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State of Stacks Q1 2023

May 31, 2023 ⋅  14 min read

Key Insights

  • Average daily transactions and average daily active addresses increased 34% and 35% QoQ, respectively. Excitement and activity on Bitcoin triggered increased BNS activity.
  • Ordinals and Inscriptions proved that the Bitcoin ecosystem has a serious demand for NFTs, fungible tokens, and DeFi. Stacks is perfectly positioned to meet that demand, with its added functionality and deep Bitcoin compatibility.
  • STX’s price increased 330% QoQ from $0.22 to $0.93, far outpacing the total crypto market cap’s increase of 46%.STX ended Q1 at its highest price in nearly a year.
  • Stacks 2.1 enabled trust-minimized bridging to Bitcoin and decentralized mining pools. Bitcoin assets bridged to Stacks such as sBTC and sOrdinals can be incorporated into sophisticated applications that wouldn’t be possible on Bitcoin.

Primer on Stacks

Stacks is a Bitcoin layer for smart contracts. Decentralized applications are executed on Stacks and settled on Bitcoin. This setup leverages the security and capital of Bitcoin while offering arbitrary programmability that is not possible directly on Bitcoin’s scriptable settlement layer.

Stacks has knowledge of the full Bitcoin state and can read from Bitcoin at any time, thanks to its Proof-of-Transfer (PoX) consensus mechanism and Clarity programming language. With PoX, miners commit BTC to eligible Stacks addresses that participate in consensus. This process of STX holders participating in consensus and earning BTC from miners is known as Stacking and launched as part of the Stacks Mainnet launch in January 2021. PoX runs parallel to Bitcoin’s Proof-of-Work (PoW) consensus, hashing and settling Stacks transactions on the Bitcoin L1. Metadata from newly mined Stacks blocks is anchored to every Bitcoin block, allowing users to verify the canonical Stacks chain via Bitcoin blocks.

Key Metrics

Performance Analysis

Network Overview

Overall activity surged in Q1, riding a wave of energy from the greater Bitcoin ecosystem. Ordinals not only brought about new use cases for Bitcoin but also showed that there is significant demand for fungible and non-fungible tokens and storing arbitrary data on Bitcoin. Ordinals are non-fungible tokens created directly on the Bitcoin blockchain by tracking and leveraging the inherent non-fungible nature of sats (the smallest unit of bitcoin). Stacks, being the leading programmability layer for Bitcoin, is perfectly positioned to capture some of the sat activity and value, as Stacks is the obvious landing place for added functionality (e.g., trading wrapped Ordinals).

Average daily transactions increased 33.7% QoQ from 6,900 to 9,200. As a result of the increased network activity, the average transaction fee (STX) increased by 14.2%, spiking during times of high activity when users competed for block space. The significance of this increase is amplified after looking at the same metric denominated in USD. The average transaction fee (USD) increased over 3x, from $0.24 to $0.75, largely due to the sharp increase in STX’s value over the quarter.

The Q1 activity spike had a catalyst outside of Stacks. High activity on the Bitcoin network, specifically Ordinals Inscriptions, triggered the increased activity in BNS registrations and overall transaction volume on Stacks in early February through the end of the quarter. Inscriptions are explored in depth in the Bitcoin Ecosystem section.

Average daily active addresses echoed average daily transactions, rising 34.8% from 2,300 in Q4 2022 to 3,100 in Q1 2023. This indicates that the increased activity was likely a result of more ecosystem participants rather than the same set of users simply transacting more.

BNS activity has driven Stacks activity spikes over the last two quarters. BNS, the Bitcoin Name System, allows users to interact with wallets via human-readable domain names. BNS is explored in depth in the Ecosystem Overview.

Financial Overview

STX is the native token on Stacks and is used for transaction fees, smart contract execution, staking, and securing the Stacks data layer. It’s important to note that BTC rather than STX is used for staking rewards. STX’s circulating market cap increased 340.4% QoQ from $0.29 billion to $1.29 billion, outpacing the total crypto market cap’s increase of 46%.

Due to the 2.5% QoQ inflation rate, STX’s price saw a slightly smaller increase of 329.7% QoQ from $0.22 to $0.93. Because Stacks uses inflation to reward its miners, it places a slight downward pressure on price. STX's quarterly price peaked at $1.18 on March 24, 2023, its highest value since April 21 of last year.

STX's value in Q1 2023 was in the same range as in Q2 2022. But, across those two quarters, Stacks saw a 27.7% higher revenue from transaction fees in Q1 2023. High fees, and by extension greater revenue, are primarily driven by the urgency of users to transact. As users compete for their transactions to be processed first, the resulting demand for blockspace directly increases network revenue. Stacks fees from Q1 2023 transaction demand follow the same pattern as Bitcoin fees from Ordinals/BRC-20s and Ethereum fees from meme coins (i.e., PEPE).

Ecosystem Overview

Both the number of overall contract calls and the number of specific contracts called on a daily basis increased QoQ by 27% and 144%, respectively. This shows not only an increase in activity but also a diversification of the activity sources. Daily NFT transactions also increased, up 21% from 102 in Q4’22 to 123 in Q1’23, but the quarterly NFT sales volume declined by 40% QoQ.

DeFi

TVL (USD) surged in Q1, increasing 276% QoQ from $7.1 million to $26.7 million. Much of the TVL (USD) volatility can be attributed to STX’s price action, emphasized by the stark difference between TVL (USD) and TVL (STX). Although the price action did impact TVL (USD), the 17.1% increase in the market cap/TVL ratio shows that some of the increase was due to more liquidity entering the ecosystem.

ALEX further increased its dominance over Stacks DeFi. ALEX is a multi-headed DeFi protocol, focused on trading and lending/borrowing cryptoassets with Bitcoin as the settlement layer. Its automated market making (AMM) protocol is at the core of ALEX’s ecosystem, providing liquidity for its Launchpad and Orderbook. ALEX’s services include an AMM DEX, Launchpad, and Lend/Borrow, with Orderbook and Bridge in development.

In Q1, ALEX introduced its Trading Pool and its testnet USDT bridge. Its Trading Pool is designed to support different pairs of assets with a Generalised Mean Equation. ALEX is currently the top DeFi protocol on Stacks.

BNS

BNS, the Bitcoin Name System, allows users to interact with wallets via human-readable domain names, similar to other domain services such as ENS and ADA Handle. There are eight different types of BNS contract calls, but 99.9% of BNS transactions come from only four types: update, transfer, register, and preorder for names.

Average daily BNS transfers increased over 4,000% in Q1 from 16 to 677. This increase was due to heightened activity at the end of March, when 3,000-6,000 BNS names were being transferred daily. BNS registrations decreased QoQ, as many of the most desirable three and four-letter BNS names had already been registered in 2022.

Staking Overview

The total STX staked, also referred to as stacked, came down from Q4’s all-time high, from 505 million to 428 million in Q1’23. Stacking is the Stacks consensus process, in which participating STX holders receive BTC rewards from miners. However, thanks to STX’s price increase, the amount staked in terms of USD increased 209% from $137 million to $236 million. This added economic security boosts the security of bridged assets in development, as detailed in the Qualitative Analysis.

The Reward Slot Minimum is a dynamic threshold that stakers (stackers) must exceed in order to be eligible for rewards. The average threshold value for cycles in Q1 decreased 15.2% QoQ, from 131,000 STX to 111,000 STX. This average threshold is the lowest it has been in over a year, making it theoretically easier for independent stackers to receive rewards without having to combine in a pool. However, the increase in STX’s price more than offset the difference, increasing the value of the threshold from $29,000 to $104,000 in USD terms.

The number of stackers meeting the threshold to stack individually continued its year-long decline, down 3.1% QoQ from 167 to 162. Pools, as compared to stacking as an individual, remain the easiest and most accessible (financially speaking) method to participate in stacking without any concern over the eligibility of rewards.

Qualitative Analysis

Stacks 2.1

The Stacks 2.1 update launched on March 19 (at Bitcoin block 781,551), following the vote from November 2022. The update included a reversal of Stacks 2.0’s sunset timeline for PoX, various new Clarity keywords to reduce the complexity and cost of certain operations, and more support for reading and prompting transactions between Stacks and Bitcoin.

Combinations of smaller features in the update enabled two significant complex features: bridging and decentralized mining.

Bridging

Bridging was enabled by the creation of several new keywords in Clarity and the new ability to send Stacks assets to Bitcoin addresses. New Clarity keywords allow Stacks smart contracts to scan the Bitcoin network for transactions that trigger a contract’s execution. BTC can then be sent to a vault and trigger an asset such as sBTC (Note: s[asset] stands for a Stacks bridged version of a Bitcoin asset) to be sent to the Bitcoin address of the sender on Stacks. This approach does not require any attachment of arbitrary data to specify the destination address of the bridged token.

Theoretically, this same process could be done with Bitcoin NFTs and BRC-20s, allowing them to be traded on Stacks, which has established DEXs, lower fees, and more programmability for a better DeFi user experience.

Decentralized Mining Pools

Decentralized mining pools were enabled by Stack 2.1’s support for Segwit and Taproot addresses and flexible reward payments. This feature makes mining more accessible to users with less capital, which should theoretically increase participation and decentralization.

Taproot allows a single miner to represent multiple contributors, and it introduces other advantages such as reducing transaction fees. Flexible reward payments allow miners to pay block rewards to any address of their choosing rather than only the key that signed the coinbase transaction. With flexible reward payments, Stacks smart contracts can act as recipients and distributors of rewards, so users can mine in pools and receive rewards in a trust-minimized way. Contributors to the mining Taproot key can be proven via their funding transactions and can then receive rewards via their Bitcoin address, as detailed in the bridging explanation of Stacks senders using Bitcoin addresses for recipients.

Bridged Assets

The sBTC whitepaper was released in December 2022, detailing a trust-minimized two-way Bitcoin peg system. The Nakamoto Release whitepaper describes the protocol changes required to enable that two-way peg system. The first of these changes was implemented in Stacks 2.1.

sBTC is still in development and is positioned to be the first decentralized, non-custodial Bitcoin peg that allows smart contracts to write back to the Bitcoin blockchain. sBTC allows BTC to move freely between the Bitcoin and Stacks networks and deploy liquidity from Bitcoin directly to Stacks for DeFi, NFTs, and more. As with other bridged versions of BTC, moving off of the Bitcoin network is simpler than moving back on.

In the case of Stacks and sBTC, users send BTC to a threshold wallet where sBTC is minted by Stacks consensus and backed by BTC 1:1. Because Stacks already reads the Bitcoin mainchain, there are no additional trust assumptions outside of Stacks and Bitcoin.

The peg-out – moving from sBTC on Stacks to BTC on Bitcoin – however, is not as straightforward and comes with additional trust assumptions. By utilizing the open-source and dynamic set of stackers and delegating them to be threshold signers, Stackers inherit the responsibility to fulfill sBTC peg-out requests. Since Stackers already have an economic incentive, peg fees become unnecessary. There is an economic trust assumption on the peg-out, unlike the cryptographic trust assumption on the initial peg. Due to this trust assumption, the peg is trust-minimized, and not trustless.

Unlike other synthetic BTC variants, like wBTC (Wrapped BTC) and RBTC (Rootstock BTC), sBTC doesn’t rely on federations or centralized custodians. Instead, sBTC relies on an open network in which anyone can help maintain the peg. The open membership of users is maintained by incentivizing users to behave rationally as the most profitable course of action. sBTC is somewhat similar in design to tBTC (Keep Network BTC), a permissionless Ethereum-wrapped BTC. However, tBTC is settled on Ethereum, and it utilizes an additional set of signers for peg requests and over-collateralization ratios.

Ordinals, BRC-20s, and all other Bitcoin assets have the potential be bridged to Stacks in a similar manner, which should encourage development on those bridges to begin soon.

Bitcoin Ecosystem

The Bitcoin network saw new innovation in Q1 leveraging the Segwit and Taproot upgrades. More importantly, these Ordinals and Inscriptions innovations proved that there is a serious appetite for added functionality in the greater Bitcoin ecosystem. Many Bitcoin maximalists were standoffish about adding functionality to the Bitcoin ecosystem, but many users began participating once added functionality was proven possible on the base layer.

Ordinals emphasize the inherent non-fungible nature of bitcoins and specifically sats (the smallest, atomic unit of a bitcoin) to create NFTs. Ordinal Theory is the practice of numbering and tracking sats off-chain. Inscriptions attach arbitrary data to the Bitcoin blockchain using the witness data section, which was introduced in the SegWit upgrade in 2017. Its scope was later expanded by the Taproot upgrade in 2021. After the first Ordinal Inscription occurred on December 14, 2022, it only took a few months for activity to explode to thousands of daily Inscriptions. By combining these two concepts, traditional non-fungible (Ordinals) and semi-fungible tokens (BRC-20s) can be created directly on-chain.

While these new assets can be created on Bitcoin, the base network’s throughput and scriptable settlement are still limited. Stacks, on the other hand, is perfectly positioned to support more complex and scalable usage of sBTC, sOrdinals, and sBRC-20s by leveraging its new bridging functionality and existing smart contract language Clarity.

Other layers and technologies in the Bitcoin ecosystem such as Lightning Network, Babylon, and RootStock also received attention from this Bitcoin renaissance. But because none of them are specifically programmability layers for Bitcoin, they did not capture as much excitement and attention as Stacks did.

Closing Summary

Stacks is positioned to meet the demand for NFTs, fungible tokens, and DeFi in the Bitcoin ecosystem. Stacks 2.1 introduced trust minimized bridging to Bitcoin, enabling the incorporation of Bitcoin assets into sophisticated applications.

The innovation and excitement on Bitcoin have already had a significant impact on the value and activity within the Stacks ecosystem. STX's price experienced a remarkable surge of 330% QoQ, marking its highest price in almost a year. There was also a notable increase of 34% in average daily transactions and a 35% rise in active addresses, triggered by heightened engagement with Bitcoin innovations such as Ordinals. Moreover, Stacks’ overall activity and contract calls increased, signifying a diversification in the sources of activity.

It will be worthwhile to watch which Bitcoin assets and activities migrate to Stacks as well as which new Stacks-native assets and functionalities are created as a result.

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This report was commissioned by Stacks Foundation. All content was produced independently by the author(s) and does not necessarily reflect the opinions of Messari, Inc. or the organization that requested the report. The commissioning organization does not influence editorial decision or content. Author(s) may hold cryptocurrencies named in this report. This report is meant for informational purposes only. It is not meant to serve as investment advice. You should conduct your own research, and consult an independent financial, tax, or legal advisor before making any investment decisions. Past performance of any asset is not indicative of future results. Please see our Terms of Service for more information.

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Red is a researcher, educator, and developer in the web3 space. Red's background is in electrical and software engineering. His main interest is privacy technology, through zero-knowledge proofs and general cryptography.

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Red is a researcher, educator, and developer in the web3 space. Red's background is in electrical and software engineering. His main interest is privacy technology, through zero-knowledge proofs and general cryptography.

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