Introduction to Stellar DeFi
Why should you care about Stellar and its ecosystem
On the Stellar network, DeFi applications leverage the platform’s capabilities for fast, low-cost transactions and asset tokenization. Stellar allows the creation of tokens representing various assets, such as fiat currencies, commodities, or securities, facilitating new investment opportunities. Through this, Stellar is known to be the solution to these 3 key areas:
Interoperability, scalability and low cost, fast transactions.
Interoperability
The network seamlessly connects with traditional financial systems and other blockchains, making it a hub for cross-chain DeFi dApps. Stellar is ahead of the curve and anticipated institutional involvement from its inception. They have focused on allowing for seamless integration with existing banking systems. This interoperability facilitates cross-border payments and asset transfers between different financial systems. They currently have a partnership with Moneygram which has rails between USDC and fiat by providing a smooth, seamless on and offramping.
Interoperability extends across the cryptocurrency space also. Stellar supports transactions across multiple blockchain platforms, enabling cross-chain dApps. This feature allows for various blockchain networks to communicate with each other, thus enhancing the reach and versatility of DeFi solutions.
Scalability
The more a project can scale, the more traffic it can handle and thus the more transactions it can handle and more users it can obtain. Stellar is designed to handle a high volume of transactions efficiently which makes it perfect for transfers such as cross-border payments and remittances. Scalability is a common problem within crypto, however Stellar built with this in mind. The following are the main contributing factors as to why they are solving the scaling problem.
- Stellar processes transactions in ≈2–5 seconds, significantly faster than traditional banking systems, compared to cross-border transactions taking multiple days/weeks.
- Stellar is also capable of processing thousands of operations per second, ensuring it can handle high transaction volumes without significant performance degradation.
- Transactions costs are ≈0.00001 USD per transaction, Stellar encourages frequent use and makes transactions accessible and affordable.
Architecture
Stellar Consensus Protocol
Taking a look at the mechanism behind Stellar, you will find that Stellar uses the Stellar Consensus Protocol (SCP), a Federated Byzantine Agreement System, which allows for quick transaction confirmations without the need for energy-intensive mining. This mechanism supports a high volume of transactions while maintaining network security and reliability.
Also, Stellar implements state archival, which helps manage data storage efficiently by archiving inactive accounts and storing them off-chain. This approach maintains the network’s overall health and efficiency.
Soroban
Stellar provides a robust smart contract architecture called ‘Soroban’. Soroban was created to enhance and support Stellar’s mission of being scalable and secure. Soroban is built with the goal of providing a developer-friendly environment that supports languages like Rust, making it easier for developers to build on the Stellar network. It is built with the goal of providing a developer-friendly environment that supports languages like Rust, making it easier for developers to build on the Stellar network.
Soroban is optimized for scalability, ensuring that smart contracts can handle a high volume of transactions efficiently. This scalability is crucial for dApps which require fast and reliable execution. It also emphasizes security, providing mechanisms to protect user funds and ensure the integrity of the smart contracts.
As Soroban underpins everything, here’s some use cases for the technology. Soroban can be used to build DEXes which offer fast and secure trading experiences. Developers can also create lending platforms which allow users to borrow and lend assets in a decentralized manner and these platforms can offer more flexible terms and better interest rates compared to traditional lending systems. This works to further improve the world of DeFi with higher yields compared to TradFi options.
Asset Tokenization
The future is onchain. As real world assets (RWAs) and stablecoins grow, so too will the ways they are issued and distributed. Stellar has built their network to allow for this process without the need for any smart contract involvement.
How to tokenize an asset on Stellar (Guide)
- Set up a primary account to issue the asset. This account is the origin of the asset and is forever linked to its identity.
- Establish a secondary account to receive and distribute the asset. This account is the first recipient of the asset and is used to manage its distribution.
- The distribution account must establish a trustline with the issuing account to hold and trade the asset. This trustline signifies trust in the issuing account and its assets.
- The issuing account transfers the asset to the distribution account, which can then distribute it further to other users.
Tokenization comes with compliance risk and procedures to follow. There are many such historical cases in which this has been a problem and outlawed entire projects from seeing the light of day. By recognizing this, Stellar has built-in compliance features which help issuers manage assets in accordance with regulatory requirements.
Features such as asset control access, limiting supply and publishing information about the asset natively, allow those to adhere to regulations such as AML and KYC, thus eliminating this potential risk for those who build and issue on Stellar.
Financial Inclusion
Stellar’s focus on financial inclusion is driven by its ability to offer low-cost financial services that are accessible via mobile devices. This commitment to financial inclusion can enhance corporate social responsibility initiatives while opening new customer segments for businesses. By leveraging blockchain technology, Stellar provides a platform for individuals without bank accounts to access essential financial services, including savings, loans, and remittances, which are often unavailable to them.
Cross-Border Payments and Remittances
Stellar’s ability to facilitate cross-border payments and remittances is particularly significant, offering a faster and cheaper alternative to traditional methods, which can be slow and expensive. Transactions on the Stellar network are processed in seconds, significantly faster than traditional banking systems, which can take days to settle cross-border payments. The low transaction fees on Stellar reduce operational costs, making it an attractive option for remittances and cross-border transactions
Scalability and Interoperability
The Stellar network is designed to handle a high volume of transactions efficiently, making it suitable for scalable applications. It uses the Stellar Consensus Protocol (SCP), which ensures fast transaction validation without the need for energy-intensive mining. Additionally, Stellar’s interoperability features allow different financial systems to connect seamlessly, enabling smooth transactions across various currencies and platforms. This capability is essential for businesses looking to expand their reach and tap into new markets, as it reduces the friction associated with currency conversions and enhances financial accessibility.
Role of the Stellar Development Foundation (SDF)
The Stellar Development Foundation (SDF) plays a crucial role in promoting the network’s growth through partnerships, funding, and open-source tools. This supportive environment fosters collaboration among developers and entrepreneurs, driving the creation of new financial applications and services. The SDF’s efforts help ensure that Stellar remains a leader in the blockchain space, particularly for those interested in financial inclusion and scalable DeFi solutions.
Stellar positions itself as a leader in the DeFi space, offering developers a robust infrastructure to build innovative financial solutions that enhance global financial inclusion and accessibility for the everyday DeFi user(s) and institutions who hold trillions of assets. A blockchain for everyone.
To keep up to date follow us on X, sign up to the early list HERE and join us in Discord!
