This article is designed to help you become more familiar with the Stellar payment network, and to help you become more educated about principles associated with cryptocurrency.
In this article, I’m going to describe how assets and anchors are handled on the Stellar network.
What is the Stellar Network?
The Stellar network is a system of computer nodes running an open source protocol that allows users to trade various forms of money. Stellar can be used to store assets as well as to trade them, including fiat currencies (currencies not backed by collateral, such as gold or another precious metal) such as USD and EUR, cryptocurrencies, stocks, precious metals, and other things that have value.
Whereas other digital asset protocols make use of smart contracts, in the Stellar network, the asset concept is programmatically included in the software itself. Because Stellar uses this approach of integrating assets within the logic of the software itself, representing assets is more streamlined with Stellar.
Stellar’s 3 Types of Assets
Stellar represents assets on its payment network in three different formats: lumens, non-anchored assets, and anchored assets.
Lumens (abbreviated XLM on trading platforms such as Coinbase) comprise the native, built-in currency of the Stellar network. The lumen asset type was created as a barrier for spam, making it more difficult for people to abuse the Stellar network by essentially requiring some transaction commitment through fees for accessing the network.
Besides being a currency themselves, lumens act as an asset bridge, forming a currency interface between other assets that exist on the Stellar network. Other assets can be converted into Lumens, which can then be converted into other assets involved in a trade.
Non-anchored assets originate on the Stellar network. They don’t have a connection with assets that reside outside of the Stellar network. Examples of non-anchored assets include initial coin offering (ICO) tokens such as those created using the ERC-20 standard.
Non-anchored assets are also referred to as non-collateralized or non-redeemable, referring to their utility only within the Stellar network and not connected to assets outside the network.
Anchored assets are connected to the Stellar network by anchoring entities, or simply anchors. Anchored assets are also referred to as collateralized, redeemable, or tethered assets, terms that infer that the physical asset lives outside of the Stellar network.
The use of anchors in the Stellar network facilitate the ability to trade assets that originate outside the Stellar network within the network with very little friction, and with high efficiency.
Stellar anchors act similar to cash deposits at banking institutions in that you can deposit an asset to a Stellar anchor and have that asset credited to your specific account, with the results of the deposit visible through a wallet app or ledger explorer. Just like you would at a bank, you can later withdraw your deposit.
Anchors act as a bridge between outside currencies and the Stellar network.
The ability to have assets anchored to the Stellar network provide a tremendous amount of flexibility to the network and ultimately help give the network usefulness for its intended purpose: to facilitate holding and transferring assets, in whichever world they live – digital or physical.
Examples of Anchored Assets
What types of assets can be anchored to the Stellar network, making them exchangeable on the network?
Here is a list of the most commonly anchored types of assets
- Fiat currencies, such as the USD or Euro
- Cryptocurrencies that exist on other crypto networks
- Company stocks, or shares of ownership in a company
- Bonds, or IOUs from government and other bond-issuing entities
- Commodities such as gold and other valuable resources
- Real estate, one of the most trusted and traded physical assets