What is Stacks?
Stacks is a smart contract platform and Layer 2 (L2) built on Bitcoin. It provides native visibility into Bitcoin state as well as full smart contract capability, all backed by the security of Bitcoin. Put simply, Stacks enables the Bitcoin economy to grow. After the upcoming Nakamoto release, Stacks will enable faster and cheaper BTC transactions and provide builders (and their users), the security of 100% Bitcoin finality as well as paths to using BTC as payment for gas fees on the network. Its native cryptocurrency, the STX token, is used to validate the network and ensure security and governance.
What Problem does Stacks Solve?
Bitcoin’s genesis block went live on January 3, 2009. Not long after that, the Bitcoin community has asked for better scalability and new use cases for their tokens. To go beyond being a ‘digital gold’ or Store-of-Value as it is often seen today, Bitcoin will need new applications powered by faster block times and higher throughput. We believe the team at Stacks can bring these upgrades to Bitcoin without any upgrades to the Bitcoin network itself. This scalability and programmability comes while leveraging Bitcoin’s most valuable attributes; namely its security, decentralization, and massive capital base.
Transactions on Stacks are significantly faster and cheaper than on Bitcoin. Currently, Stacks blocks coincide with Bitcoin blocks (about one every 10 minutes), but will be upgraded to approximately 5-second block times after the network’s Nakamoto upgrade. Transaction fees are also significantly lower than on Bitcoin. Finally, Stacks brings smart contract functionality to Bitcoin and opens the door to a universe of new Bitcoin dApps.
Use Cases
Stacks brings the power of programmability and smart contracts to Bitcoin. With Stacks, users can issue NFTs, build decentralized exchanges, and unleash composable crypto-assets all tied to the Bitcoin blockchain.
- DeFi: Multiple Stacks Decentralized Exchanges and DeFi protocols allow for BTC swaps, BTC liquidity pools, BTC lending, as well as seamless transfer of Stacks, Bitcoin, Ordinals, and other crypto assets.
- NFTs: Minting and trading NFTs is possible through several marketplaces on Stacks.
- Bitcoin Domain Names: Users can register .btc and other domain names anchored to the Bitcoin Name System through Stacks.
- Bitcoin State Legibility: Through its native programming language, Clarity, Stacks has full visibility into the Bitcoin blockchain and can natively read its state. Applications can use this to integrate Bitcoin-native transactions into their core environment.
The STX Token
STX is the cryptocurrency and native token of the Stacks network. The token was distributed through the first-ever SEC qualified crypto offering in 2019, with mainnet launch occurring in early 2021. The project raised $70M in funding for R&D in its early years and decentralized leading up to the mainnet going live.
STX had an initial token supply of 1.3 Billion that will eventually grow to 1.82 Billion. Like Bitcoin, STX supply also halves every four years.
Proof-of-Transfer (PoX)
Stacks uses a unique consensus method called Proof-of-Transfer (PoX) that has both staking and mining components to secure the network. In PoX, a Stacks ‘miner’ opts into Stacks consensus and sends BTC-denominated bids on the Bitcoin L1 for the right to produce a new Stacks block. A Verifiable Random Function helps pick a winner, where probability of winning increases as more BTC is bid. The miner reward is then paid out in STX tokens. No material energy expenditures, extra equipment, or specialized hardware is required to mine STX.
On the other side of PoX, ‘stackers’ lock STX tokens in the protocol to validate new blocks and ensure network consensus. The core functionality of locking STX in a smart contract to earn rewards and help secure the protocol is similar to traditional staking. However, stacking rewards are paid in BTC from the PoX process rather than STX token inflation (as with most PoS protocols). Stacking adds additional utility to the power used in PoW Bitcoin mining, sometimes referred to as recycled PoW.
A few important changes are coming to Stacks consensus once the Nakamoto upgrade is released early next year. Namely, miners are becoming more like sequencers and stackers are becoming validators. Sequencers produce blocks while validators validate and sign them.
- Blocktime will be decreasing significantly. Miners can produce multiple blocks for the Stacks blockchain during a single Bitcoin block, with STX block times expected to be 5 seconds. This has the effect of strengthening security by requiring miners confirm additional new blocks.
- Stacking (staking) is becoming a core part of consensus. Stackers will now help confirm blocks, validate, and confirm miner block creation. PoX payouts will help incentivize stackers to continue stacking. Blockchain operations will be more decentralized and secure as a result.
- Stacks will benefit from Bitcoin finality – Post-Nakamoto, an attacker will need to reorg Bitcoin L1 in order to alter Stacks L2 transactions / block ordering. By validating new blocks as they’re produced, stackers will prevent malicious behavior and forking until blocks are confirmed on Bitcoin. This way Stacks can offer faster block times with the security of 100% of Bitcoin’s hash power.
- MEV is being addressed from Day 1. The Nakamoto upgrade will alter the probability of a miner winning a new block, discouraging monopolistic mining practices and promoting fair competition. Winning odds will be further balanced and based on active and fair participation in the mining process. New block additions will be more equitable and secure.
Stacking Specifics
To Stack, a participant purchases STX and delegates it to an STX node for the course of a Stacking cycle, typically 15 days. This can be done through a centralized exchange, a Stacks liquidity pool, a qualified custodian, or a Stacks wallet.
Stacking specifics:
- Staking Rewards Rate: ~6% annual rewards in BTC
- Unbonding period: Up to 15 days, depending on when in the 15-day Stacks cycle the STX is stacked
- Slashing: No slashing, however rewards will be frozen for downtime
Recent History of Bitcoin
Despite its open-source and decentralized nature, there are still contributors that maintain infrastructure and occasionally deliver new upgrades to Bitcoin. The Bitcoin Core team operates client software and provides wallets, nodes, and cryptography libraries used by the vast majority of Bitcoin miners and nodes. Two major Bitcoin Core upgrades have been passed via community consensus (when 90% of miners included a predetermined activation signal). Though not a formal upgrade, the concept of Ordinals also came to Bitcoin this year and has been one of the most hotly discussed topics in the community. We expect this renewed wave of attention on the innovation landscape in Bitcoin (including layers, side-chains, and roll-ups) will continue.
- SegWit: Released in 2017, the Segregated Witness (or SegWit) upgrade was based on decoupling transactions and creating a better ‘SegWit’ execution layer. It split a BTC transaction into two portions; the first containing sender and receiver addresses and the second containing signatures from the transaction. This allowed for more transactions to be sent in a single block and prevented bad actors from altering a transaction’s content.
- Taproot: Released in late 2021, the Taproot upgrade allows for enhanced privacy by batching different types of signatures together. Specifically, multiple and single signature transactions became more difficult to break apart, helping to enhance network security. Taproot also helped to make transactions cheaper and faster on the Lightning network, as well as adding some basic smart contract functionality.
- Ordinals: Finally, Bitcoin ordinals came into being in January of this year. The primary idea of ‘Ordinals theory’ is that unique satoshis can become their own standalone, fungible assets. Ordinals users inscribe unique text and images to satoshis that can then reference larger datasets (including entirely self-contained coin standards). Though not a formal Bitcoin Core upgrade, the idea has brought new use cases and collectibility features to Bitcoin this year.
Despite these upgrades, Bitcoin still has a block time of about 10 minutes and a low degree of programmability on the core network. Transferring tokens and ordinal satoshis is still extremely slow and expensive compared to doing it on a protocol like Stacks.
The Team
The Stacks project began in late 2017. That year, Muneeb Ali completed a PhD thesis at Princeton on blockchain and distributed systems titled “Trust-To-Trust Design of a New Internet”. If this sounds similar to the fictional Pied Piper company from the TV show Silicon Valley, it should; Ali served as a technical adviser to the show.
When Stacks launched its Alpha version in 2017 it garnered investments from top VCs and angels including Union Square Ventures, Blockchain Capital, Lux Capital, and Digital Currency Group.
As Stacks has decentralized over time, several entities have formed to contribute to the Stacks ecosystem.
- Trust Machines builds products and applications for the Bitcoin ecosystem, including both for the L1 and the L2. Product highlights include a web3 community chat app built on Bitcoin (Console), a self-custody Bitcoin wallet (Leather), and a decentralized swaps protocol to swap between Bitcoin and Stacks with Lightning (LN Swap).
- Ecosystem Partners: Among other applications, there are multiple teams building DeFi, wallets, and NFT infrastructure on the Stacks. Some highlights below:
Future Developments
The Stacks team continues to deliver on a robust product roadmap and have shipped many new features and upgrades since the protocol’s inception. The Nakamoto upgrade is the next major milestone in the Stacks roadmap and will bring sBTC live. sBTC is a 1:1 Bitcoin-backed asset that allows full programmability on top of native Bitcoin. It is permissionless, noncustodial, and doesn’t charge users wrapping or bridging fees like many other wrapped Bitcoin assets do. It also isn’t dependent on a centralized intermediary or oracle to the Bitcoin network.
For an example use case, a Bitcoin holder could deposit BTC into an sBTC smart contract and deploy it to a DeFi protocol to generate yield on their Bitcoin without ever turning over their BTC to another party. The Stacks network and stackers help to ensure the security and liveness of sBTC. Stacks plans to integrate sBTC as a core part of its network prior to the BTC halving in April 2024.
Figment’s Involvement
Figment is excited to support Stacks with an enterprise-grade Stacking solution. We are also participating in the Stacks testnet. If you are interested in stacking STX, Figment offers a host of services aimed at delivering safe and reliable staking rewards for your assets. Stay tuned for further announcements, staking guides, and more.
Our 250+ institutional clients rely on Figment to provide best-in-class staking services including seamless and easy integrations, detailed rewards reporting, insights, double sign slashing, and downtime penalty coverage. Figment’s team has extensive Stacks knowledge intended to help dive into the specifics such as rewards and staking information. Meet with us to learn more about Stacks stacking.
The information herein is being provided to you for general informational purposes only. It is not intended to be, nor should it be relied upon as, legal, business, or investment advice. Figment undertakes no obligation to update the information herein.
