Edge of Innovation

Stellar cryptocurrency challenges Bitcoin as the future of money

 

What is the future of the money in your pocket? Is it a replacement credit card like Plastc and Coin? Or wireless payment systems like the Apple Watch? Perhaps it’s all-digital currencies like Bitcoin, which has been growing in respectability since it debuted in 2009?

Bitcoin isn’t the only so-called cryptocurrency around. Auroracoin, BlackCoin, Monero and Dash have all launched against it. But with the launch of Coinbase in the UK, enabling Bitcoins to be securely traded for British Sterling as well as US dollars, the world’s first digital currency is gaining a wider foothold.

In fact, the credibility of some Bitcoin exchange and processing systems, such as Coinbase and Bitpay, have enabled large companies like Dell, Microsoft and Expedia to start accepting digital payments.

Bitcoin is a volatile currency with a troubled history

The trouble is, Bitcoin is a limited currency. There will only ever be 21 million Bitcoins in circulation. It’s also a volatile currency. A Bitcoin was worth over $1,000 in January 2014. A year later, it was worth $177. In some respects, Bitcoin has become a stock – not something to be spent, but an investment to be managed.

The security of Bitcoin is also a barrier to wider acceptance. Back in February 2014, the Mt. Gox Bitcoin exchange in Tokyo closed after hackers stole 850,000 bitcoins, worth more than $460 million. While in January 2015, the Slovenia-based Bitstamp exchange was fleeced to the tune of 19,000 BTC ($5.1 million).

Stellar, a technology that claims to move money directly between people, companies and financial institutions “as easily as email”, is a late entrant to the cryptocurrency party. Its SCP protocol, created by Stanford professor David Mazières, is being pitched as a faster, cheaper and more secure alternative to Bitcoin.

Stellar Development Foundation
Want to know how Stellar works? The organisation has produced a handy digital comic that explains its consensus validation model.

It works in a similar way. All transactions are recorded on a shared public ledger and are authorised by “a decentralized system in which participants together ensure integrity by agreeing on the validity of one another’s transactions.”

With Bitcoin, a network of currency ‘miners’ run software to solve mathematical problems and receive new Bitcoins as a reward for doing so. Bitcoin transactions can only be verified by these miner machines. SCP does things slightly differently, enabling its users to identify their own trusted partners. It will only validate transactions once the majority of those partners have authorised them.

The model is called a federated Byzantine agreement (FBA).

Stellar hopes to be easier to use and more difficult to hack

“In FBA, each participant knows of others it considers important,” says Mazières. “It waits for the vast majority of those others to agree on any transaction before considering the transaction settled. In turn, those important participants do not agree to the transaction until the participants they consider important agree as well, and so on. Eventually, enough of the network accepts a transaction that it cannot be undone.”

Compared to Bitcoin, this approach to consensus and validation should make Stellar speedier to use and more difficult to hack.

The biggest challenge for any cryptocurrency is acceptance. It’s why the Stellar Development Foundation is a non-profit organisation and why Stellar has been designed to be open and inclusive.

“Just as the Internet allowed anyone to send an email or create a blog, Stellar’s common financial platform now allows you to easily send, save, and receive money, without large fees or hassle,” says the Stellar website.

Find out more at: www.stellar.org.

Featured image, copyright: Lightboxx/Shutterstock.

 

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