Detailed explanation of Bitcoin Layer 2 network Stacks

This article will first delve into how Stacks introduces smart contracts to the Bitcoin blockchain from technical architecture, consensus mechanism, and other perspectives. Additionally, it will explore the investment value of STX (the native token issued by Stacks) based on fundamental analysis and the examination of various potential factors.

Part 1: Detailed explanation of Stacks from a technical perspective

Stacks is a Bitcoin Layer 2 network designed to extend functionality without modifying Bitcoin itself, enabling the introduction of smart contract capabilities to the Bitcoin blockchain. This allows smart contracts and decentralized applications (DApps) to utilize Bitcoin as an asset in a trustless manner and settle transactions on the Bitcoin blockchain.

Stacks has its native token, “STX.” Miners on the Stacks chain earn STX rewards by producing blocks, while STX holders can earn BTC rewards by participating in the Stacking process. Both parties leverage the POX consensus mechanism to collaboratively provide security for the Stacks blockchain based on the Bitcoin blockchain.

How does Stacks implement smart contracts into Bitcoin?

In simple terms, Stacks introduces a new consensus algorithm called Stacking. The Stacking consensus algorithm employs a mechanism called Proof of Transfer (POX), which ensures that Stacks blocks are unaffected by forks, achieving 100% Bitcoin finality and inheriting all the security of Bitcoin.

At the same time, Clarity, a smart contract programming language designed specifically for the Stacks blockchain, can read the state of the Bitcoin main chain. This enables smart contracts on the Stacks layer to also read the Bitcoin state and can be triggered by standard Bitcoin transactions. This further enables transactions to settle on the Bitcoin chain in a trustless manner, verifying all smart contract and transaction records like Bitcoin transactions.

Stacks also innovatively designs a decentralized Bitcoin anchoring mechanism called sBTC, which is pegged 1:1 with BTC. It aims to enable writing to the Bitcoin blockchain in smart contracts in a trustless manner, unlocking billions of dollars’ worth of BTC assets.

Next, let’s delve into these technical principles in detail.

Consensus Mechanism: Proof of Transfer (POX)

Proof of Transfer (PoX) is a novel blockchain consensus mechanism that enables Stacks to settle transactions on Bitcoin, establishing a symbiotic relationship with Bitcoin. This unique relationship allows for the extension of Bitcoin without modifying Bitcoin itself.

In the PoX consensus mechanism, there are two types of participants: Stacks miners and • • • Stackers (STX stakers). The entire PoX process can be broken down into two core mechanisms: Stacks miners produce blocks (i.e., mining), and Stackers sign and verify transactions (blockchain validation). In this mechanism:

• Stacks Miners: Spend BTC to win mining opportunities on the Stacks chain, thereby receiving newly minted STX token rewards, STX transaction fees on the Stacks chain, and contract fees.

Stackers: STX holders participate in the PoX consensus mechanism by signing and verifying the validity of Stacks blocks, determining whether to include the block on the Stacks chain, and receiving a portion of the BTC bid by miners as a reward. This participation process is called “Stacking.”

So, how does the PoX consensus mechanism ensure that Stacks blocks are unaffected by forks and achieve 100% Bitcoin finality? Next, we will describe the overall process of miners producing blocks, Stackers signing and verifying transactions, and interacting with the Bitcoin blockchain using an example.

The interaction between the Stacks chain and the Bitcoin chain.

Stacks chain block production and on-chain process, source:Stacks

As shown in the above diagram, the overall principle is roughly as follows:

1. Each Bitcoin block corresponds to a new Stacks miner tenure, during which a single Stacks miner is responsible for producing all Stacks blocks.
2. During the tenure of Stacks miner A, a user initiates a transaction, which is broadcast to the memory pool. Stacks miner A adds this transaction to Stacks block “A4” and then sends the block to Stackers for signature verification. When 70% of Stackers signers verify its validity and reach consensus, the block is added to the Stacks chain.
3. Next, a new Stacks miner B submits a block-commit transaction to the Bitcoin chain. This transaction sends BTC to the reward pool address for all Stackers in the current STX staking period. Simultaneously, the Bitcoin script OP_RETURN in this transaction includes the index block hash of Stacks miner A, triggering a change in the Stacks miner tenure. The “index block hash” here is a hash value recognized by the Stacks chain of all previously accepted Bitcoin transaction hashes, as well as the hash value of the Stacks block itself, anchoring the history of the Stacks chain to that of the Bitcoin blockchain.
4. Then, Stacks miner B, having submitted the BTC transaction according to the rules and won the next mining qualification according to the encryption algorithm, triggers a “TenureChange-BlockFound” transaction, which is monitored by miners A, B, and Stackers.
5. Next, Stackers initiate tenure change transactions on the Stacks chain. Stackers determine that “block A6” is the last block produced by Stacks miner A, and then Stacks miner B will build its own block on top of block A6. This marks the beginning of Stacks miner B’s tenure.
6. The process of tenure change from Stacks miner B to Stacks miner C will repeat the similar process described above.

From the above process, we can understand the following:

1. Achieving fast blocks: Stacks chain block production is approximately 5 seconds per block after the Stacks Nakamoto upgrade. This is achieved by separating miner block production from cryptographic ordering (random selection of miners). Stacks chain miner tenures are anchored 1:1 with Bitcoin blocks, and each Stacks miner can produce multiple Stacks blocks.
2. Achieving 100% Bitcoin finality:
3. The finality of Stacks chain transactions is obtained after two Bitcoin blocks in the Bitcoin blockchain. In the example above, when the tenure of miner C arrives, miner C will submit a block-commit transaction to the Bitcoin chain, which will include the index block hash of miner B’s first block B1. This hash value actually contains the status information of all Stacks blocks during the tenure of miner A. Since block A4 in the tenure of miner A contains the user transaction tx, it can be seen that this transaction during the tenure of miner A is recorded on the Bitcoin chain with the block-commit transaction of miner C.
4. Forks are allowed within six settlement blocks in the Bitcoin chain, and the overall Stacks chain will fork with the Bitcoin chain. From the example above, we know that Stacks chain transactions fall into two types, those dependent on Bitcoin transactions and internal transactions. If Bitcoin forks, internal transactions are not affected. Transactions dependent on Bitcoin transactions are carried out by reading the Bitcoin state and are affected by Bitcoin fork transactions, but they will follow the Bitcoin finality and fork as the Bitcoin fork.
5. There are almost no forks in internal transactions of the Stacks chain. In the Stacks chain, miners are only responsible for block production, and whether the produced block can be added to the Stacks chain is determined by Stackers’ signatures. So there are almost no forks in the Stacks chain. (Note: The reason why it is said here that there are “almost” no forks is that when more than 31% of Stackers refuse to sign, there may be a fork. In such cases, Stacks’ solution is called “Stacker blessing.” However, such situations are extremely rare, and this article will not go into further detail.)
6. Achieving settlement of Stacks chain transactions on the Bitcoin chain. As seen in the example above, Stacks chain miners package user transactions into Stacks blocks, and then Stackers sign and confirm adding the block to the Stacks chain. When the next block arrives in the Bitcoin chain, the Stacks chain undergoes a tenure change, with the new Stacks miner continuing to produce Stacks blocks. During the tenure change, the new Stacks miner submits the Stacks chain transaction status to the Bitcoin chain, thereby achieving settlement of Stacks chain transactions on the Bitcoin chain.

Consensus Algorithm: Stacking

Holding and locking STX for one or more cycles to support the security and consensus of the Stacks network and receive BTC as a reward is called “Stacking.”

The key difference between Stacks’ Stacking and ETH’s Staking is that in Ethereum’s staking, validator nodes may face penalties, including slashing or confiscation of staked ETH tokens, for malicious behavior or network downtime. However, Stacks’ Stacking does not have this feature.

Stacks Miners and Stackers

In the Stacks chain, miners and Stackers are essential participants in “Stacking,” and they play a crucial role in maintaining the network’s security. They are fully decentralized, and anyone can become a miner or a Stacker. After the Nakamoto version upgrade, miners determine the content of blocks, while Stackers decide whether blocks are included in the chain. This collaborative relationship between miners and Stackers enables the Stacks chain to achieve fast block times and 100% Bitcoin finality.

Overview of the behavior of miners and Stackers

How do miners obtain mining opportunities?

Miners obtain mining opportunities by spending BTC, and winning miners are selected through a verifiable random function (VRF), with the probability proportional to the amount of BTC spent. After the Nakamoto version upgrade, “sorting probability” will be introduced to mitigate the impact of “Bitcoin miner MEV resistance” and promote fairer mining opportunities.

Miners receive rewards from three sources: mining rewards in STX, Clarity contract fees, and Stacks transaction fees.

Among them, mining rewards follow a fixed schedule: 1000 STX per block for the first 4 years, halving every four years thereafter until it reaches 125

STX per block, which will be released indefinitely.

Clarity contract fees and transaction fees fluctuate with network usage.

Bitcoin Miner MEV Resistance: Some Bitcoin miners also operate as Stacks miners. They can review “block-commits” transactions submitted by other Stacks miners to the Bitcoin blockchain and then exclude these other Stacks miners from their Bitcoin blocks. When the STX block rewards are attractive enough and the cost for winning Stacks miners is extremely low, they can win mining opportunities from Stacks miners. After the Nakamoto version upgrade, Stacks changed the sorting algorithm to ensure that Bitcoin miners do not have an advantage as Stacks miners and they must spend competitive BTC to have a chance to earn STX.

How do Stackers get BTC rewards?

Stackers refer to participants in the Stacks chain who hold and lock STX for one or more cycles as stakers.

1. Reward Cycle: This is fixed at 2,100 Bitcoin blocks, approximately every 15 days. During each reward cycle, miners transfer funds to a set of Stacker addresses designated during the preparation phase of the cycle to receive rewards. Each reward address receives Bitcoin only once per reward cycle from miners.
3. Eligibility to Participate in Reward Cycles:
4. Participate before the start of a reward cycle. Once a reward cycle begins, Stackers can only choose to participate in the next cycle.
5. Specify the number of cycles to participate in, with a minimum of one cycle and a maximum of 12 cycles (25,200 Bitcoin blocks or approximately 7 months).
6. Provide supported Bitcoin addresses to receive rewards.
7. Stake the minimum amount of STX tokens to ensure a reward slot or pool with others to reach the minimum amount.
8. Receive rewards at a BTC address in one of the following two formats:
9. Legacy (P2PKH), starting with “1.”
10. Segregated Witness / Segwit (P2SH), starting with “3.”
11. Currently, the “Native Segwit” format (starting with “bc1”) is not supported.
12. The minimum staking quantity of STX tokens is a dynamic value adjusted based on participation to set the reward threshold.
13. Each reward cycle can transfer miner funds to a maximum of 4,000 Bitcoin addresses, so the participation threshold is 0.025% of the STX liquidity supply (1/4,000). However, if the participation rate is below 100%, the reward pool can accept a lower staking amount of STX.

How to choose the best stacking strategy for maximum rewards?

There are primarily two ways to engage in Stacking: running Stacking independently or joining a Stacking pool. Stacking pools are further divided into custodial and non-custodial options. The choice depends on one’s crypto experience and the amount of available STX. Here’s a breakdown of the differences:

Running Stacking Independently: Requires meeting a dynamic minimum STX quantity (currently around 100,000 STX at the time of writing, which increases with the growth of STX liquidity supply).

Running Stacking independently allows avoiding the need to trust third parties and directly receiving rewards from miners.

Joining a Stacking Pool: If the minimum requirement is not met, one can still participate by joining a Stacking pool. Stacking pools are typically operated by independent third parties who combine participants’ STX amounts to stake on their behalf, then distribute rewards proportionally (minus any possible fees) to each participant. Stacking pools are divided into custodial and non-custodial options.

Custodial Pool: Examples include OKX or Binance. Participants need to send their STX tokens to the pool operators, who then run Stacking with their wallets. Rewards are paid out to the participant’s specified BTC address or in STX or other tokens.

Non-Custodial Pool: The pool never directly accesses one’s STX, but participants need to “delegate” their STX to the pool. Trust in these pools’ ability to pay out rewards is required. STX can be withdrawn from the pool at any time, but the funds remain locked until the selected Stacking cycle ends.

Although running Stacking independently allows avoiding the need to trust third parties and receiving rewards directly from miners, the minimum STX quantity requirement for each cycle may increase, affecting the rewards obtained. Therefore, even if the minimum requirement is met, joining a Stacking pool may still be the optimal solution to maximize rewards. To understand the impact of the dynamic minimum STX quantity increase on rewards, one can refer to this article. The choice of Stacking channel can be obtained from the Stacks official website. Various Stacking data and statistics can be viewed on Stacking Club.

Programming language: Clarity

Clarity is a smart contract programming language designed specifically for the Stacks blockchain. It is a determinable language, optimized for predictability and security, drawing lessons from common Solidity vulnerabilities to prevent similar issues. One of Clarity’s key advantages is anchoring smart contracts on the Bitcoin blockchain, enabling smart contracts to operate based on the state of the Bitcoin blockchain.

Key Features of Clarity:

Determinable: Clarity allows complete static analysis of the entire call graph of smart contracts. It can determine what a program will do solely from its code, including analyzing the runtime costs and data usage, allowing prediction of actions and expenses.

No Compilation Required: Unlike Solidity, Clarity is an interpreted language and does not require compilation. This enhances readability of contract source code and avoids complexities introduced by compilers and potential contract vulnerabilities arising from compiler-level errors.

Visibility of Bitcoin State: Clarity smart contracts provide built-in Bitcoin SPV proofs, making it easy to read the state of the Bitcoin blockchain. This means that smart contracts can trigger certain logic based on Bitcoin transactions.

SPV (Simple Payment Verification) is the process of verifying transaction validity in the Bitcoin lightweight client environment.

Read here to learn more.

Clarity has many other advantages, such as disallowing reentrancy, preventing overflow and underflow, enforcing response handling, and attaching post-conditions to transactions (enabling transaction rollback), which collectively help prevent many common smart contract vulnerabilities.

To learn more about how Clarity prevents smart contract vulnerabilities, the article “Making 8 Dangerous Smart Contract Vulnerabilities ‘Clarity’” focuses on introducing some of the most common smart contract vulnerabilities and how Clarity addresses them.

Of course, the current Clarity, due to its non-compilation nature, does not perform as well in terms of runtime performance as compileable smart contracts. However, with the Nakamoto version upgrade, Clarity Wasm will address this issue. By compiling Clarity smart contracts into Wasm, contract execution speed will significantly improve, and compatibility will also be greatly enhanced.

Difference Between Compiled and Interpreted Languages: Compiled and interpreted languages both interpret source code, but their methods of operation differ, leading to differences in efficiency. Compiled languages compile all source code into machine language upfront, running the entire code as a whole, which is highly efficient. Interpreted languages interpret source code line by line into machine language only when corresponding statements are executed, resulting in less efficiency as the code executes.

In summary, as an innovative programming language following Solidity, Clarity does indeed address some of Solidity’s shortcomings. However, as a smart contract programming language for the Bitcoin blockchain, Clarity’s most significant contribution lies in its integration of Bitcoin SPV proofs, allowing the readability of Bitcoin state on the Stacks blockchain. This also means that smart contracts on the Stacks blockchain can be triggered by Bitcoin transactions, achieving programmability of the Bitcoin blockchain on its Layer 2 network, Stacks.

Decentralized Bitcoin peg mechanism: sBTC

sBTC is a decentralized token pegged to BTC assets, operated by a group of permissionless, decentralized, and dynamic participants. These participants receive economic incentives through Stacks’ POX consensus mechanism to correctly execute the pegging operation. If Stacks achieves the integration of smart contracts into the Bitcoin blockchain through a series of innovative technologies, then the sBTC pegged to BTC at a 1:1 ratio is built on this foundation, unlocking BTC assets as programmable productive assets (profit generation), enabling Bitcoin’s entry into the DeFi space.

Using this pegging mechanism, smart contracts can utilize Bitcoin as a currency asset in Stacks for various DeFi transactions such as lending, BTC stablecoins, and more. While wBTC (wrapped Bitcoin assets on Ethereum) can also facilitate these DeFi functionalities, wBTC is issued by centralized institutions, with less transparent BTC reserve proofs, and requires additional “wrapping fees.” In contrast, the sBTC pegging mechanism operates in a decentralized manner without the need for trust, with its minting process recorded in Bitcoin’s blockchain scripts and without the need for additional wrapping fees, giving sBTC’s pegging mechanism a competitive advantage.

How does sBTC work?

In simple terms, sBTC is a token on the Stacks blockchain. Similar to other Ethereum ERC20 tokens, it is defined based on the homogenous token standard sip-010 on Stacks and is issued by a Clarity smart contract. The minting and burning of sBTC tokens are implemented by the sBTC protocol.

When a user wants to use BTC on the Stacks chain: The user creates a deposit transaction on the Bitcoin chain by transferring BTC to a multi-signature wallet address. This deposit transaction notifies the sBTC protocol of the deposited BTC amount and the user’s receiving sBTC address on Stacks. Subsequently, the sBTC protocol mints an equivalent amount of sBTC tokens at a 1:1 ratio and sends them to the user’s receiving address.

When a user wants to withdraw their BTC Assets: They create a withdrawal transaction on the Bitcoin chain. This withdrawal transaction notifies the sBTC protocol of the sBTC quantity to withdraw, the Stacks addresses from which to withdraw, and the BTC address to receive the withdrawn BTC. The sBTC protocol then burns the specified amount of sBTC from the provided Stacks addresses and sends an equivalent amount of BTC to the specified BTC address to complete the withdrawal.

In this process, the current set of Stackers in the current cycle needs to provide signatures for the BTC withdrawal transaction to be fulfilled. If over 70% of Stackers provide signatures, the withdrawal operation can be executed, and Stackers will receive BTC rewards accordingly. The set of Stackers signing changes dynamically in each Stacking cycle.

Deposit and Withdrawal Process

How safe is sBTC?

In the mentioned process, the deposit and withdrawal of assets are validated by the “Stackers” of each cycle. When over 70% of Stackers sign the transaction, the protocol executes the operation, meaning at least 30% of validators are honest, ensuring the safety of the assets. Currently, Stackers are composed of a mixture of trusted institutions (such as Figment, Copper, Blockdaemon, Luxor, etc.), Stacking pools (like OKX, Binance, Coinbase, Xverse, etc.), and individual node operators. This combination of mixed signers ensures the security and decentralization of the Stacks network.

Additionally, since sBTC operates on the Stacks chain, it inherits all the properties of the Stacks chain, such as its transaction security attributes being the same as Bitcoin transactions, and so on. However, moving BTC to any layer or chain outside of the Bitcoin chain will introduce additional complexity and security assumptions. There are potential risks associated with sBTC:

If Stackers exceed 70%, they could theoretically steal BTC from the current cycle. However, economically, this is unreasonable as they would lose more STX capital than the value of sBTC they would gain. Additionally, achieving collusion of over 70% of Stackers, as long as the Stacking composition is sufficiently decentralized, is highly unlikely. Therefore, this remains a theoretical possibility.

Bitcoin miners could attempt to review stacking operations in a remote 51% attack and try to steal Bitcoin from the Bitcoin script/wallet. However, since the Bitcoin chain has never successfully undergone a 51% attack, this also remains a theoretical possibility for now.

Although the sBTC contract is written in Clarity language, which can avoid some contract vulnerabilities at the programming language level, there may still be unknown risks that require rigorous security analysis to mitigate.

Higher performance and feature expansion: Subnets

Stacks achieves scalability through subnets and different VMs.

Although Stacks has optimized block speed from 10 minutes to 5 seconds after the Nakamoto upgrade, certain use cases may demand low-latency, high-throughput, and bursty transaction volumes (e.g., NFT minting, gaming) in terms of performance.

Subnets are designed to enhance the scalability of Stacks, improving its network performance at the cost of reducing decentralization at the execution layer. However, transactions can still be settled on the Bitcoin blockchain through Stacks. Subnets are used for execution, not asset storage. With high-performance subnets, developers and users can opt for high throughput when needed, and then withdraw their assets to the core Stacks layer as required. Subnets can support smart contracts in different programming languages. As shown in the diagram, one subnet can support the Clarity VM, while another subnet can support Ethereum’s Solidity language and EVM compatibility.

The concept of subnets in Stacks is similar to that of subnets in other public chains (such as Avalanche’s subnets), with the key difference being that applications on Stacks subnets benefit from Bitcoin’s finality and security.

To summarize:

Through a series of innovative mechanisms such as POX, Stacking, and Clarity, Stacks has implemented a “Bitcoin Layer,” using the Bitcoin blockchain as a secure foundational settlement layer and Stacks as a Layer 2 extension layer for BTC. This allows smart contracts to be applied on the Bitcoin chain. Meanwhile, sBTC, as a token on the Stacks chain, is pegged 1:1 to BTC, unlocking BTC L2 DeFi. This facilitates asset trading with BTC and unleashes liquidity.

Part 2: Exploring the investment value of STX

The previous part detailed how Stacks functions as a Bitcoin Layer 2 network, enabling BTC smart contracts and unlocking BTC L2 DeFi. So, where does Stacks stand in the highly anticipated Bitcoin L2 sector in this bull market? What is the investment potential of Stacks’ native token “STX”?

Fundamental Information

First, list the various aspects of Stacks across several fundamental dimensions, including technology, token economics, community, ecosystem adoption, on-chain data, and market competition.

Technical advantages

1. Technical Solutions Leading: From the perspective of ideal Bitcoin smart contract attributes, utilizing BTC as the native asset, settling on the Bitcoin chain, and coexisting with the Bitcoin chain (dependency on functionality), there is no doubt that Stacks’ technology is in a leading position.
2. Adequate Technical Reserves: Looking at the entire roadmap of Stacks, it can be seen that Stacks has traversed bull and bear markets. Even during bear markets, the Stacks team has been consistently building. Stacks was first launched in Q4 2018 and has gone through several versions of updates, consistently focusing on building within the Bitcoin ecosystem. Its understanding of Bitcoin technology and related technical reserves are also in a leading position.
3. Comprehensive Technical Documentation: Detailed technical documentation can be found on the Stacks official website, Stacks documentation, and Stacks GitHub. These materials cannot be established in a short period and require accumulated time. From these accumulated materials, it can be seen that Stacks has a complete community governance process, from technical concepts to proposal through Stacks Improvement Proposals (SIP), followed by community discussion, development, and implementation. This is also the foundation of Stacks’ ecosystem development.

Overall, in the Bitcoin Layer 2 space, Stacks has a first-mover advantage. In comparison, many protocols are just beginning to build in the BTC Layer 2 field, while Stacks is in a leading position in terms of both the maturity of its technical solutions and its technical development capabilities.

Stacks Roadmap

Team background

Currently, Stacks is composed of multiple independent entities, developers, and community members. Together they work to develop the Bitcoin blockchain.

1. Hiro: Focuses on providing and maintaining developer tools within the Stacks ecosystem.
2. Stacks Foundation: Supports the development of the Stacks ecosystem through governance, research, education, and funding.
3. Daemon Technologies: Focuses on supporting Stacks mining and staking, as well as business in the Asian market.
4. Secret Key Labs: Specializes in providing Bitcoin wallets that can directly participate in Stacking, such as XVerse.

Key team members

1. Brittany Laughlin, Chairperson of the Stacks Foundation and founding partner of Lattice Ventures, provides startup capital and networking opportunities for entrepreneurs serving underserved industries. Previously, she served as General Manager at Union Square Ventures and worked at 3x Entrepreneur. She graduated from New York University with a degree in Marketing and International Business.
2. Ryan Shea, Co-founder of Stacks, graduated from Princeton University and is an investor in cryptocurrencies, biotechnology, and deep tech.
3. Muneeb Ali, Co-founder of Stacks, holds a Ph.D. from Princeton University and is also the CEO of Trust Machines. He is a key figure in George Gilder’s book “Life After Google” and serves as a technical advisor for the HBO television series “Silicon Valley.”

The Stacks team is not a single company; rather, it can be seen as a decentralized team organization. This organization is dedicated to building on Bitcoin, with entities like Hiro focusing on building tools for developers, the Stacks Foundation promoting ecosystem development, and XVerse specializing in Bitcoin wallets. Additionally, as a co-founder of Stacks, Muneeb Ali is highly active on Twitter, actively engaging in community discussions and advocating for Stacks’ development.

Funding Situation

Stacks was initially launched in 2013 at the Princeton Computer Science Department. Later in 2017, it raised $47 million through an ICO for the issuance of STX tokens, and in 2019, it became the first crypto company to obtain SEC qualification, raising an additional $23 million through Reg A and Reg S offerings in the United States. Currently, according to CryptoRank data, Stacks has raised a total of $95 million in funding. Many of its investors come from well-known VC firms in the crypto space, such as IOSG, Blockchain Capital, HashKey Capital, and others.

ICO/Pre-sale, source:cryptorank

Funding Rounds, source:cryptorank

Tokenomics:

Stacks issued a total of 1.32 billion STX tokens in the genesis block. These tokens were distributed through several ICOs held in 2017 and 2019. The price of STX tokens issued in 2017 was $0.12, while those issued in the Reg S offering in 2019 were priced at $0.25, and the SEC-compliant offering in 2019 was priced at $0.30.

The projected future supply of STX tokens is expected to reach approximately 1.818 billion by 2050. After the token release from the genesis block, token issuance is carried out through mining, with a floating inflation rate, to mitigate inflation. Currently, according to CoinMarketCap data, the circulating supply of STX has reached 1.45 billion.

Breakdown of tokens in the Stacks genesis block, Sourced from the Stacks 2.0 Whitepaper:

Current token statistics (Data from CoinMarketCap):

• Circulating supply: 1.45 billion

• Maximum supply: 1.82 billion

• Market capitalization: $4.41 billion

• Fully Diluted Valuation (FDV): $5.54 billion

• Market Cap/FDV ratio: 0.79

Ecology and Community

According to on-chain data from DefiLlama, the total value locked (TVL) in Stacks and its ecosystem is nearly $150 million. As BTC Layer 2 solutions continue to gain attention, the Stacks ecosystem is also thriving, with projects spanning various areas of crypto, including wallets, NFTs, DEXs, DeFi, as well as identity, domain names, and more. Here’s a brief introduction to some of the current popular projects.

1. Alex: A Bitcoin DeFi protocol built on the Stacks chain, including AMM, BRC-20 DEX, Launchpad, cross-chain bridges, and more.
2. StakingDAO: A liquidity staking protocol designed to improve capital efficiency for STX token stakers. Through StakingDAO, users stake STX tokens into the protocol to earn stSTX as rewards, allowing them to earn Bitcoin yields while also being able to use stSTX in other Stacks DeFi applications.
3. Zest Protocol: A decentralized lending platform based on Bitcoin. Users can earn returns by depositing Bitcoin into yield pools or borrow against their holdings of Bitcoin in the lending pool.
4. Uwu Protocol: A lending protocol built on the Stacks chain based on the UWU Cash stablecoin, consisting mainly of two core components: UWU Cash and xUWU tokens.

For more Stacks ecological projects, you can view here.

TVL ranking of The protocol TVL ranking within the ecosystem, sourced from Defillama.

Currently, according to TwitterScore data, Stacks enjoys high popularity within the Twitter crypto community, with many influential followers.

Source:TwitterScore

Explore the value of STX

long term value

Assessing whether a token has investment potential, from a fundamental perspective, requires at least three main aspects:

1. Technical Innovation: The Key to Progress
2. Token Flywheel Effect: Printing Money, Airdrops, High Yield, Staking
3. Storytelling: The Power of Narrative

The more innovative the technology, the stronger its storytelling ability. Stacks’ technological innovation meets the ideal properties of Bitcoin smart contracts, cleverly balancing efficiency and security.

Achieving the token flywheel effect requires incentivizing users to hold tokens through project revenue, staking, or other mechanisms. For example, airdrops and high yields create a flywheel effect for tokens in the Ethereum ecosystem. For Stacks, the flywheel effect may come from two aspects: first, utilizing the Stacking mechanism to earn BTC rewards by locking STX for consensus signing; second, issuing tokens similar to ERC20 standards, such as sBTC, which is pegged to BTC, unlocking DeFi opportunities for BTC. Currently, many Stacks ecosystem projects are based on Bitcoin and build DeFi protocols.

Storytelling breathes life into technology and tokens, inspiring imagination and belief, thus creating a strong, engaged community. Stacks is already composed of decentralized entities and communities that have been collectively advancing the Stacks narrative, forming a solid foundation for the Stacks community. Additionally, elements such as the approval of spot BTC ETFs, BTC halving, Stacks Nakamoto upgrade, and increased competition in BTC L2 contribute to the narrative.

Narrative alone can drive token development, but without technological innovation, the narrative is just a bubble. When combined with technological innovation and the token flywheel effect, narratives can sustain high token prices for longer periods. Based on the detailed analysis above, we believe Stacks fully meets the three aspects of investment potential evaluation. It can be said that Stacks, as a leader in the BTC L2 space, and its native token STX, hold long-term investment value. Moreover, in the long run, the STX price will rise with each narrative hotspot until the BTC L2 season arrives.

Correlation with BTC price movements

The economic incentives of the Stacks chain are closely related to Bitcoin. Miners compete for the opportunity to mine STX by bidding with BTC, while STX stakers earn BTC rewards based on the proportion of STX they stake. Therefore, the prices of BTC and STX should be positively correlated, meaning that the price of STX will increase along with the price of BTC. The comparative price trend chart below also roughly illustrates this point.

Price trends of BTC and STX, source:coinmarketcap

Future price estimates

If we compare BTC Layer 2 Stacks with Ethereum Layer 2 Optimism, based on current prices, Optimism’s market value is estimated to be less than 1% of ETH’s market value. Therefore, if Stacks were to represent 1% of BTC’s current market value, the price of STX would be approximately $9.7, indicating more than a three-fold increase from the current price.

Of course, this price is only an estimation, and there are many factors that can influence token prices. We are simply considering this from a conventional perspective and not providing any investment advice.

Summarize

With the approval of the Bitcoin ETF and Bitcoin reaching new all-time highs, there are high expectations for the Bitcoin Layer 2 sector to potentially see tenfold or hundredfold increases in this current bull market. Stacks, as a leader in the Bitcoin Layer 2 field, holds immense promise and potential for development. Although the price of STX has already increased by 413.68% compared to last year, we believe that Stacks is still in its early stages, and the real breakout may occur when the Bitcoin Layer 2 season arrives. When the Bitcoin Layer 2 season arrives, we can expect a significant explosion in the Stacks ecosystem, with a particular focus on projects with rapidly growing Total Value Locked (TVL).

References:

1. Stacks Whitepapers

https://docs.stacks.co/stacks-101/whitepapers

1. SIP007：Stacking Consensus

https://github.com/stacksgov/sips/blob/main/sips/sip-007/sip-007-stacking-consensus.md

1. Choosing the right Stacking strategy

https://www.stacks.co/blog/stacking-strategy-how-to

4.Clarity Camp

https://clarity-lang.org/universe#camp

5.Clarity of Mind

https://book.clarity-lang.org/title-page.html

6.Making sBTC ready for DeFi prime time

https://forum.stacks.org/t/making-sbtc-ready-for-defi-prime-time/14421

7.The Ultimate Stacks Nakamoto Guide

https://stacksfoundation.notion.site/The-Ultimate-Stacks-Nakamoto-Guide-7360bc316dcb49e6a03699342f0523be#2acf6dd00b8046f7a6beb2cd5ca868ca

8.Subnets

https://github.com/hirosystems/stacks-subnets

1. First Class In-Depth Report: Comprehensive interpretation of Stacks features, ecological status and token economy

https://www.stackschina.com/news/toudengcang-in-depth-analysis-of-stacks-report

10.RootData-Stacks

https://www.rootdata.com/zh/Projects/detail/Stacks?k=MTM%3D

11.Cryptorank-Stacks

https://cryptorank.io/ico/blockstack?page=1

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