The Role of Anchors In The Stellar Network

The Stellar Network is an excellent, futuris-current resource for sending money across borders effortlessly. Or at least, it feels effortless — largely thanks to anchors. 

In this post, we will be looking at Stellar anchors, how they work, and how your business can become one. 

Table of Contents

• What is an anchor?
• What do anchors do?
• Issuing fiat tokens and creating a digital counterpart for a fiat currency
• How do anchors connect?
• How to become a Stellar anchor
• Seeking a simple way to become a Stellar anchor? We’ve got you covered!

What is an anchor?

First, let’s define what a Stellar anchor is. For those that don’t know, a Stellar anchor is a bridge between fiat money (local currency) and a representation of that money as an asset in the network.

Stellar anchors act as on and off-ramps to the Stellar Network.

They accept deposits of fiat currencies via existing methods, like bank deposits, and send users the equivalent amount of digital tokens that then represent those deposits on the Stellar network. 

Some of the largest anchors in the Stellar network right now are MoneyGram, Settle, and Tempo.

What do anchors do?

Now that you know what a Stellar anchor is, let’s explore what these anchors do. Below is a breakdown of how anchors facilitate transactions for Stellar users. 

Serve as a connection to the outside world

Anchors serve as a conduit to the outside world. If the Stellar network is a walled garden where transactions are allowed to occur, the anchor points are gateways to that garden. 

Anchors exist to expand access to the Stellar network and let anybody use the network. This includes unbanked individuals.

Anchors let people access the network with external assets, which lets them interact with the banking ecosystem. 

This also means that there’s a level of responsibility involved in being a Stellar anchor because anchors need to provide legitimate and reliable access to the Stellar network. 

Digitally represent fiat currency

These anchors can digitally represent fiat currency. For those not aware, fiat currency is a reference to traditional currencies, like the U.S. dollar. 

Unlike other cryptocurrencies, which act as independent storage of value, Stellar is meant to only serve as a medium of exchange.

Its purpose is to transfer real-world currencies using digital representations of that cash.

So your fiat currency becomes a digital asset, is moved through the Stellar network, and then becomes a fiat currency once more when it’s delivered to the recipient. 

Anchors are what make this digitization possible because they do the digitization in both ways: from fiat to digital currency, and from digital currency to fiat. 

Create a network ecosystem

And anchors work together to create the Stellar network ecosystem. Each individual anchor can accomplish the above functions, but all of the anchors integrate and work together to leverage access to the network. 

This network allows users to connect traditional currencies, and exchange them — all while supporting Stellar’s growing set of features. 

Plus, the more assets there are present in the network, the more conversion rates can be optimized.

So, having more anchors acting as gateways to the network for more people and more assets is a great way to support the growth of the Stellar network.

Issuing fiat tokens and creating a digital counterpart for a fiat currency

If you know anything about cryptocurrencies, you know that they’re not too stable.

And with that in mind, you may be wondering how you can convert a fiat currency to a cryptocurrency without the value wildly fluctuating. 

Anchors can issue fiat tokens in the Stellar network to accomplish this.

A fiat token, a.k.a. a “stablecoin,” is a cryptocurrency token that won’t fluctuate in value — or at least, anchors implement mechanisms to ensure it fluctuates in rhythm with its fiat counterpoint.

It’s a one-to-one relationship. 

Since this fiat token exists within the Stellar Network, it can interact with the functionalities that make Stellar so powerful.

This allows consumers and businesses to transfer money across borders instantly, send money from one currency and have it arrive in another, and (soon) even execute smart contracts with their cash. 

Enabling on/off-ramp of fiat currency

Remember how we mentioned that anchors act as gateways to the Stellar Network? Those gateways are what’s known as on/off-ramps. 

These “ramps” let Stellar users exchange a fiat currency for that currency’s counterpart in Stellar tokens. This is what happens when a user uses the on-ramp.

When users use the off-ramp, their Stellar tokens are converted back to their fiat currency or another fiat currency of their choosing. 

How do anchors connect?

Now that we know how anchors function, let’s talk about how they connect. After all, it’s the connections that make anchors so powerful. Here’s a quick breakdown. 

Standards, protocols, and SEPs

Each anchor is managed and represented by a trusted financial institution or business.

And to ensure that these various institutions work together, the Stellar ecosystem has outlined several standards, protocols, and “SEPs” (Stellar Ecosystem Proposals) that determine when, how, and if anchors can interact with one another. 

These standards, protocols, and SEPs aim to promote collaboration and connectivity between the anchors. And so far, they’ve been very successful.

If anchors are the connective tissue for the Stellar network, these standards are the connective tissue for the anchors. 

Collaborative standards

Some of these standards are specifically designed to foster unique collaborative efforts between anchors.

These collaborations, when successful, can create new opportunities, features, and automated workflows for consumers and businesses. 

You can think of these collaborative features as those offered by the average FinTech company.

They allow for creative and productive use cases that benefit everyone and encourage more competition in the marketplace. 

How to become a Stellar anchor

If you’re wondering how your business or institution can become a Stellar anchor, you’re not the only one.

There are a lot of benefits, including the knowledge that you’re contributing to a budding network of collaboration, competition, and innovation. There are a few key things you need to know about becoming a Stellar anchor.

There are several standards you need to follow

Depending on what services you want to provide as an anchor, you’ll have to follow different standards and protocols.

They can be analyzed in more detail with the Stellar Ecosystem Protocols (SEPs), which define how different institutions should interact and interoperate. 

Anchors also need to comply with local regulations in every location where their services are available.

Anchors need to comply with regulatory, registration, and licensing obligations for financial transactions, data privacy regulations, industry-standard cybersecurity practices, and any anti-money laundering regulations. In addition to local regulations, anchors need to comply with US sanctions. 

You’ll need to manage fiat assets

Since anchors act as an on and off-ramp to the Stellar Network for fiat currency, anchors need to be able to manage incoming and outgoing fiat assets as well as their digital counterparts.

Fiat assets need to be processed through local domestic payment rails and not via wire transfers. And all deposits and withdrawals need to follow the Stellar ecosystem standards.

This helps ensure interoperability between wallets and anchors network-wide. 

Getting technical support 

Becoming a Stellar anchor and leveraging the network capabilities of your business is definitely something that you can set up on your own, but you’ll need some technical know-how to get going.

Thankfully, Stellar has a great community more than willing to help you navigate the process. 

If you’re interested in becoming an anchor but don’t have the in-house expertise it might be a good idea to partner with an expert.

Working with a partner means you’ll have help setting up the anchor infrastructure and making sure you’re adhering to the appropriate SEPs and leveraging the right Stellar network features to your business.

Seeking a simple way to become a Stellar anchor? We’ve got you covered!

Now that you know what a Stellar anchor does and what goes into becoming one, you may be seriously considering starting your Stellar anchor journey.

If you’re looking for help with the process, reach out to the experts at Cheesecake Labs today.

We’re an official Stellar integration partner with experience helping others become Stellar anchors. So don’t hesitate to send us a message!