Jed McCaleb is the founder of Stellar, an open-source non-profit platform that is seeing its first ICOs. He detailed the capabilities of Stellar’s open-source code, as well as the challenges and opportunities of the project in a recent Q&A podcast Block Zero by Kevin Rose.

The creation of Stellar, back in 2014, consumed much of Jed McCaleb’s energy, as the project climbed to rank six in terms of market capitalization in the cryptocurrency markets. In the podcast, McCaleb goes into detail on what makes Stellar different from both Bitcoin and Ethereum. At the moment, Stellar is one of the market’s most active cryptocurrencies, gaining the attention of the Asian markets, but it’s also accessible to US-based investors.

How, and Why was Stellar Created?

Stellar mimicks the model of Ethereum, NEO, QTUM, NEM and other projects aiming to go beyond just issuing a coin, and into creating an entire ecosystem. But this project is also a lesson in governance and game theory, seeking to go beyond the mining proof of work engine of the Bitcoin and Ethereum networks, instead building a network of carefully engineered consensus nodes able to avoid hijacking by malicious actors and impersonators. The Stellar system combines cryptography, governance and trust in an ecosystem allowing for fast and secure transactions.

With more than 1,500 various digital assets listed on the markets, Stellar truly stands out, both by surviving for years in a dynamic market that saw the unraveling of hundreds of coins and platforms – but also for taking 2017 by storm, remaining in the spotlight for months where one-day crypto sensations had only weeks of active trading. At the moment, Stellar sees consistent daily volumes of more than $100 million, and is gaining in one important measure – a strengthening price against Bitcoin. Even at a low dollar price, some believe the inflow of Bitcoin investments may more strongly boosting to Stellar.

McCaleb heard about crypto back in 2010 while looking for upcoming technological opportunities. At that point, Bitcoin was just launched, and the White Paper of Satoshi Nakamoto was just released, the only source of information on the nature of the first working cryptocurrency.

McCaleb was attracted by Bitcoin for having solved the problem of free electronic money uncontrolled by a central authority. A Slashdot article shed light on Bitcoin, and although McCaleb never mined the coin in earnest, he went on to create Mt. Gox, the Tokyo-based early and influential Bitcoin exchange that later went defunct. McCaleb had already abandoned Mt. Gox before it crashed in 2013, causing one of Bitcoin’s biggest slides from $1,000 back to $100.

It was the first real exchange, after a period where Bitcoin was a novelty, exchanged on local markets and in-person meetings, McCaleb explained. Years ago, Bitcoin would be traded by personal promises, using small PayPal transfers.

The Mt. Gox scandal saw McCaleb leaving Bitcoin’s early adoption and moving on to new projects. He tried to creatively solve the mining problem, and its energy waste, seeking ways for security without mining. Currently, Bitcoin mining is constantly increasing in energy usage, causing even more concerns it is becoming unsustainable, and inviting solutions with some form of staking.

Stellar arrived just when online technologies were booming, and online presence was increasing; hence the digital asset and the platform was created as internet-grade protocol for payments. The idea was to make value and money move like email, with heightened security. McCaleb envisioned connecting financial institutions and everyone participating in the same system without gatekeepers. At the moment, the Stellar ecosystem has installed the programming infrastructure for achieving payments similar to existing online technologies, but only at the developer level. According to social media users, Stellar’s biggest weakness is the lack of a user friendly fintech product, which could help it to build a larger user base, and also invite businesses with increased credibility.

The Stellar ecosystem and platform were created from scratch, with unique features that went beyond even the functionalities of the most widely used ecosystem, Ethereum. The Stellar project is fashioned for the internet and is completely open and non-controlled by an entity, except for the Stellar Foundation, a grass-roots organization. Stellar is a bottom-up project, still far from adoption by the finance sector. So far, banks have only tried those systems on a trial basis, but may be years away from adopting production software.

According to Jed McCaleb, Stellar’s development may come from the community, as the open-source code features all the tools and primitives, but the final user-friendly application is a matter of future work. So far, there are no hard and fast milestones for Stellar.

How does the Stellar Network Function?

Stellar features a different consensus protocol created by professor David Mizeres back in 2014. Every node chooses a list of other nodes it wants to listen to, picking the important peers. Then, node operators agree based on other operators that agree, and there is a transitive quorum over the network as nodes converge to the same value. It is similar to a Facebook friends graph, based on overlapping points, covering the whole network. If a node starts misbehaving, it may be dropped from the trusted list, encouraging solid actors. There is also the need to believe that there are no collusions and cartels, and all players are honest.

Proof of work would not work for Stellar, since the system will have the capability of tokenizing assets. This means that real-world economic value would be at stake, not just newly created digital tokens. This may give more incentive to hackers, compared to those attacking other networks, to abduct the native digital asset. At the moment, a 51% mining attack on Bitcoin is not feasible, but if each Bitcoin represented even more valuable assets, attacks may become, in theory, more probable.

If there is a trillion worth of worth, the PoW only protects the native asset – but not the potential tokenized assets. Therefore, the Stellar system needed a new layer of security. Tokens exist in the Stellar ecosystem, backed by specific institutions so that they may run validators with other nodes. These nodes must agree and accept their versions of the distributed ledger, otherwise the network would be split into conflicting versions. In the Stellar ecosystem, validator nodes have the right to “speak” only to selected peers, thus discounting nodes suspected to be dishonest. This introduces a level of trust and partial centralization into the system, but it is a necessity to secure the tokenized assets.

According to McCaleb, the Stellar system is superior to Ethereum, since a split in the Ethereum chain would also make all tokens split, and create confusion. So far, Ethereum has had only a handful of contentious hard forks, and nothing has been said of duplicated tokens on both networks. But in Stellar, a network split is impossible, due to the consensus system which takes the nodes and their reputation into account. A minable proof of work coin is much easier to split, creating an alternative blockchain.

How are Assets Tokenized in the Stellar Ledger?

Since the Stellar ecosystem seeks to bring in the future of fintech and cross-border payments, fair tokenization is important. According to McCaleb, the principle can be intuitively understood by assigning assets in the distributed ledger, which would represent dollars, or any other fiat currency used by banks.

To verify that assets actually exist, the participating institutions are important to verify the balances and transactions. The principle is the same as the PayPal system of assigning dollars, while connecting to the bank’s transfer system. PayPal moves dollars most of the time without involving banks; they are “PayPal dollars”, as McCaleb calls them.

Stellar aims to work with licensed institutions to ensure the legality and truthfulness of balances and to avoid accusations that affect the Tether ecosystem. Tethers are confusing phenomena in the crypto market. They are specialized, fixed-price tokens pegged to the US dollar, and in theory backed by dollars in a bank account. However, there is still no satisfying legal proof that the dollars actually exist. Still, Tethers are in use on most major cryptocurrency exchanges.

How did Stellar Survive?

Stellar has survived since 2014, when many crypto projects died out due to neglect, loss of developers, or outright scams. After a long drought, the markets and popularity picked up in the spring of 2017. McCaleb shared that he was caught rather surprised by the sudden 10X growth in Stellar (XLM) prices, which was a game changer in terms of popularity.

Around the time the great bull market was just picking up, Stellar had already partnered with IBM, even before the market price spike. However, the coin increased in popularity as its price exploded.

IBM is perfect for Stellar, said McCaleb, for building a cross-border payment solution for banks. The contacts with banks come from IBM, but Stellar is a tested anchor to the payments. Stellar itself is not aiming to partner with tokenized banks’ assets, and is not communicating directly with financial sector entities.

The system is still theoretical and being tested for glitches, but the aim is to use the public blockchain, instead of creating private blockchain channels. A private database is not needed; it would a better and faster, and a better-understood data structure, thinks McCaleb. However, using a public blockchain is more robust due to decentralization, as well as having a time-tested consensus system.

One of the big challenges is to respect banking secrecy, while also running transactions on a public blockchain and a shared ledger. The Stellar project solves this issue by masking individual users by not linking their balances to a specific on-chain transaction. A user of Stellar would not have the funds revealed and tied to a personality, or a bank account. Hence, sending funds over Stellar would be just a technicality, not tied to a person’s wallet, or the bank account where the funds originated.

How does Stellar Achieve Decentralization?

To encourage more users to participate and give the network more value, Stellar has much smaller requirements for running a node. McCaleb believes that the network will not have millions of nodes, and was careful not to exaggerate the potential growth of the ecosystem. A thousand validators would be enough for a robust network, and accepting the vote of each node would be optional, allowing for routing to preferred nodes. This is a part of the complex game theory behind the ecosystem.

A potential vector of attack, by creating more nodes, is also prevented, because the existent nodes may vote down, or not pay attention to the new, hostile nodes, so any attacker with a large number of nodes would have a different network with no value, incompatible with the real one.

In the end, all the validator nodes have a complete copy of the ledger state, with accounts and balances of all currencies. Sending a transaction updates the ledger. Any nodes suspected of being unfair, or launched with the aim to abduct the network, could be dismissed, and the consensus voted among trusted nodes.

In terms of technology, Stellar would remain open-source, and would work in a manner comparable to the Linux open-source system, explained McCaleb. While there is only one person with commit rights on the Linux GitHub, anyone can fork the project and demonstrate the desired changes to the open-source code.

Initial Coin Offerings (ICO) Go Stellar!

Stellar is also seeing a flock of ICO projects choosing its platform, and tries to encourage quality startups to come and seek funding. So far, Mobius is one of the biggest projects on Stellar. However, McCaleb believes the ICO hype has gone a bit too far, but at the same time it’s an extremely promising way for gaining funding, even for projects outside Silicon Valley. This would level the playing field and give access to funding for global projects, or those that do not have access to the venture capital ecosystem. ICO funding could reach projects in foreign countries, or overlooked states like Kansas, McCaleb explained.

Is a Stellar Token a Currency?

All assets in the Stellar ecosystem are treated the same, whether they are asset-based, or generic tokens. Participating in an ICO on the Stellar ecosystem and buying tokens is straightforward – tokens appear immediately in the Stellar wallet. Afterwards, their movement across the network is the same for all assets, no matter the reason for their creation.

How does Stellar Allow Cross-Chain Swaps?

An easy exchange between different blockchains is one of the most coveted achievements in crypto. So far, many projects have done it, but the exact technique is still not established, so users have to rely on exchanges to move between digital assets.

In theory, a mechanism for cross-chain swaps is in the protocol, but third-party developers are expected to do that in the future with the primitives available to them. Hence, Stellar is only offering a potential, not a ready solution for cross-chain swaps.

Stellar also has the capabilities for a DEX, and it has a built-in exchange for cross-border payments in its programming tools. This mechanism is built into the network and can achieve currency exchanges through Stellar-based tokens. The order book is built into the distributed ledger and can handle payments and any other orders for currency exchanges.

Stellar is also fast in settling trades and exchanges, not as fast as NASDAQ, but the ledger updates every five seconds. Trading is a primitive on the Stellar network, more efficient than Ethereum, where such actions are built through scripts.

How does McCaleb See Stellar in Five Years?

Stellar is not focusing on smart contracts now, and it is up to third-party developers and community enthusiasts to take up the code and achieve results. Cross-border payments and currency exchanges are currently key for the Stellar project, as well as handling stocks and derivatives, as well as payments. Stellar aims to be the standard for sending international payments and will achieve this by snowballing with a group of payment companies and participants.

For moving money cross-country, users would ultimately have a global Venmo-like system, backed by the Stellar system. However, this is still in the works, and people are currently involved and contributing. So far, Venmo remains a unique solution, but in terms of fintech, it is a good example of what would be desirable in the case of crypto coins.

In Europe, kiosks exist to send money internationally, said McCaleb, and there is a path through the Stellar network, possibly sending remittances to the Philippines. The startup, bext360, has specialized kiosks to send value to coffee farmers, utilizing the public Stellar blockchain. International money transfers are extremely expensive, a problem for those aiming to send money to families – Stellar will aim to solve this, said McCaleb.

What is the Next Big Thing in Crypto?

McCaleb currently has various works in progress, some of which are confidential. For Stellar, building the UI for a decentralized exchange is central right now, as is the building and creation of SDAX, for fiat-based tokens, mimicking forex exchanges. The plan is to launch this system in the spring, meaning that the Stellar project is due with news soon.

McCaleb still plans to research the other up and coming crypto projects and sift out the promising, quality coins – but right now the options are too numerous. He urged users interested in Stellar to join the Reddit community and the Slack channel, possibly chatting up the developers personally.

To learn more about Jed McCaleb and Stellar visit: http://jedmccaleb.com/