Over the past few years Bitcoin has made giant strides to become a store of value, positioning it as “Digital Gold”. With Central Banks creating ever more fiat money, Bitcoin has become a safe haven for an increasing diverse set of people. As an example, MicroStrategy announced the purchase of $1B in Bitcoin. They believe “Bitcoin will provide the opportunity for better returns and preserve the value of our capital over time compared to holding cash”. Despite the increase in adoption, there is an important problem that Bitcoin did not solve: Peer to peer payments.
This problem in fact can be found in the first line of the white-paper:
“Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. The cost of mediation increases transaction costs. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.”
After more than 10 years of development and a Bitcoin market cap of almost 600 billion dollar, we still mostly pay online through trusted third parties (like banks). One apparent reason for this is:
If I want to pay in Bitcoin, but my friend or my favorite web shop wants to receive dollars, I’m stuck with paying in dollars.
Most western consumers or web shop owners don’t have much benefit of paying in Bitcoin compared to regular fiat. It’s most often not cheaper, faster or easier than the already existing infrastructure. This leaves Bitcoin with the “Digital Gold” use case, where it functions as a hedge against inflation. A strong use case, but wouldn’t it be amazing to realize broad adoption of the peer to peer payments use case as well?
For this to happen, the challenge above needs to be solved — I need to be able to spend X, while my friend receives Y.
Solving the payments use case
This challenge can be solved by onboarding the legacy payments systems onto the same network as a digital currency.
This is where the Stellar network comes in. Stellar is an open network for storing and moving value of any kind. This makes it possible to create, send, and trade digital representations of all forms of money: dollars, pesos, Bitcoin, pretty much anything. These representations come in the form of tokens. The protocol has a built-in decentralized exchange, which makes it possible to trade any kind of value for any other kind of value, at almost zero fee.
There is even such a thing as “path payments”, which means you can pay X, while your friend receives Y (sounds familiar?). The protocol finds the cheapest route from for example Peso to Naira and executes it in one atomic transactions.
This is an interesting way to improve international remittances, but how is this related to the peer to peer payments use case?
Well, the network has a native digital currency called the Lumens (XLM). Like Bitcoin, it can be used to transact peer to peer and has a fixed total supply. The fact that it’s part of a network that is interoperable with legacy payment systems, means that you can pay with it, even if your friends want to receive something else (fiat). As an added benefit, Stellar transaction are way faster (3–and cheaper compared to Bitcoin. This makes it easier to adopt by general people.
As more and more entities issue tokens that represent value on the network, the utility of lumens grows. Cowrie for example tokenized the Nigirian Naira on the network. Which means I can pay XLM to my friend Alex, who receives Naira in his bank account. What happens behind the hood is that my XLM are traded for Naira tokens, which are then instantly redeemed for Naira in Alex’s bank account. Naira and Tempo explain here how they enabled payments from Euro bank accounts into Naira bank accounts in seconds by using the Stellar network.
Every new “anchor”, as issuers of these tokens are called, enables me to pay friends in more different assets. Even if these anchors only use XLM to pay for network fees, they increase the utility of lumens. As time goes by, some of these new friends will want to transact in this peer to peer digital currency as well.
While Bitcoin will continue to have it’s utility when storing value. The Stellar Network and the digital currency lumens are getting closer to solving a problem that was addressed in the original Bitcoin white-paper: Peer to peer payments. And for those that like to pay in Bitcoin? It can be represented on the Stellar network, making it interconnected with legacy payment systems.
