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What is a Stellar Anchor?

Last Updated: 1st November 2018

A Stellar anchor is a trusted entity on the Stellar network that is permitted to hold user’s deposits and issue credit for those deposits. Anchors act as a bridge between established currencies and the Stellar network by issuing credit to represent existing currencies; users can then use this credit to initiate transactions. Anchors tend to be organisations such as financial institutions, remittance companies and central banks.

Issuing Assets

One key function of an anchor is to issue assets. Assets such as: bitcoins, USD and ICO tokens can all be exchanged if sufficient credit has been issued by the anchor. Users do not trade actual physical assets, but instead, assets that have been credited to their account. For example, when trading USD on the Stellar network, it is not actual USD being traded, but USD that has been credited by an anchor.

In order to be an anchor, two separate accounts must be maintained:

An issuing account

A base account

Issuing account – This is used solely for issuing or destroying assets. If a new user wishes to trade an asset under the control of an anchor, the anchor would simply credit the user’s account, thus issuing a new asset. Conversely, if the user were to redeem that credit, the issued asset would subsequently be destroyed.

Base account – This is the account an anchor uses to transact with other Stellar accounts on the network. When a user decides to make a deposit with an anchor, an equivalent amount of that deposit is then credited to the user’s account from the anchor’s base account.

However, before an anchor can successfully issue an asset to a user, the user must first create a trustline with that anchor. A trustline signifies that a user trusts the asset that he/she is being issued and believes it to be redeemable at a later date.

Customer accounts

There are multiple ways that a Stellar anchor can manage customer accounts, two of those ways are as follows:

Maintain a Stellar account for each customer

Use the federation protocol to conduct transactions

By maintaining a Stellar account for each customer, deposits and redemptions can be credited and retracted from a user’s account depending on which action has been taken. For example, if a user wishes to make a deposit, the appropriate amount would simply be credited to their account by the anchor.

Through use of the federation protocol, a Stellar anchor can send and receive payments on behalf of their users. All transactions conducted in this manner require the management of only the anchor’s base account.

Infrastructure

In order to qualify as a Stellar anchor, the appropriate infrastructure must be in place; infrastructure that is capable of:

Processing payments

Monitoring the activity of federated addresses

Complying with Anti-Money Laundering (AML) regulations

Processing payments – Payments made through an organisation operating a Stellar anchor must be processed properly in order to allow for communication between an organisation’s internal systems and the Stellar network. If a transaction request from an anchor is considered valid by the network, the bridge server creates a transaction, signs it, and sends it to the Stellar network. Customer accounts must then be subsequently updated to reflect any transactions.

Monitoring the activity of federated addresses – Federated addresses are simply public addresses represented as something similar to an email address. For example, a public address such as: “F4K39U6L1C4DD8ESS,” would take on the form “fake*publicaddress.com” on the Stellar protocol, with the “@” symbol being replaced with an asterisk. This makes it less likely for a user to make a mistake when sending money to an email-like address as opposed to a traditional public address. Stellar anchors must monitor any requests made to customer’s federated addresses.

Complying with AML regulations – Through use of the Stellar compliance protocol, Stellar anchors can collect user information such as: name, date-of-birth and address. This allows anchors to exchange compliance information with each other and pre-approve certain transactions.

Conclusion

To conclude, Stellar anchors are integral to the Stellar network and facilitate for the issuance of new assets. A certain level of infrastructure is necessary before an anchor is successfully appointed. Infrastructure such as: payment processing capabilities and AML compliance protocols must also be in place in order to become an anchor on the Stellar network.