Stellar advertises itself as the perfect platform for cross border remittance payments. In the beginning, it was hard for me to understand how this would work. Somehow the money needs to move over the boarder and moving it is going to get expensive. How can a system like Stellar reduce the cost? What happens in the case if the money doesn't arrive at the other end? Who is giving me a refund? Isn't Stellar just a distributed database?
Here I will provide only one specific example how cost can be reduced leveraging a system like Stellar. In this example you will see that money doesn't need to physically travel for it to arrive somewhere.
Bernard is from Brazil, but currently he is working in Germany and looking for a way to send money back home to his wife Luísa. One of his problems is that he earns Euros, but Luísa can only spend Brazilian Real. So he needs to exchange the Euros for Real. If he was sending money inside the EU and there was no exchange happening the process would be extremely fast and cheap (and it's getting faster and cheaper in 2017), but sending it to Brazil is much more expensive. Especially using regular bank transfers. One of his options are companies specialised in cross border remittance like Transferwise. Sending 1000 Euros to Brazil costs around 14 Euros in fees and takes several days with Transferwise.
There is also a parallel story happening. Carlos living in Brazil wants to buy a new nice table for his kitchen. The problem is that the table is sold by a French company called BestTables and costs 1000 Euros. Carlos has now similar options to move his Brazilian Real (around 3,487) to Euros and send it from Brazil to France.
It's better to work together
If Carlos and Bernard work together they can minimise the cost and time to transfer the money. What they need to do is:
- Agree on a fair exchange rate from Brazilian Real to Euros (lets say 1 Euro = 3.487 BRL).
- Carlos giving 3,487 Real to Luísa.
- Bernard sending the 1000 Euros for Carlos to BestTable using a cheap/fast bank transfer inside the EU.
In this case no money left the country, but from the perspective of the involved parties it looked like it did. The only problem with this solution is that finding the right person to trade with and trusting that the person will not just run away with your money becomes impossible.
Stellar is here to save the day
Stellar can completely eliminate the need for the involved parties to trust each other. Lets now see how the example above can be done on the Stellar network. Lets assume that there are 2 anchors. One in Germany that issues Euros and one in Brazil that issues Brazilian Real. This anchors can be banks or other financial institutions. They only need to provide a way to deposit and withdraw money from inside the same country.
- Bernard deposits 1000 Euros with the German anchor and is given 1000 Euro tokens on the Stellar network.
- Carlos deposits 3,487 Real with the Brazilian anchor and is given the equivalent amount of Real tokens.
- Now both have the possibility to send their tokens to someone else in seconds over the internet. But if Bernard did so, Luísa would still not be able to withdraw the Euro tokens in Brazil. The German anchor only decided to allow deposits and withdrawals in the EU.
- Because the Stellar network is at the same time a distributed exchange, Bernard and Carlos can in a secure way exchange their tokens without the possibility of one of them cheating.
- Now that Bernard has 3,487 Real he sends them to Luísa and she withdraws them from the Brazilian anchor.
- Carlos sends his tokens to BestTable and they can redeem them for the equivalent amount of Euros.
Lumens as a bridge currency
This process seems a bit complicated, but I wanted to explain what happens on a lower level on the Stellar network. Most of the technology is built into Stellar and thanks to path payments Bernard doesn't need to be aware what is happening in the background. Once he deposits his Euros with an anchor he gets access to the whole Stellar network. He just types in what tokens he wants Luísa to receive (in this case Brazilian Real) and is shown an exchange rate. If he agrees Luísa gets the money in seconds.
The process doesn't need to go Euro -> BRL, it can be Euro -> Croatian Kuna -> XLM -> BRL. The system will find the cheapest way. Because Lumens are the native currency of Stellar they can be a middlemen. So you don't need to have sellers and buyers from Euro to BRL, only from Euro to Lumens and from BRL to Lumens. This increases the liquidity of all exchanges and keeps the price down. Now if you want to go from Croatian Kuna to BRL you just need to have a way from Croatian Kuna to Lumens if there is no direct path to BRL.
This is only one of many examples how we can use Stellar to move money extremely fast and cheap around. As the network grows and more financial institutions are joining Stellar it will just become easier to find matching trades. With path payments and simple mobile wallets it will become extremely easy for users. The whole complexity will be hidden in the background. Just one click on Bernard's mobile phone and Luísa got her Brazilian Real that she can immediately withdraw from her anchor in Brazil.