Cryptocurrencies have been dreamed about for years—e-cash, Digicash, b-money and bit gold—until they finally became a reality in 2009. Once the seeds of decentralization with bitcoin were sown, many people could see countless opportunities in a virtual currency. Blockchain technology, the source of this democratic phenomenon, had the potential to disrupt various industries. This realization led to ground breaking and innovative projects involving developers, business minds and programmers including early cryptocurrency pioneer Jed McCaleb.
The original idea was to help people by reducing extraneous fees and connecting them worldwide; however, the idea got lost in a sea of emerging ICOs and crypto projects. Staying true to blockchain’s concept, a finance platform that would be beneficial for both rich and poor, named “Stellar,” was created in 2014 under the guidance of Jed McCaleb. Like any other project, the system strived to provide a wide range of options for users, but unlike others, its aim was to become a non-profit organization that would fulfill basic financial needs.
Finance with a Mission
The Stellar Development Fund (SDF) was officially introduced in June 2014 by co-founder and CTO, Jed McCaleb. The project promised to focus on philanthropic activities such as providing banking for people without one. It was a non-stock organization with no individual profits for employees or private investors. The Stellar network was created as an open-source code with a distributed and decentralized exchange that would allow people to send and receive cross-border payments.
Out of the 100 billion Lumens (XLM), previously known as “Stellars,” that were initially created, 50% were dedicated to whomever signed up to the network, 25% for partnerships with non-profit institutions and other businesses, 19% for bitcoin holders, 1% for XRP holders, and 5% for Stellar’s operational costs. Additionally, the network decided that new Lumens would be added every year using an inflation rate of 1%, where XLM would be distributed weekly to users based on a voting system. Stellar received $3 million in funding from Stripe, an Irish online payment processor, in exchange for 2% of available Lumens, as per the Lumen Distribution Mandate. Currently, 18 billion Lumens have been distributed by SDF; 4 billion have gone to new users, 2 billion are held by bitcoin consumers and 1 billion have been given to existing partners.
A Philanthropic Approach
The detail that differentiates Lumens from other cryptocurrencies is that acquiring XLM is mostly free, reinforcing the company’s motive to work for various social causes. In order to understand the journey and Stellar’s generosity, we must have a look at the person behind the project.
McCaleb always had one problem with the world: banks and financial institutions posed unfair restrictions for everyday people. He claimed that “the world’s financial infrastructure is broken and that too many people are left without resources.” Having worked for technology companies, along with creating eDonkey and Code Collective, he was well aware that not much progress was being made in the developing countries. So Jed along with Kim, created SDF to provide an easily accessible and cheaper online payment system for the world. The Stellar network was launched in November 2015 with a few upgrades made on the Stellar Consensus Protocol (SCP), which would allow fast and secure transactions.
Poverty and Growing Unbanked Population
In 2016, McCaleb gave an interview to IdeaMensch during which he explained that 2.5 billion people in the world don’t have access to banks and financial institutions. Most of these people live in developing countries; however, some even belong to economically stable countries. This situation stifles business and employment opportunities for these people, which leads to poverty and unbanked individuals.
Many people in these areas store cash in their houses, an easy target for criminals who leave them penniless. Here are a few of the reasons why unbanked and even underbanked people avoid opening bank accounts:
- Awareness—Some people in developing countries use banks only when they need to save money. This low demand for financial institutions results in turn in fewer banks in a country. So, the ones that are available increase their remittance fees.
- Bank Fees—A person who earns a low salary and has a family to feed and rent to pay finds it impossible to waste money on banking fees.
- Deposit Fees—When someone opens an account, a sum of money is required to be deposited into the account. In some cases, if certain requirements of the bank are not fulfilled, a monthly fee is deducted from the bank balance.
- Hidden Fees—Some local banks may charge fees without explanation and refuse to respond to questions from their customers. Pew Research Centre reports that one-third of people surveyed chose to leave banks due to random fee structures.
- Transaction Fees—Local transaction fees may be low, but foreign transaction fees take out a large part of the amount one intends to receive or send.
- Paperwork—Many people shy away from the heaps of paperwork they need to fill out while opening a bank account. Additionally, lack of education makes it difficult for many to even understand, let alone fill out, basic forms.
- Accessibility—Banks are mostly located in the center of a town, which may be far away from the residential population. Since banks have limited operating hours, some people can’t get to one without taking time off from work.
- Disqualification—People who have poor credit, lack required documents or earn little money may simply be prevented from creating a bank account.
In the last few years, people have had available various electronic payment systems and mobile payment applications. Even though these platforms offer global connectivity, they still require people to connect their online account to a bank account. Furthermore, they fail to lessen the increasingly large remittance costs.
Stellar to the Rescue
SDF plans to solve these problems by improving accessibility and promoting financial inclusion and education. Stellar powers a blockchain ledger that provides permanent and transparent transactions. One of the network’s responsibilities as a non-profit organization is to distribute, promote and facilitate the use of its digital currency. This task can’t be achieved by adopting general cryptocurrency scarcity methods meant to increase the value of the coin. According to McCaleb, “With Stellar, our aim is to use an open source financial network to tie the disparate, siloed institutions together and move money cheaply and seamlessly.”
The only way to tackle this problem is simple: to give people access to Lumens; they would then actively use the network and become advocates, promoting the company to other interested parties. More entities and individuals would donate funds to Stellar to promote financial accessibility worldwide. The project itself takes careful measures to fit a non-profit structure by making executive compensation and annual financial reporting available to the public. In a period of ten years, all the free Lumens would have been distributed, thus making Stellar a phenomenon similar to the Internet. The network is and will always remain free—a single transaction requires only a base fee of .00001 XLM. The fee exists to keep cyber-attacks such as DoS far away. Similarly, users are required to keep a minimum of 0.5 Lumens to create an active network of users.
Foreign transactions are completed using three methods: (1) conversion through an offer, (2) using Lumens as an intermediary currency, or (3) a chain of conversions. Let’s take the first method where a person in South Korea plans to send a certain amount of won to the U.S. without going through the hassle of wire transfers. The person will create an account on Stellar and receive Lumens after following various instructions—or buying them from an exchange. Next, this person will deposit won into his or her account by using anchors. Anchors can range from banks and other entities to non-profit organizations that will transfer cash into a virtual account. The anchor will find another anchor that is ready to exchange the specified amount of won to dollars. The transaction will be verified using consensus, and the lowest conversion fees will be applied. Finally, the person in the U.S. will receive the virtual money, which can be easily convert to cash.
The second method converts money into Lumens in case the anchor is unable to directly exchange the won. The third method finds an exchange to turn the won into another currency, which is then converted into dollars. However, even if the process requires more than one exchange, no additional fee is added to the users’ account. This means that users are always successful in finalizing their payments by eliminating banking fees and paperwork and avoiding the challenge of financial accessibility.
Banking the Unbanked
The three remaining problems for tackling poverty and unbanked problems are awareness, disqualification and lack of education. Fortunately, Stellar has existing examples in its portfolio that describes the future of the network, as explained by Jed McCaleb in the Distributed Markets conference last year. All of this is possible by partnership programs offered by SDF, where companies gain Lumens from donating funds to the organization. In this way, international companies adopt the protocol and aid the network in spreading its branches throughout the entire world.
Only 37% of women in developing countries have bank accounts. Either banks don’t allow them to open accounts since they are jobless, or they save money in their homes. Because of this, one of the earliest partnerships was formed with the Praekelt Foundation in 2015. The organization used Stellar’s protocol in a messaging app to help South African women save money on their mobiles. Now, girls can collect mobile airtime as a form of money that can be converted to cash whenever they want. Thus, they can pay for their own school fees, and in turn, increase the literacy rate for women.
In 2016, Stellar joined hands with Oradian, a cloud-based software, to create a payment transfer system in Nigeria. The Gates Foundation reported that 24% of the people in rural Nigeria had no access to banks or other financial institutions. By using Stellar, 200 rural areas and almost 300,000 Nigerians (out of whom 90% were women) can enjoy free financial transactions. Improving life in rural areas by introducing a modern and robust network of payment system ultimately reduces poverty. Stellar also collaborated with modern banking provider Parkway Projects, payment and e-commerce service Cellulant, financial provider Flutterwave, non-cash remittance platform SureRemit, and value-added service provider Cowrie Integrated Systems in Nigeria. In all of these partnerships, Stellar went beyond providing a payment system—it created opportunities for women in developing countries to improve their lives.
In 2017, Stellar partnered with Bloom Solutions to provide payment solutions for unbanked people in Philippines. With 7,107 islands, many areas were left untouched by financial institutions. Locals had to travel in boats and spend money on other transportation services to reach banks. The country has one of the biggest remittance markets in the world—in 2015, Filipinos sent $26.92 billion back to their families. By digitizing payments, they can now directly send and receive money from any financial branch that uses Bloom Solutions. Stellar also teamed up with coins.ph to provide mobile payment services in Philippines.
Apart from technological advances, Stellar distributed 19% of Lumens to bitcoin holders in 2016 and 2017 to give everyone an opportunity to become an owner of XLM. Additionally, 5% of Lumens, set aside for operational costs, were also auctioned to fund the network without allowing team members to participate in any of these events. Stellar found additional anchors in China, Kenya, India, Uganda, Singapore, the Pacific Region, Bahrain, Indonesia, Australia, Malaysia and Korea. These companies fell under the categories of asset management platforms, technology and mobile service providers, banks, fintech startups, and cross-border payment, money transfer and remittance platforms.
The Road to Financial Inclusion
Two years ago, McCaleb said that in order to promote the Stellar ecosystem, SDF must “seed it with use cases that will make a real impact on the global economy: savings, credit, and payments products for the 2 billion people without access to traditional finance.” Back then, many wondered how Stellar would manage these financial operations since it was a non-profit organization.
The answer to the question was straightforward but slightly fragmented. For any philanthropic company to succeed, it must create a team of professionals, identify a realistic and fruitful mission, give back to the society, become extremely transparent and make plans for the future. Stellar’s team members include former Yahoo, Microsoft and Facebook employees as well as developers who have extensive background in dealing with cryptocurrency and blockchain technology. Furthermore, the advisory board consists of WordPress founder Matt Mullenweg, AngelList founder Naval Ravikant and Y Combinator president Sam Altman, among others.
The company’s mission is clear and concise:
The mission of the Stellar Development Foundation (SDF) is to promote global financial access, literacy, and inclusion. SDF accomplishes this by expanding worldwide access to low-cost financial services through the development and maintenance of technology and partnerships.
Not only does Stellar emphasize the equal distribution of Lumens but it also uses unclaimed XLM to improve SDF operations or allocate them for the Stellar Build Challenge (SBC). SBC rewards users with Lumens for creating applications, APIs, wallets, tutorials, ICOs, and exchanges built using its protocol. Once again, the company is finding more ways to build a healthy environment for cross-border payments via online networks. Stellar doesn’t distribute profits to its employees, nor does it compensate the team secretly. It is a tax-exempt non-profit organization, which means that financial and compensation documents are freely available. Furthermore, the organization interacts with the community and regularly publishes details and roadmaps of future updates.
Today, blockchain and cryptocurrency projects, as well as tech savvy companies, are turning towards the better blockchain: Stellar. Its ability to allow quick transactions (3-5 seconds) accompanied with lower fees makes it highly attractive for users. Jed McCaleb calls himself and his project “eager” to bring a positive change to the world. Last year, IBM chose the network to begin working for a system that would cover 60% of cross-border payments in the South Pacific region. In addition to that, Mobius ran its ICO on the Stellar platform and raised $39 million. Since the beginning of 2018, more and more people want to learn about this cryptocurrency—now listed among the top 10 cryptocurrencies. The market cap crossed $1 billion in November 2017 and since then has stayed above that figure.
While people rush to invest in Lumens and spread the word among colleagues and friends, SDF successfully fulfills its mission. The gaps created by illiteracy and geographical distribution are being filled. Simply put, the road to financial inclusion is being slowly built, just like people are slowly adapting to this digitized world. It won’t be long before the network covers all parts of the world. In the end, Stellar will stand out as the first blockchain payment system of the people, by the people, and for the people.
More information on the Stellar Development Foundation and Jed McCaleb can be found on his personal website http://jedmccaleb.com/ as well as on Twitter (@jedmccaleb), GitHub (@jedmccaleb ) , and Cointelegraph .