Building Block: Stacks
Michael Zhao
Last Updated: 5/23/2023 | 8 min. read
Stacks is a scaling solution bringing smart contracts and other functionality to Bitcoin.
Exhibit 1: STX represents <1% of the Smart Contract Platforms Crypto Sector by market capitalization
The Token
STX is the native token of the Stacks network and represents a piece of ownership in the ecosystem (Exhibit 2). The STX token is used for (i) paying for transaction fees, (ii) acting as a medium of exchange on the network, (iii) rewarding miners who commit Bitcoin to secure the network, and (iv) “stacking”—a component of the network’s novel consensus mechanism.
The Network and Technology
The Stacks network is structured as a sidechain—one type of blockchain scaling technology—and secured through a novel “proof-of-transfer” consensus mechanism. Under this structure, miners commit Bitcoin and create Stacks blocks in exchange for the possibility of earnings STX rewards. In this way, the Stacks network partly shares the Bitcoin network’s security. Unlike the Bitcoin mainnet, Stacks offers smart contract functionality and dApps.
In addition to the growth in Bitcoin development, the Stacks protocol is nearing a critical upgrade called Nakamoto, designed to enhance its performance by reducing block times from 10-30 minutes to about five seconds. The upgrade will also introduce a new asset, sBTC, which will be pegged to Bitcoin and can serve as collateral in financial applications. With increased transaction activity on the main Bitcoin chain driving up costs, the Nakamoto upgrade positions Stacks as a more efficient and cost-effective alternative, making this a pivotal moment for the protocol.
Exhibit 3: Stacks features cheaper transactions and faster blocks compared to Bitcoin
Use Cases
Factors to Consider
The Bitcoin ecosystem is changing. The launch of Ordinals, BRC-20 tokens, and Runes have demonstrated that more can be built on the Bitcoin network, and the introduction of spot Bitcoin ETFs in the US market has brought further attention to the first public blockchain. While Bitcoin has created a narrative as a “store of value” asset, a new wave of development seeks to find more uses for the token and its underlying network.
In addition, after the Nakamoto upgrade the Stacks protocol will offer unique features, including: (i) Bitcoin collateralized stablecoins, (ii) Bitcoin-based lending (and therefore Bitcoin native reward), and (iii) Bitcoin-based decentralized autonomous organizations. Similar to how basic financial primitives enabled the growth of Ethereum’s DeFi ecosystem in 2017, Bitcoin’s ecosystem may now similarly flourish given its current place in the spotlight.
Exhibit 4: Bitcoin’s existing opportunity set remains large
Stacks faces several possible risks specific to the network, which include, but are not limited to:
Competing networks: Stacks faces competition from other blockchains with smart contract functionality, such as Ethereum, Solana, Binance Smart Chain, Avalanche, and others. In addition, Stacks faces competition from new Bitcoin Layer 2 projects that also want to take advantage of the increased interest on Bitcoin.
Economics and valuation: As of May 21 2024, Stacks network fee revenue remains low[5] compared to other blockchains, such as Ethereum.
Network resilience: Stacks leverages several new technology approaches; the Stacks Proof-of-Transfer consensus mechanism is not widely used, and may not function as intended. There may be flaws in the cryptography underlying the network, including flaws that affect the functionality of the Stacks Network or make the network vulnerable to attack. Stacks’ economic incentives in the Proof-of-Transfer model may not function as intended, which may cause the network to be insecure or perform sub-optimally.
[1] By market capitalization as of May 14, 2024
[2] As founder Muneeb Ali’s PhD thesis, then called Blockstack.
[4] Source: Electric Capital’s Developer Report, as of May 21, 2024
