Category: Finance

Ethereum smart contracts vs. Stellar smart contracts is a binary I often have to answer in my consulting work and product design workshops. The answer, of course, is not always so straightforward. What are the pros and cons of each innovative solution and when should you choose one over the other? A lot has to do with the level of decentralization you’d like to achieve and what tradeoffs you’re willing to accept.

TL;DR, Both Ethereum and Stellar are smart contract-enabled blockchains. Ethereum is more decentralized — but slower. Stellar is less decentralized — but faster.

Preliminary explanation

So if you’re considering which blockchain protocol to use, carefully identify your target users’ wants and needs and build your solutions around those.

Smart contracts underpin many of the arguments for the utility of blockchain technology. These computer programs automatically execute specific actions once all the criteria are met.

Public blockchains add a layer of transparency to the type of data moving around. There are many public blockchains nowadays but not all are useful for the same things. At Espeo we primarily work with Ethereum and Stellar ecosystems as guiding public blockchains. Of course, there are others on the market but the specific utility of these two is the main reason for this choice. 

Ethereum is a global, open-source platform for decentralized applications on which you can write code called a smart contract that controls digital value and runs exactly as programmed. Ethereum is the most popular blockchain because of the apps you can write on top of it.

On the other hand, the Stellar blockchain is an open network for storing and moving money. As we can see these two blockchains represent different business values. Ethereum works best for programming smart contracts in business integrations while Stellar facilitates the transfer of funds in a blockchain ecosystem.

Smart contract origins

Legal scholar and cryptographer Nick Szabo invented the smart contract concept which he laid out in a 1996 paper. In it, he defined smart contracts as “a set of promises, specified in digital form, including protocols within which the parties perform on the other promises.”

A smart contract is a self-executing contract made possible by blockchain technologies and enforced by cryptographic coding. 

First, we should know that Stellar blockchain doesn’t have a smart contract as a smart contract language or build in a virtual machine to execute code. A Stellar smart contract is a composition of transactions that are connected and executed using various constraints and is instead optimized for sending, storing and trading value.

Stellar smart contracts

The following are examples of constraints for Stellar smart contracts:

• Multisignature —  a concept requiring signatures of multiple parties to sign transactions stemming from an account. 

• Batching / Atomicity — the concept of including multiple operations in one transaction. Atomicity is the guarantee that given a series of operations if one operation fails they all operate if the transaction fails.

• Sequence —  represented on the Stellar network through sequence number. Using a sequence of numbers in transaction manipulation, it can be guaranteed that specific transactions do not succeed if an alternative transaction is submitted.

• Time bounds — are limitations on the time period over which a transaction is valid and can be used to represent time in a Stellar smart contract.

Each transaction on the Stellar blockchain is confirmed by a consensus algorithm. The Stellar Consensus Protocol is an evolution of a federated Byzantine agreement.” The FBA protocol has a determined membership list but SCP uses open membership.

Stellar takeaways

Transactions on the Stellar blockchain are faster and the fee for a transaction is cheaper than Ethereum. So, Stellar offers new possibilities for business models. IBM, for example, uses Stellar to facilitate cross-border payments. The project is called IBM Blockchain World Wire and seems to be a very promising project. In Espeo Blockchain we use the Stellar blockchain to create P2P payment applications.   

Ethereum smart contracts

The Ethereum blockchain offers nearly endless possibilities to write smart contracts. We can approach many more uses than another blockchain because we can control our written code.  To write Ethereum-based smart contracts there are a few different programming languages: Solidity, which is like JavaScript and the most popular nowadays and Serpent like Python. 

The question is how and why it works. To understand it that we should know two important and related concepts with Ethereum blockchains like the Ethereum Virtual Machine and gas. 

• The Ethereum Virtual Machine (EVM) is a place where smart contracts run in Ethereum. It is Turing Complete programing language or we can say that it is a distributed global computer where all smart contracts are executed.

• Each transaction has a cost measured in gas and each gas unit consumed by a transaction must be paid for in Ether, based on a gas/Ether price which changes dynamically. We should know that in each transaction we have a gas limit parameter that is an upper bound on how much gas we can consume. This parameter is used as a safeguard against programming errors that could deplete an account’s funds.

As we can see we have control over our smart contract. It has both good and bad sides. If we are about to create a decentralized application we have way more possibilities using Ethereum, because it offers more than the Stellar blockchain. On the other hand, if our code has a bug, it can be hacked very easily. As in any other blockchain, each smart contract run on the Ethereum blockchain is confirmed by a consensus algorithm. 

Ethereum takeaways

Ethereum is currently a proof-of-work consensus model. In proof of work, miners lend their computing power and compete against each other to complete transactions on the network and get rewarded in cryptocurrency. unsurprisingly, this is very energy-intensive but this algorithm protects the network against hacking.

Real-world applications

There are many different industries and solutions for these industries. When we want to choose blockchain we should ask which blockchain helps us solve problems and grow our business. These questions we can put in public and private blockchains too.  

Ethereum is the most popular blockchain that uses smart contracts. Ethereum is the best choice where we need to set parameters for the smart contracts. The best applications for the Ethereum blockchain are decentralized finance and asset tokenization.

The second very important thing is the ability to create different ERC tokens based on Ethereum. Many of us can say that Ethereum is slow and it’s true. Although, there are tricks to overcome this. However, we should pay attention that it’s the beginning of this technology and Ethereum core developers are working to improve the protocol.

Ethereum has versatile applications in which it outperforms other blockchains. In the real estate industry, we can tokenize real estate, or art opening these investments up to a larger number of people. We can improve and automate this process of fractional ownership as well. Today we have platforms that use Ethereum smart contracts to change ownership of parts of the building.

You deposit fiat or digital currency money and receive tokens that represent part of the building. It looks like a notary’s contract but is faster, automatic and considerably cheaper. Ethereum has an advantage over other blockchains because it has its own tokens such as ERC20, and ERC721 among others.

Conversely, the Stellar blockchain is quite different blockchain for the other applications. The Stellar blockchain doesn’t have smart contracts based on Turing machines. We have an API where we have a number of endpoints to use. 

Stellar and Ethereum – Conclusion

Developers can’t write our own smart contracts as in Ethereum. It’s not wrong because our work could be faster when we use existing methods. The Stellar blockchain is better for industries where we want to transfer assets like cryptocurrency or tokens generated on the Stellar blockchain. A good example it’s a peer-to-peer mobile payment application or payment gateway using Stellar’s cryptocurrency, Lumens. In Espeo Blockchain, we have started work on a peer-to-peer payment system based on Stellar which is the most appropriate solution for this use case. 

Three main things why: very low fee for transactions than other blockchains, very fast transactions and the ability to create our own token which we can use as our asset in the finance ecosystem.

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• Blockchain use cases in fintech

Blockchain use cases in fintech have taken the world by storm. The popularity of blockchain keeps on growing. By 2018-2022 many European and North American banks were exploring the technology and how to leverage it. Financial companies spent around $552 million on blockchain projects globally. But, what is this technology exactly, and which blockchain usability will change the face of banking and finance?

This article will provide you with simple answers to both these questions and share different examples of blockchain ecosystems influencing global finance.

What is blockchain technology, and how does it revolutionize the financial services sector?

Blockchain technology is a data management system using complex cryptography to power many cryptocurrencies and other decentralized applications. At their core, blockchains are accounting systems and digital ledgers that facilitate auditing. What makes them different from traditional databases is that they distribute up-to-date versions of ledger data to all the devices on the network. This makes it nearly impossible to change the information once it’s on the blockchain network as all the devices in the network would have to accept the changes i.e. in the voting process. 

One of the first times blockchain was used, its product was Bitcoin, which facilitates digital money transfers and has no central authority, such as a central bank. The protocol uses the computing power of all the devices — called mining — in the network to add new data to the chain and rewards miners with bitcoins. 

The complexity of the system makes it resistant to hacking as someone would have to take control of the 51% or more of the computing power of the network to do it. 

Later, Ethereum emerged and introduced smart contracts, making this blockchain more useful for business needs like financial markets.

Blockchain has many applications in real-life financial services. PWC revealed in a 2017 report that 77% of fintech companies expect to involve it as a part of their systems. Forbes summed up the 50 most significant 2022 projects and mentioned many in the fintech sector.

Fintech companies are moving towards this new trend for several reasons, including the following.

Decrease transaction costs

An online transaction has multiple elements that you have to consider. There are trading companies or applications, transfer channels, as well as some intermediaries who slow down the process and introduce some extra charges to it. The costs rise even more for international dealing.

A study by McKinsey says that remittance companies are making $40 billion per year with these fees. Blockchains can decrease all these losses. Blockchains enable direct peer-to-peer (p2p) transactions over the internet, which eliminates the intermediaries and their costs. The decentralized system also eliminates delays in online payments. Their real-time data updating feature further ensures smooth, error-free operations and prevents extra charges or lost investments. 

Resolve identity theft issues

A press release by Javelin shows that 6.64% of consumers became a victim of identity theft in 2017. Since then, digital fraud and identity theft issues were made even more painful, especially during the pandemic. 

Banks and fintech firms are required to implement know-your-client and anti-money laundering procedures following increased oversight. Of course, this means they need a lot of paperwork which slows their processes. It can take weeks to verify the identity and complete an online transaction. The lengthy and non-standardized paperwork of these verifications further adds to the problem.

Therefore, financial institutions are increasingly open to implementing a blockchain-based system. In this system, the user has to prove the identity only once. After that, they are given a verification document that they can use to conduct transactions from any part of the world. They can also use this document to manage and share personal data, log in without a password, and e-sign any document.

Global payment options

The blockchain network is entirely internet-based and doesn’t need any specific setup for operation. Thanks to the digitization of assets, users can access the data and conduct transactions from any part of the world using their account’s public and private keys.

Its internet-centric system also makes it flexible for global transactions. In fact, the 2016 Statista study about blockchain usage opportunities amongst financial institutes reveals that about 60% of the total blockchain-based transfer of digital assets involved cross-border transactions. 

Enhanced regulation and auditing 

With increased financial connectivity across the world, the demands for regulatory services are also growing. Companies will need better and more advanced fintech systems to deal with the demand, and that’s where blockchain solutions come to play. 

Blockchain applications use a decentralized system that creates new storage areas for every new action but never tampers with the old blocks. It also maintains a non-deletable report of the transaction related to your blockchain. The system also saves the original document of the trade that the users can view at any time.  

Moreover, blockchain provides all the data and analysis reports at one single source, which is beneficial for auditing. Its smart, read-only nodes decrease the time and the cost required for verification and accounting.

Credit reports

Banking & financial institutions often store the transactional information of their users to analyze their monthly transactions. They use this data to analyze the credibility of the users and prepare their credit reports. However, they mostly use a centralized server or system for this job, which is a huge security risk. Anyone who can hack into the server can get complete access to the private data of all users. 

Blockchain-based systems are different and more reliable in this case. They decentralize the information and use separate storage spaces to protect the data. It also deploys robust security algorithms and identity verification protocols that further enhance the level of security.

The best part is that they can also help to audit these credit reports at a much higher speed than the traditional system.  

Lending as a way to gain budget or to invest

Traditional credits and loans are not accessible for some businesses, while they may still require cash flow to expand or start performing efficiently. It is valid for some fintech startups or e-commerce companies. On the other side, groups of small investors are looking for a way to invest without much work and unnecessary risk.

Blockchain tools, especially smart contracts, are a way to match investors with individual borrowers. The technology provides a way to transfer assets, sign deals with terms transparent to both sides and finally automate debt management and execution. Blockchain mitigates risks on both sides and gives a chance to investors and borrowers that are omitted in the traditional finance system.

Financial instruments trading

Cryptocurrencies and NFTs are investment options, but that is not what this case is about. Blockchain networks, often private enterprise ones, have been changing the way financial assets are traded for years. The process requires approvals, audit trails, and accessibility for many pre-verified roles like financial brokers or advisors.

All of that is done by each unit taking part in the process separately. Blockchain is one virtual place where those businesses meet with full accountability and transparency of actions. Solutions for financial clearing services are cutting times and errors by more than half.

Conclusion to blockchain application in fintech

Blockchain use cases in fintech are revolutionizing the finance industry. The benefits of blockchain are clear as it has removed the barrier of speed, cost, and many more factors of financial transfers. It can provide you with real-time database management, financial tracking, resource management, and a lot more.

This future tech can even enhance the security level of your financial institution and work as a defence against identity theft issues. These advantages are noticed by large banks like HSBC, Deutsche Bank, and KBC are using this technology to maintain the reliability of their services.  

Blockchain platforms are the future of finance, not only for cryptocurrency users but also for FIAT currencies, a trend that is driving massive business. That is why many organizations are looking for a way to use blockchain to be a part of it. 

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