The following report was written by Messari Hub Analyst(s) and commissioned by Stacks Foundation, a member of Messari Hub. For additional information, please see the disclaimers following the article
First impression is the last impression. This concept has proven to be true many times in the music or film industry. It has happened for some singers and actors that their first albums or movies were so successful to make their image permanently intertwined with that album or movie, no matter what they have done in their future works. For some of them this has been a blessing whereas the most polyhedric ones have found their future endeavors to be boxed in. Is Bitcoin likely to face a similar scenario? Initially conceived as a peer-to-peer decentralized cash system and most recently referred to as a “store of value”, it could actually become much more than that. One could argue that the recent adoption as a legal tender in El Salvador makes Bitcoin a means of payment too. What’s really missing is the notion of Bitcoin as an ecosystem. To become one, developers must be able to efficiently build applications on top of it. This calls for smart contract compatibility. And that’s exactly what Stacks is cooking.
The evolution of Stacks began in 2013. The project was created by the founders Muneeb Ali and Ryan Shea. Stacks is the product of Muneeb’s doctoral thesis, which detailed a framework for an internet that could be built around the Bitcoin blockchain. This framework was called Blockstack. The initial research and development has been made possible thanks to the participation in the Y Combinator batch in 2014. Muneeb Ali and Ryan Shea have raised funds in the early stage from Union Square Ventures, Naval Ravikant, SV Angel, Winklevoss Capital and others.
The project raised $47M in a token offering for the Stacks cryptocurrency in 2017, and an additional $23M through the first-ever SEC-qualified US Reg A offering and concurrent Reg S offering in 2019. More than 4,500 Stacks holders participated in these offerings, including USV, Lux, DCG, Winklevoss Capital, Blockchain Capital, Foundation Capital, Hashkey, Fenbushi, and others. In 2020, Blockstacks rebranded to Stacks and launched Stacks 2.0 mainnet in January 2021 with Clarity smart contract compatibility.
Stacks addresses the main difficulties of building on top of Bitcoin
There are two fundamental challenges to building apps and smart contracts on Bitcoin:
Stacks has developed a solution for both issues. Instead of deploying smart contracts directly on the Bitcoin chain, Stacks executes them on its own Layer-1 blockchain and uses Bitcoin for settlement only.
How does the Stacks blockchain communicate with the Bitcoin blockchain? A novel consensus mechanism called Proof of Transfer (PoX) allows Stacks miners to write new blocks on its own blockchain through the mining energy consumed by those same miners on the Bitcoin blockchain. No further energy consumption is thus needed.
Speed is of the essence when it comes to decentralized apps. The Bitcoin blockchain is notoriously slower than most of the top chains that support smart contracts. Since each block produced on Stacks must be stored on Bitcoin, one could assume that Stacks’ speed must be smaller or equal to that of Bitcoin. To work around this issue, Stacks has designed a mechanism that allows its blockchain to make good use of the time between two blocks produced on Bitcoin by means of intermediate smaller blocks called microblocks. These blocks can leverage a much faster confirmation speed, and by the time Bitcoin has confirmed a block, the microblocks can settle from Stacks to Bitcoin and provide finality. Microblocks, therefore, provide a speed improvement while utilizing the security of the Bitcoin network.
The Stacks blockchain provides support for smart contracts using the Clarity programming language. Clarity differentiates itself from the most common smart contract languages for two main reasons:
The traditional Proof-of-Work mechanism on the Bitcoin blockchain basically works like this: miners spend electricity to guess the hash of the preceding block and the first one able to do this receives bitcoin as rewards for its effort.
All Stacks transactions settle on Bitcoin. This enables Stacks transactions to benefit from Bitcoin’s security. Because of the need for the Stack blockchain to broadcast its block headers to the Bitcoin blockchain, implementing a Proof-of-Work algorithm on Stacks would have implied an additional energy consumption.
Stacks has chosen a more energy-friendly mechanism that employs bitcoin as “digital energy” to be spent by Stacks miners in place of electricity. This mechanism is called Proof-of-Transfer (PoX) and it allows any Proof-of-Work chain, such as Bitcoin, to be leveraged and extended.
This consensus mechanism involves two parties: miners and stackers.
To sum it up, in PoX miners are not converting electricity into computing power to earn block rewards. They are instead leveraging the already mined bitcoin to transfer them to stackers. This approach harnesses Bitcoin Proof-of-Work without further environmental impact.
What’s the point for miners to be rewarded in STX and for stackers to be rewarded in BTC? Stackers earning BTC could rely on a more established and stable cryptocurrency than STX. This should contribute to boost initial adoption among the community and reduce the reliance on the native STX cryptocurrency. On the other hand, miners could achieve more diversification by earning a cryptocurrency other than BTC but whose success and adoption is intrinsically dependent on Bitcoin. Through the use of a native cryptocurrency, miners can join the Stacks blockchain in a permissionless fashion. Miners and stackers contribute to STX market dynamics in a complementary way: stackers provide buying pressure because of the incentive to lock STX to earn BTC rewards. Miners can therefore invest in the mining activity knowing that STX tokens they receive as rewards will be well supported by the market.
What differentiates PoX from Proof-of-Stake (PoS)? The first difference is that miners and stackers are not the same entity whereas in PoS they can coincide. Moreover, miners actually spend tokens to participate in the miner election whereas validators in PoS help achieve consensus through bonding their capital in the form of native tokens. Contrary to a PoS blockchain, the Stacks blockchain can fork because it is not affected by the “weak subjectivity” problem. Weak subjectivity means that no miner/validator is able to identify the “correct” chain without trusting other nodes. The ability to fork allows a blockchain to survive critical failures that could severely impact the functioning of a PoS chain. Finally, actors participating in the consensus (i.e. stackers) earn rewards in a different token (BTC) than the one locked in the blockchain (STX).
Currently there are more than 436 million STX (more than $1.1 billions) locked in stacking, more than 30% of the STX circulating supply. The average stacking APR is in the 8-10% range.
The projects that could be considered closest to Stacks are Liquid Network, Lightning Network and RSK. However, Stacks represents a unicum, and it differentiates itself from each of these three projects in the following features:
As for most of the Layer-1 blockchain native coins, Stacks cryptocurrency (STX) is designed to pay for transaction fees and smart contract execution. This makes the long-term value of Stacks dependent on the growth of the Stacks ecosystem and the related demand for Clarity smart contracts because:
The Stacks cryptocurrency has 1.32 billion STX in the genesis block. The distribution has been rolled out through an initial coin offering in 2017 where Stacks raised approximately $ 47 million and investors purchased STX at $ 0.12. In 2019, two SEC-regulated coin offerings occurred: the Reg S offering raised $ 7.6 million with a STX price of $ 0.25 whereas the Reg A+ offering raised $ 15.5 million with a STX price of $ 0.3.
The Stacks’ economic policy was updated in October 2020 with the switch from an adapting burn-and-mint mechanism to a decreasing issuance model that should result in a future supply of approximately 1,818 million by 2050. The decreasing issuance is achieved through the three halvings already illustrated in the previous paragraph.
The Stacks ecosystem is experiencing a solid organic growth mainly driven by the following sectors:
Furthermore, STX stackers have been given the option to earn NFTs as stacking rewards. This has been made possible by a project called Boomboxes whose total value locked now exceeds $1 million.
The Stacks blockchain is undertaking a major upgrade, namely Stacks 2.1. The 2.1 upgrade will not be automatic. When ready, it will only activate with the consent of the network. There are a few backwards-incompatible features the upgrade should ship in 2.1 that will contribute to improve the overall functioning of the Stacks blockchain such as:
Furthermore, the Stacks team is currently working to enhance the interoperability with different blockchains through the following bridges:
Stacks Bridge - cross-chain transfer service that allows owners of ETH or STX based NFTs to move their NFTs between blockchains.
Banana Bridge - this bridge would allow Megakongs transferability from Ethereum to Stacks and vice versa. Bitcoin NFTs could then access metaverse projects very soon.
Orbit Chain - the Orbit Chain, which has recently partnered with Gala Games to expand into the gaming industry, is currently bridging Stacks. In the past year, more than $ 10 billion worth of assets have been bridged across the likes of Ethereum, BSC, Polygon, Klaytn, ICON, and Ripple.
Bringing smart contracts to Bitcoin is an incredibly ambitious plan because of the technical reasons mentioned so far. A fair question could be whether it’s really worth the effort when there are so many other blockchains available for DeFi, NFTs and other applications. Bitcoin, however, can count on the largest community, one of the most secure and decentralized blockchains and a worldwide adoption that no other coin currently even comes close to. Since the cryptocurrency market is gaining wider adoption, decentralization and network robustness become paramount for large and systemically important institutions to build upon. Bitcoin is that network. It’s only logical for Nakamoto's creature to take on the challenge of smart contract compatibility. At the dawn of the multi-chain era, the most famous blockchain in the world seemed way behind competitors in terms of product offerings. Stacks has built a theoretically sound and operationally flexible infrastructure to fill this gap and take Bitcoin to the next level.
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