For every settlement network, it is highly important to support multiple currencies natively, along with the ability to deposit and withdraw them.
This aspect is currently covered by anchor concept, where a special centralised entity takes care of managing a “twin” of the original crypto token or fiat currency on the target blockchain.
The concept is well adopted in Stellar, Ethereum (with anchor smart contracts) and other general-purpose smart contract capable blockchains, or blockchains supporting extensive token systems. However, in a nutshell, this concept has a significant disadvantage of requiring to blindly trust a single centralised entity – anchor issuer. Every event of issuer’s insecurity or dishonesty ultimately leads to losing money by the end-user and the licensing aspect may only reduce the harm by providing insurance capabilities in certain events.
The most innovative feature of the Cosmos network – a novel Inter-Blockchain Communication protocol, currently under development, brings the most major improvement for the anchor concept, by gracefully eliminating a centralised 3rd party entity – anchor’s issuer, from the loop, and allowing seamless tokens circulations among different blockchains.
Anchors are special entities in the ecosystem that issue tokens on the network tied to the assets that they possess in custody.
The same rules and compliance logic will apply for anchored tokens, i.e. issuers (anchors) will be able to issue freely circulating tokens (e.g. for cryptocurrencies such as BTC or XLM), KYC-bound tokens (e.g. for fiat stablecoins) or bound to compliance oracles if required by the legislation (e.g. for anchoring shares of public companies, metals, ETFs, etc.).
The blockchain will allow anchor issuers to retain the ability to mint tokens, while the burn operations will be always allowed. Thus anchors will be able to add tokens into circulation for deposits and burn them for withdrawals.