Stellar Protocol 11 Upgrade: Improved Capacity, Better Pricing and Buy Offers

The Stellar Development Foundation (SDF), an organization focused on the ongoing development of the Stellar (XLM) network, has announced that the blockchain-based platform’s transaction validators will cast their votes to approve, or reject, an upcoming upgrade.

Per the Foundation, the Stellar blockchain network validators will submit their votes on June 10, 2019 at 16:00 UTC - regarding whether to move forward with the set of updates associated with Protocol 11.

As noted in a blog post published by the SDF on May 31, 2019, the three main modifications to the Stellar protocol that will be noticeable to end-users include increased network capacity, “introduction of buy offers”, and an improved transaction pricing mechanism.

“Overpaying for Transactions Is Against the Very Spirit of Stellar”

The SDF explained that currently when submissions (transactions) to the Stellar blockchain “exceed network capacity”, the network “enters surge pricing mode.” In this mode, market dynamics are analyzed in order to determine which submissions will be registered on Stellar’s distributed ledger.

According to SDF’s blog, submissions that “offer a higher fee per operation” are given priority over other transactions as they make it onto the Stellar blockchain first. Currently, the Stellar network charges transaction (TX) fees at fixed rates - meaning that users “submit the amount [they are] willing to pay to add [their] transaction” to the Stellar blockchain. Currently, users pay the transaction fee they’ve specified, and if their fee is “too low”, then they are risking “getting squeezed out by surge pricing”, SDF’s blog explained.

Developers Will Be Charged “Lowest Possible Fee” After Protocol 11

The Foundation further noted that the fixed-fee structure “goes against the very spirit of Stellar” and that the platform’s developers have to “guess” the future fees by entering pre-signed transactions and smart contracts. This type of TX fee model not only “encourages [users] to overpay for their transactions”, but it also makes developers guess (and hope) they entered the right price.

After Protocol 11 has been activated, fixed fees will be “replaced with a version of a VCG auction”, the SDF’s blog mentioned. It added that this will allow users to “choose the maximum fee [they’re] willing to pay, but [they’ll] actually [be] charged the lowest possible fee.”

As noted by the SDF, surge pricing (under the current implementation) “only kicks in” when the Stellar blockchain is running at capacity. The network’s capacity is “determined” by the Stellar blockchain’s validators, as they are responsible for voting on ledger entry limits - which is part of the Stellar Consensus Protocol (SCP).

Validators Voting on Number of Ledger Entries Is an “Inexact and Highly Variable Metric”

As explained in SDF’s post, prices are usually set “high enough to allow the network to support an increasing volume of activity.” However, they must be “low enough” to allow validators who only have access to less powerful hardware to also have a chance to “keep up” with the other network participants, SDF noted.

The Foundation also pointed out that prior to the development of Protocol 11, it was quite difficult, or “nearly impossible”, to strike a balance - meaning that “validators voted on the number of transactions per ledger, which … is an inexact and highly variable metric.”

According to the SDF, the reason for it being an inexact metric is that on the Stellar network, “an operation is a single command” that alters the state of the ledger. For instance, a payment is an operation “as is a buy offer”, the SDF explained. Meanwhile, a transaction on Stellar is essentially a set of operations that may consist of 1 to 100 operations.

Setting Operations-per-ledger Limit, Not Transactions-per-Ledger

After Protocol 11 activation, Stellar network validators will no longer vote on a “transactions-per-ledger limit,” the SDF confirmed. This approach, the Foundation noted, often led to validators “tending to err on the side of caution” when establishing limits.

In an attempt to prevent the Stellar blockchain from becoming congested, developers had been taking into account “the biggest-case scenario” in which every ledger entry would consist of 100 operations. And “so, historically, they set the transaction/ledger limit at 50”, the SDF explained.

This resulted in a maximum of 5,000 operation/ledger, however most TXs only contain “a single operation,” so in most cases, the “effective limit” was around 50 operations/ledger. Now after Protocol 11 goes live, developers will not have to “assume the biggest-case scenario.” Instead, the SDF noted that in just “five minutes after the vote” to activate Protocol 11, Stellar network validators will “convene for a second vote.”

At this point, they will be “expected to set the operations/ledger limit to 1000.” According to the SDF, Stellar network throughput will increase considerably when the limit is set this high, because it’s significantly greater than the current network average.

New Type of Buy Offer

Additionally, Protocol 11 will enable a new type of operation that will let individual users and organizations “express buy offers more intuitively and accurately than before,” SDF’s blog stated.

Prior to Protocol 11 launching, there had been only a single operation for placing orders on ManageOffer, Stellar’s decentralized exchange (DEX), the SDF explained. It added that this only allowed users to express offers according to what they were trying to sell “in exchange for another asset.”

This type of setup only makes sense if users were “actually selling an asset.” However, it was “pretty convoluted if (in your mind) you were trying to buy an asset”, the SDF noted. For instance, if a trader on the Stellar network wanted to purchase euros with USD, then they had to “instead sell USD for EUR, which forced [them] to think about the transaction upside down.”

Moreover, when traders make an offer, they don’t know ahead of time what the actual execution price of the trade will be. This made it challenging for XLM investors to use ManageOffer to settle trades as it didn’t allow firms to “execute customer orders faithfully and accurately, and the ManageOffer operation didn’t always allow them to do that.”

However, after Protocol 11, traders will reportedly be able to use a new operation, known as ManageBuyOffer. This will let users “submit actual buy offers” - meaning traders can enter the “maximum amount of an asset” they want to purchase, and the amount they want to pay for it. Notably, ManageOffer has now been renamed to ManageSellOffer and “CreatePassiveOffer to CreatePassiveSellOffer” respectively, the SDF’s blog mentioned.