This article was published on August 1, 2014

What you need to know about Stellar, the new open-source solution to international currency exchange

What you need to know about Stellar, the new open-source solution to international currency exchange
Roberto Baldwin
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Roberto Baldwin

Roberto Baldwin was a reporter for The Next Web in San Francisco between April 2014 and March 2015. Roberto Baldwin was a reporter for The Next Web in San Francisco between April 2014 and March 2015.

Sending money internationally usually involves an expensive wire transfer at a brick and mortar location. “Our lives have become global but the financial system hasn’t caught up,” says Stellar Executive Director, Joyce Kim.

Stellar is the latest currency scheme from the tech world to help move the financial system into the present. It’s being financed by Stripe, the online payment system amongst others. The open-source decentralized system facilitates sending and receiving money in multiple currencies. For example, you can send US dollars to a friend or family member in Mexico and it’ll be received as Pesos.

The transactions can be peer-to-peer or use a middleman known as a Gateway. The gateways help create a more convenient tracking system of your transactions. Sort of like how a traditional bank acts as a gateway to help you store and track your transactions. But because Stellar is an open protocol, anyone can be a gateway.

While it’s a money system made “for the people,” it’s important that you trust the gateway you’re using says Kim. You should trust a gateway in the same way you would trust an established banking institution. “If it’s like, you shouldn’t trust that element,” she says.

To start sending money, you make a deposit in a gateway like you would a traditional bank. For example, if you deposit $200 in a gateway it is now credit in your account. Then with that credit you could send $50 to your family in Mexico, and $100 to your friend in Japan. Both parties will receive credit in their accounts. When anyone wants to “cash out,” they trade the credits with gateway for the corresponding currency. The system replies heavily on gateways.

Fortunately, Stellar has already generated a ton of buzz in the financial and developer world. “We’ve gotten tons of emails about it and its IRC chatroom is full of people talking about what they want to do with it,” Kim told TNW. So don’t be surprised when a gateway from a company you trust pops up.

Since Stellar is open source, developers can build payment and transaction apps around the service. Someone could build a Venmo-like app to send money to friends in other countries and not worry about dealing with converting the cash. But, not all countries have an easy way to convert one currency to another. Maybe there isn’t an easy way to convert Euros to Kenyan shillings. That’s where the virtual currency comes in.

Called stellars, the virtual currency acts as a link between currencies during a transaction. When two currencies can not be directly converted, stellars make it happen. “It’s the water that connects those two islands together,” says Kim. Which is why Stellar is giving the currency away for free as an access tool.

On its FAQ, Stellar states:

The hope is that the stellar currency itself will be mostly a behind-the-scenes currency, and that the Stellar network will help provide more liquidity between currencies.

Each transaction costs 10 microstellars (0.00001 stellars) which is incredibly cheap when you factor in that if you signup for Stellar right now, you get 5,000 stellars. There’s an initial cache of 100 billion stellars and every year, that will increase by one percent. Currently, stellars have no actual value, but that can change over time if the system takes off.

Considering how much of Silicon Valley is made up of immigrants hoping to make a better life for themselves here in the United States in the tech-sector gold rush, and that many of those folks send money home to their families, a system like Stellar could take off pretty quickly. And it if does, it could grow internationally and suddenly you don’t have to visit Western Union to wire money to your family, like you’re still living in the old west.

➤ Introducing Stellar

Correction: An earlier version of this article indicated that Stellar was from the Stripe team. Stripe is an investor.