Stacks
VeradiVerdict - Issue #266
Key takeaways:
Since Bitcoin's release in 2009, the network has established its viability as the foundational Layer 1 (L1) network. While other networks have experienced downtime, disruptions, and more, Bitcoin has managed to stay the course. While Bitcoin has shown resilience and amassed over $500 billion in idle capital, the ability to utilize core features was lacking as there is no inherent programmability to Bitcoin as with Ethereum.
Stacks is a leading solution to unlock programmability on Bitcoin as a Bitcoin L2. It is a layer 2 for Bitcoin that has full smart contracts, where transactions are permanently settled on the BTC blockchain.
Stacks has brought smart contracts and programmability to the Bitcoin network as a Bitcoin L2, unlocking $500+ billion of idle untapped Bitcoin capital for developers and applications.
The upcoming Natamoto network upgrade will increase network speed by reducing block times to 5 seconds and introduce sBTC, the mechanism through which Bitcoin deposit and withdraws from L1 will work unlocking BTC liquidity.
Addressing Bitcoin Scalability:
Amidst the surging new activity and transactions that need block space of Bitcoin, its fundamental Layer 1 protocol confronts an inherent hurdle in scalability. Built upon a decentralized consensus mechanism that ensures security, Bitcoin’s very design imposes restrictions on transaction throughput. These limitations become particularly apparent during periods of high network congestion when surges in activity lead to delayed confirmation times and elevated transaction fees. Further, the limited scripting capabilities of Bitcoin's Layer 1 curtail the spectrum of viable applications, exacerbating the problems related to scalability. While the limited design space is both limited and often desirable, it has thus far made building more complex applications on the network difficult or untenable.
It's in this context that Layer 2 solutions emerge as a concept designed to complement and augment Layer 1 capabilities. Layer 2 solutions, like the name implies, operate atop the existing blockchain, alleviating congestion and enabling the development of sophisticated applications without compromising the crucial tenets of security and decentralization. The importance of Layer 2 solutions lies in their capacity to create new network capabilities, thereby enabling innovation without betraying the fundamental security and economic promises of the underlying blockchain.
Layer 2
Builds the blockchain architecture
Adds additional functionality on top of L1 networks
Can offer solutions (sharing, change in consensus mechanism, etc.) to improve scalability in large scale software upgrades but validators must be persuaded to implement changes through a hard fork.
Involves use of off-chain services (rollups, sidechains, etc.) to boost scalability.
Established record of security on the blockchain.
Requires users to rely on the L2 developers and network for efficiency and processing transactions. Security can often be derived from the L1.
Unveiling Stacks (STX):
Standing prominently among the array of Layer 2 solutions for the Bitcoin network is Stacks (STX), an innovative platform that is redefining the boundaries of scalability and functionality. Operating as a Layer 2 solution, Stacks seamlessly integrates with the Bitcoin blockchain, unlocking fresh possibilities. At its core, Stacks introduces a pioneering methodology that bridges the divide between Bitcoin's base layer and a secondary layer optimized for intricate applications. Unlike conventional Layer 2 solutions that concentrate solely on off-chain transaction management, Stacks elevates Bitcoin's Layer 1 capabilities by empowering developers to devise dynamic smart contracts on its Layer 2. This fosters a symbiotic connection between the two layers, ensuring that complex computations and interactions transpire on Layer 2 while transaction security and finality remain firmly anchored to the foundational Bitcoin blockchain. This innovative architecture requires no changes to Bitcoin L1, preserves the robust security of Bitcoin and prioritizes scalability, allowing for a plethora of applications to function seamlessly without burdening the primary network. Stacks' distinct approach sets it apart, proffering a more comprehensive solution that capitalizes on the strengths of both layers to create an efficient ecosystem for decentralized applications.
Crafting Decentralized Applications on Stacks:
The development of decentralized applications (DApps) on the Stacks network opens doors to an array of possibilities, fostering innovation across sectors like finance, digital art, supply chain management, and decentralized finance (DeFi). Stacks creates an environment where diverse types of DApps can flourish by seamlessly integrating with Bitcoin, the flagship cryptocurrency, and leveraging its user base and security features. Developing DApps on Stacks provides access to enhanced scalability, ensuring fluid user experiences even during network spikes. Stacks' innovative architecture establishes a secure DApp environment, making use of Bitcoin's base layer security. This stratified approach enhances trust, enabling developers to design applications capable of handling sensitive data and valuable assets with confidence. Interoperability with the Bitcoin network stands as another pivotal advantage, enabling seamless interactions between DApps and Bitcoin's native assets and ecosystem. Consequently, Stacks empowers developers to bring their creative ideas to life while affording users a robust and user-friendly decentralized experience.
The Nakamoto Upgrade and Progression:
The upcoming Nakamoto upgrade signifies a pivotal milestone in the ongoing evolution of the Stacks network, ushering in transformative enhancements. The Nakamoto upgrade introduces a range of technical advances that collectively fortify the networks’s speed and security prospects. Combined with the introduction of sBTC, a 1:1 Bitcoin backed asset, Stacks will soon enable writing to Bitcoin in a fully decentralized manner, enabling easy movement of Bitcoin in and out of L2. This unlocks hundreds of billions of dollars of latent capital into web3. sBTC is a trust minimized way to move BTC between L1 and L2; it operates through economic incentives in addition to cryptography. The threshold wallet is not managed by a centralized or pre-determined set of entities to whom a user must entrust their BTC, as seen in earlier sidechain approaches. Rather, the threshold wallet is managed by a permissionless, dynamically changing group of entities who are economically incentivized to maintain the peg and who can join and leave peg maintenance as they like (following the ethos of Bitcoin itself).
Using this mechanism, an asset can be issued on the Bitcoin layer (here, sBTC on the Stacks layer) that always maintains its 1:1 peg to BTC. Fully expressive smart contracts, triggered by Bitcoin transactions as in the current Stacks L2, can operate on sBTC, and can also broadcast signed transactions on the Bitcoin blockchain without need for trusted entities. This solves the ‘trustless Bitcoin write’ problem, and it allows smart contracts to effectively operate on BTC as their asset without the risk of converting BTC to another, unpegged currency. Unlike typical sidechains, Stacks L2 transactions (and smart contracts) have other important properties inherit: (i) They settle on the secure, durable Bitcoin blockchain; (ii) peg-related operations are implemented as Bitcoin transactions that cannot be censored by the Stacks layer or its miners; and (iii) Stacks transactions and peg operations achieve Bitcoin finality⎯i.e., they are backed by 100 percent of Bitcoin base layer security/hashpower, and (iv) Stacks transactions and peg operations fork seamlessly with Bitcoin, so they do not require any intervention when Bitcoin forks.
Additionally, the Nakamoto upgrade aims to substantially reduce execution times, transitioning from minutes to seconds. This accomplishment stems from groundbreaking research and development, positioning Stacks to offer users an experience akin to Ethereum's Layer 2 solutions while maintaining strong ties to the security of the Bitcoin network. The Nakamoto upgrade underscores the Stacks community's steadfast commitment to pushing boundaries within the Bitcoin blockchain, positioning the platform as a hub for a fresh wave of decentralized applications.
Use Cases:
1. Decentralized Finance (DeFi):
Stacks L2 stands to become a hotspot for DeFi applications that serve Bitcoin holders. Through Stacks, users can access decentralized lending, borrowing, and trading platforms. DeFi projects on Stacks are designed to offer financial services while utilizing Bitcoin as collateral. This approach provides Bitcoin holders with opportunities to earn interest and access DeFi features without leaving the Bitcoin ecosystem. Given $500B in latent BTC capital, this is potentially a very large opportunity for developers and new use cases.
2. Digital Ownership and Identity:
Stacks facilitates the creation of digital assets representing real-world ownership, such as real estate or intellectual property. Users can establish verifiable digital identities and claim ownership of these assets on the blockchain. This has implications for the tokenization of physical assets and the development of secure, tamper-proof records.
3. Tokenization and NFTs:
The Stacks ecosystem supports the creation of non-fungible tokens (NFTs) and tokenized assets. Artists, musicians, and content creators can tokenize their work and sell it on Stacks-based marketplaces. This empowers creators to retain ownership and royalties for their digital creations.
4. Voting and Governance:
Stacks enables decentralized governance and voting mechanisms. Users can participate in decision-making processes, such as protocol upgrades and community initiatives, by staking STX tokens. This enhances the democratization of blockchain networks and ensures that stakeholders have a say in the platform's evolution.
5. Cross-Chain Integration:
Stacks is exploring cross-chain integration, allowing assets and data to move seamlessly between different blockchains. This has the potential to bridge Bitcoin with other blockchain networks, expanding the utility of both Stacks and Bitcoin.
6. Bitcoin Mining with STX:
Miners can participate in Bitcoin mining while simultaneously supporting the Stacks ecosystem by locking up Bitcoin (BTC) as collateral. This innovative Proof of Transfer (PoX) consensus mechanism aligns the incentives of both Bitcoin and Stacks communities.
Stacks Ecosystem:
The Stacks developer ecosystem serves as a testament to collaborative innovation, where developers unite to shape the future of finance and technology. Let’s look at some popular leading projects and tooling.
1. Hiro PBC (formerly Blockstack PBC):
Hiro PBC built the early version of Stacks and is now a developer tooling company for Bitcoin L1 and L2s. They have been instrumental in developing the early version of Stacks and its associated technologies and continue to contribute to recent developments. Hiro PBC provides tools, and resources to developers and projects building on Bitcoin L1 and Stacks L2, with offerings such as the Ordinals API, Chainhook indexers, and subnets. Their efforts aim to drive developer adoption of Bitcoin L1 and L2s.
2. Trust Machines:
Trust Machines is building the largest ecosystem of Bitcoin applications to maximize the value of the Bitcoin network. Trust Machines is building Bitcoin DeFi projects, and projects apps that explore what Bitcoin backed assets and identities can unlock such as Console, a Web3 Chat app that is gated by your identity. Trust Machines contributes to open source code for Bitcoin L2s like Stacks and Bitcoin L1 technologies like DLCs.
3. Stacks Foundation:
The Stacks Foundation supports builders on a mission to activate the Bitcoin economy through broader adoption. The Stacks Foundation provides funding for critical open source technology development and educational efforts, community development and event resources, developer education resources, and contributes to the open source Stacks development and SIP (Stacks Improvement Proposal) processes.
Wallets:
The Leather Wallet (formerly known as Hiro Wallet), and Xverse Wallet both are essential application for users to manage their STX tokens, Bitcoin and Bitcoin based assets (including Stamps and Ordinals) and interact with decentralized applications (DApps) on the Stacks blockchain. They provide a user-friendly interface for securely storing, sending, and receiving BTC and STX tokens, making it easy for individuals to engage with the ecosystem.
ALEX:
The Bitcoin DeFi protocol & decentralized exchange (DEX), released the first-ever bridge between Ethereum and Stacks layers in Q2 2023, allowing users to transfer assets between the blockchains.
Bitcoin NFT marketplace and creator launchpad, released its own Ordinals Marketplace and a Partner Program featuring 60 debut artists across Bitcoin and the traditional art worlds.
BNS (the Bitcoin Name System):
The oldest Bitcoin Name System started on Bitcoin L1 in 2015, with over 300k names registered to the .BTC namespace alone, and Leather and Xverse support for sending and receiving BTC to unique, human readable names.
Clarity Smart Contracts:
Clarity is the smart contract language developed for Stacks, ensuring security and predictability. Developers can build decentralized applications and smart contracts using Clarity, promoting trust and reliability in the ecosystem. Clarity’s design eliminates a huge number of common smart contract bugs seen on other networks.
Stacking Pools such as Fast Pool (fka Friedger Pool):
Fast Pool allows users to pool and stack STX with others, making Stacking rewards more accessible for users with less than the protocol minimum for stacking. The Stacking protocol allows folks to opt into locking STX and being eligible for BTC rewards that are sent by miners mining STX. Fast Pool is a self-service pool, where the smart contract is the pool operator. Fast Pool sends payouts to users via STX, not BTC, for reduced transaction fees.
The Bitcoin Frontier Fund:
The Bitcoin Frontier Fund, previously Stacks Ventures, has introduced the inaugural Bitcoin Ordinals accelerator program. This program aims to foster innovation in the realm of Ordinals, offering start-ups seed funding, access to funding channels, and mentorship. In exchange for participation, the Bitcoin Frontier Fund provides a $100,000 investment and access to a supportive community, claiming a 2-3% equity stake in common shares. Start-ups without significant prior funding will yield a 3% equity share, while those with $600,000 or more in recent funding will give 2%. Areas of interest include infrastructure, proven Web 3.0 use cases, developer tools, and accessibility.
Bitcoin Layer 2 Labs:
Bitcoin L2 Labs is a core development-focused entity based in Pakistan, playing a pivotal role in the advancement of Bitcoin's Layer 2 solutions. With a strong commitment to the development of Bitcoin's infrastructure, this organization has positioned itself at the forefront of blockchain innovation in Pakistan. Bitcoin L2 Labs is actively engaged in research, development, and implementation of Layer 2 scaling solutions, contributing significantly to the scalability and functionality of the Bitcoin network. In a rapidly evolving blockchain landscape, their work underscores Pakistan's growing presence in the global blockchain community and its dedication to the continued development of blockchain technologies.
DeSpread:
DeSpread has been dedicated to fostering a healthy blockchain ecosystem, particularly addressing language and cultural barriers specific to the Korean market. Over nearly four years, this company has evolved significantly, now boasting a team of 21 blockchain experts, all without external investment. DeSpread specializes in providing growth and market strategy consultancy services for blockchain projects, leveraging its extensive market knowledge. Furthermore, they actively contribute to the industry by publishing educational materials and research publications, fostering shared growth within the blockchain community. DeSpread Labs, their in-house development team, plays a crucial role by operating validators, driving on-chain activities, and creating web3 community platforms, demonstrating their commitment to blockchain innovation.
HireVibes:
HireVibes is a platform that focuses on transforming the traditional job market by integrating blockchain technology and decentralization principles. Through its innovative approach, HireVibes aims to create a more equitable and efficient job-hunting experience for both job seekers and employers. By harnessing the power of blockchain, they facilitate transparent and fair hiring processes, enabling individuals to gain greater control over their career paths. This platform not only connects talented professionals with exciting opportunities but also promotes values like sustainability and social impact by allocating a portion of job placement fees to charitable causes. With a commitment to revolutionizing the job market, HireVibes represents a pioneering force in the intersection of blockchain technology and human resources.
Sustainable Bitcoin Protocol:
The Sustainable Bitcoin Protocol is a groundbreaking initiative aimed at addressing one of the most pressing concerns in the world of cryptocurrency – carbon emissions. Recognizing the environmental impact of Bitcoin mining and transactions, this protocol seeks to offset and reduce carbon emissions associated with the network's operations. By implementing sustainable practices and technologies, such as renewable energy sources and carbon offset programs, this initiative strives to make Bitcoin more environmentally friendly and socially responsible. It represents a critical step towards mitigating the ecological footprint of cryptocurrency, aligning the digital currency's growth with global sustainability goals. The Sustainable Bitcoin Protocol is a testament to the growing awareness within the crypto community about the importance of ecological responsibility, and it serves as a model for making blockchain technology more environmentally sustainable.
Harnessing Innovations and Creativity:
The transformative potential of Bitcoin has been reignited by the introduction of "Ordinals," an innovative concept taking root in the Bitcoin ecosystem. Ordinals signify a paradigm shift in how data can be linked with individual satoshis, Bitcoin's smallest units. This innovation assigns a unique digital identity to each satoshi, enabling novel applications that leverage their distinct attributes. One practical implementation involves creating non-fungible tokens (NFTs) on the Bitcoin blockchain, associating data with individual satoshis to establish secure and immutable ownership. Beyond art and collectibles, this innovation has the potential to revolutionize provenance tracking, supply chain management, and decentralized identity verification. The introduction of ordinals introduces unparalleled granularity to the Bitcoin network, unlocking a new realm of innovation and creativity that has the potential to reshape digital assets and decentralized applications, but only if activity can be successfully scaled with L2s as previously discussed.
Future Outlook and Concluding Thoughts:
In conclusion, the journey of Stacks within the Bitcoin ecosystem is characterized by its inventive approach to scalability challenges and the facilitation of new applications. This Layer 2 solution illustrates its capacity to improve Bitcoin's scalability while upholding the core tenets of security and decentralization. The fusion of Stacks' unique attributes, innovative utilization of ordinals, and the imminent Nakamoto upgrade positions it as a pioneer in the landscape of cryptocurrencies.
As the broader cryptocurrency community recognizes the significance of Layer 2 solutions for shaping Bitcoin's future, Stacks is poised to play a pivotal role in the evolving narrative. Collaboration, technical innovation, and the exploration of novel use cases will shape both Stacks and the broader Bitcoin developer ecosystem. Unlocking $500B of Bitcoin liquidity into DeFi, providing faster, cheaper rails for BTC movements, ongoing DApp development, and the integration of cutting-edge technologies offer glimpses into the promising potential that lies ahead as the Nakamoto release of Stacks is developed.
- Paul Veradittakit
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ABOUT ME
Hi, I’m Paul Veradittakit, a Managing Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. I’ve been in the industry since 2014, and the firm invests in equity, early stage token projects, and liquid cryptocurrencies on exchanges. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.