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Explainer: Why the new challenger to Bitcoin is worth keeping an eye on

The new currency has been backed by Stripe, founded by the Limerick brothers Patrick and John Collison, but is it worth taking note of?

Stripe co-founder and CEO Patrick Collison with Facebook founder and CEO Mark Zuckerberg at the Allen and Company Sun Valley Conference in Sun Valley, Idaho.
Stripe co-founder and CEO Patrick Collison with Facebook founder and CEO Mark Zuckerberg at the Allen and Company Sun Valley Conference in Sun Valley, Idaho.
Image: AP Photo/Rick Bowmer

YOU MAY HAVE heard of Bitcoin before, and possibly others like Dogecoin, and Litecoin, but you may want to add another one to the list.

A few days ago, Stripe, the online payments company founded and ran by two Limerick brothers Patrick and John Collison, backed a new Bitcoin-like currency and payments network called ‘Stellar’, which will allow users to send any kind of currency, both traditional and digital, to one another.

While it may seem like it’s just another new cryptocurrency, there’s far more to it than meets the eye.

So what exactly is Stellar?

The Stellar Development Foundation, to give it its full title, is a nonprofit organisation designed to provide a common financial platform and help develop common financial literacy.

Patrick Collison is a board member and his company Stripe has backed it by giving the non-profit $3 million. At the start of the year, the San-Francisco company raised $80 million (€59 million) in funding to give it a valuation of $1.75 billion (€1.3 billion) making it one of the hottest e-payments services around so it’s only natural that digital currencies would come into the equation.

Alongside Collison, it’s backed by a number of high-profile advisors such as ex-PayPal executive Keith Raboits, YCombinator (one of the biggest incubators in the US) partner Sam Altman, AngelList (a company which brings angel investors and startups together) cofounder Naval Ravikant, and Automattic CEO and founder of Wordpress.com Matt Mullenweg.

The main purpose is to act as a currency exchange network, supporting traditional currencies like the dollar, euro, as well as digital currencies like Bitcoin.

How it works is relatively simple. You can use the network to send payments through one currency which will be received in another (if you pay with euro, the recipient will get it in dollars) or hold a balance with a gateway, which is a network participant that accepts a deposit in exchange for credit on the network.

But it’s also a cryptocurrency, right? How many coins are they starting off with?

Yes, it’s started by creating 100 billion stellar coins, but its aim isn’t to directly compete with Bitcoin (not yet anyway). Instead, it wants to educate people about digital currencies and help facilitate trade and bring the payments network together. It will act as a link between different currencies since all currencies only work only within their intended territories.

The initial aim is to distribute 50% or 50 billion stellars to those who signup directly,  25% will go to nonprofits to reach underserved populations via the increased access program, 20% will go to the bitcoin program and the remainder 5% will be directed towards operational costs. It’s hoped that the first 50 billion stellar coins will be given away within the first three years, but no longer than five years.

Japan Bitcoin Bitcoin was the first cryptocurrency to get mainstream coverage, but many people are still unsure how it and similar currencies work. Source: AP Photo/Rick Bowmer

That’s pretty ambitious for a currency that currently has little market value. Why so many coins?

That ties into another aim of the Stellar Development Foundation, which is to educate those about cryptocurrencies, and what better way to educate than to give away some free stellar coins and let them play around with them.

The more people that learn how to use them, the more opportunities there will be to spend them and their value will go up.

Look at Bitcoin for example. While the value has begun to settle down (one coin is worth €440 at time of writing), and more businesses and companies are beginning to accept it, many are still unsure what to make of it. That uncertainty hasn’t hurt its overall price, but it has left many skeptical about it.

Also, its userbase is quite low with some estimates saying 1.2 million – out of 2.5 million people – would have a meaningful amount of bitcoin. Not a lot for a currency that’s global.

So what’s the guarantee that they’ll be a success?

None. Like all things in life, there’s no guarantee that it will work out or grow in value. Market value of any currency depends on a number of factors, but if it does take off, it will likely take a few years for it to happen. This is a long-term bet, make no mistake about it.

The aims of Stellar ties in perfectly with Stripe’s purpose which is to make payments simple and easier for both businesses and consumers. It’s received much praise for its approach to online payments and if stellar coins grow in popularity, it will give Stripe a significant advantage in that field.

While the rewards are great, there are too many variables to suggest whether this will work or not yet through experiments like this, we become a step closer to creating a digital currency that functions just as well, if not better, than traditional currency.

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About the author:

Quinton O'Reilly

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