What Is a Stellar Anchor?

Introduction

A stellar anchor is a trusted entity on the Stellar network that can hold user’s deposits and issue credit for the deposits the user had on anchor. Anchors act as a bridge between actual currencies and the Stellar network. Anchor issues credit to the user's equivalent actual currencies value in the form of assets. Established currency may be of any currency i.e. Fiat or Crypto. Users can then use this credit to initiate transactions on stellar networks. Anchors tend to be organizations such as financial institutions, remittance companies, and central banks.

Key Functions of An Anchor

• Issues Assets
• Create Account
• Change Trust
• Deposit
• Withdraw
• Send

Issuing Assets

Issuing assets is a key function of an anchor. Stellar can exchange assets such as bitcoins, USD, and ICO tokens if sufficient credit has been issued by the anchor. Users do not trade with actual physical assets, equivalent assets are credited to the user's account to perform operations on the stellar. For example, when trading USD on the Stellar network, it is not the actual USD being traded, but USD(Asset credit instead of actual USD) that has been credited by an anchor.

To set up an anchor, two separate accounts must be maintained on an anchor:

• An issuing account
• A base account

Issuing account – Issuing account is used for issuing or destroying assets. If a new user wants to trade an asset under the control of an anchor, the anchor will simply credit the user’s account, thus issuing a new asset. Similarly, if the user were to withdraw that credit, the issued asset will subsequently be destroyed as well.

Base account – Base account is the account, an anchor uses to transact with other Stellar accounts on the network. When a user wants to deposit with an anchor, Once a deposit is received by anchor authorities in the form Fiat or Crypto, an equivalent amount of that deposit is then credited to the user’s account from the anchor’s base account.

However, before an anchor to issue an asset to a user, a trusting must be issued. The user must first create a trusting with the anchor. Once a user creates a trusting, the user is available to use that asset and transactions. A trusting signifies that a user trusts the asset being issued and believes it to be redeemable at a later date.

Customer Accounts

Stellar anchor manages users' accounts at its level. There are many 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

Maintain a Stellar account for each customer - By maintaining a Stellar account for each customer, deposits and withdrawals can be credited and retracted from a user’s account depending on the action. For example, if a user wants to make a deposit, the appropriate amount would simply be credited to their account by the anchor and vice versa if the user wants to make a withdrawal.

Use the federation protocol to conduct transactions - By using the federation protocol, a Stellar anchor can send and receive payments on behalf of their users. In this case, the anchor's base account needs to be maintained for all the transactions going through the anchor. 

Create Account

Stellar anchor allows users to create accounts on the stellar network. Create account operation creates and funds a new account with the specified starting balance. 

Change Trust

Change trust is a very important operation of an anchor to getting started with interacting with a stellar network. Change trust operation creates, updates, or deletes a trusting for a user. A user must create a trusting before starting trading or transferring that currency on the stellar network.

If a user wants to delete an existing trusting, set Line to the asset of the trusting, and Limit to 0.

Deposit

Deposit is a kind of operation on stellar that allows users to get stellar assets with spending their actual currencies i.e USD, BTC, ETH. In return, anchor credits with equivalent assets to the user’s account. For example a user wants to deposit USD. Stellar anchors accept USD payments via bank transfer and credit the user's account with equivalent USD(asset).

Withdraw

In withdrawal, a user can redeem his assets into fiat or cryptocurrency. For example a user wants to withdraw BTC in his BTC wallet by spending 100 BTC(asset). Stellar anchor deducts assets from the user's wallet and credits the user's BTC wallet through the blockchain.

Send

Send operation is used to transfer assets from one stellar account to another. An anchor accepts all asset transfers issued by the anchor.

Infrastructure

To become a stellar anchor, the appropriate infrastructure must be in place. an infrastructure that is capable of below points mentioned:

• Processing payments
• Monitoring the activity of federated addresses
• Complying with Anti-Money Laundering (AML) regulations

Processing payments – Payments going through the organizations operating a stellar anchor must be handled and processed properly. There should be proper communication between the stellar network and the organization's internal system. If a transaction request from an anchor is considered valid by the bridge and compliance server, the bridge server creates a transaction, signs it, and sends it to the Stellar network. The customer account’s balance and transactions must then be updated to reflect if any successful transactions.

Monitoring the activity of federated addresses – Federated addresses are simply public addresses represented as something similar to username*<domain_name> or email address. For example, a public address such as: “G_____YRAQUIFFI____________________S4IP25XVSHQCRY6______” would be accessed from “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 long public address. Stellar anchors must monitor the requests made to a customer’s federated addresses.

Complying with AML regulations – Through the use of the Stellar compliance protocol, Stellar anchors can collect user information from the federation server internally such as name, address date-of-birth, or public address. This allows anchors to exchange compliance information between the two anchors so that they can pre-approve certain transactions.

Conclusion

To conclude, Stellar anchors, are one of the main components of the Stellar network and facilitate the user to trade on the stellar network on behalf of the user's actual currency i.e Fiat or Crypto by the issuance of related assets. We need to take care of a certain level of infrastructure that is necessary before an anchor is successfully set up. Infrastructure such as compliance protocols, payment processing capabilities, and AML must also be in place to become an anchor on the Stellar network.