alternative to Bitcoin's proof of work