Stacks: Ten Years of Sharpening a Sword

Stacks is the smart contract layer on Bitcoin. Its formal construction began in 2017, with the initial version launched in 2021. It was founded by a group of computer scientists from Princeton University. Historically, Stacks has faced hostility, with BTC Maximalists and Ethereum enthusiasts alike considering it an outlier. With the rise in popularity of BTC L2 narratives and the emergence of various L2 solutions like Ordinals, the landscape has diversified. At this juncture, Stacks seems to once again be considered an “outsider” — having been steadily building in this direction for nearly a decade, it is not a typical “quick sand” project commonly found in crypto.

Stacks aims to become the most useful layer on Bitcoin, and the Stacks community has always been built around this goal with a long-term mindset. Continuous accumulation has earned Stacks a unique position: its ecosystem has begun to flourish, with Total Value Locked (TVL) surpassing $140 million. The Nakomoto upgrade scheduled for Q2 promises faster block times, improved security, and significantly enhanced DeFi experiences, attracting more liquidity. Additionally, there is long-term support from top-tier capital behind it. In the competitive landscape, a unique position means more resources and attention-grabbing ability, potentially attracting more liquidity and strengthening its position.

During the Chinese New Year period, Stacks saw a surge in price, with its market capitalization reaching $3.6 billion. We believe that Stacks has a stable and upward fundamental outlook, with a team that has been building consistently through cycles. Coupled with strong catalysts like the Nakomoto upgrade, it is an entity in the Bitcoin L2 space that cannot be ignored. If one is optimistic about the overall development of L2 and believes that Bitcoin will have more utility beyond being a Store of Value (SOV), such as becoming a productive asset, investing in $STX at the right price could be seen as beta exposure to the Bitcoin ecosystem. We discuss the potential valuation possibilities at the end of this article.

This article is our first in-depth article since we paid attention to the BTC ecology. Buidlers who are building in this direction are welcome to communicate and discuss with us.TG: @JaneZhang

Article Foresight👀

1. Stacks design ideas: balance, trade-offs and iteration
   1.1 Impossible triangle choices
   1.2 Nakomoto upgrade factors
2. x reasons why we like Stacks: (Fundamentals*Team)^Catalysts
   2.1 Stable and upward fundamentals
   2.2 Catalyst for the combination of virtual and real
   2.3 Consistent Alpha
3. A New Decade of Stacks: Dancing in Shackles
4. Discussion on Token Economics and Valuation
5. Summary

The full text is 7,500 words, and the estimated reading time is 17 minutes.

Stacks Design Ideas: Balance, Trade-Offs and Iteration

The Impossible Triangle of Trade-Offs

Let’s look at the design ideas of Stacks based on the Bitcoin Impossible Triangle shared by Muneeb on Twitter:

Source:@kyleellicott

Without altering the current Layer 1 (L1) infrastructure, there are three optimal options a)optimal network, b) tokenless system, c) global virtual machine (VM):

• Open Network: This means that anyone can participate in the consensus process. Correspondingly, this contrasts with a federated system, where only selected entities can participate in mining.
• Tokenless System: This aligns with the desires of BTC Maximalists, where there are no new assets competing with Bitcoin. However, tokens can incentivize miners, leading to better incentive compatibility and aiding in the network’s bootstrapping process.
• Global Virtual Machine (VM): Conversely, this involves storing data off-chain, without a universal ledger. This reduces the accessibility of data. However, it may offer better scalability and privacy, proving highly effective in certain scenarios.

Stacks has opted for options a) and c), while compromising on option b) by issuing the independent token $STX. The rationale behind this decision stems partially from considerations of user experience and developer perspective. In a global virtual machine environment, developers have more room for creativity, enabling better interaction with smart contracts, similar to their experience on platforms like Ethereum and Solana. In most scenarios, the experience with a global virtual machine tends to be superior.

Moreover, Stacks is primarily focused on building in the DeFi direction, aiming to make BTC more than just a Store of Value (SOV) but also a productive asset. Securely moving BTC between Layer 1 and Layer 2 is crucial for attracting large volumes of capital. $STX serves this purpose by incentivizing miners and validators, thereby realizing an open, trustless, and decentralized network. From the perspective of increasing the probability of commercial success, reasonable incentives are undoubtedly indispensable. Although the cost is that Stacks has been labeled as an “Affinity Scammer” by some BTC Maximalists, in the long run, feasibility and rationality will prevail over irrational emotions.

This process is centered around the Proof of Transfer (POX) consensus mechanism, which can be seen as a reuse of Proof of Work (POW) without consuming excessive additional energy. The current mechanism is outlined in the following diagram:

• Miners transfer BTC to Stackers in order to potentially receive block rewards. The probability of winning (becoming a leader) is directly proportional to the amount of BTC transferred. The leader gains the right to write blocks into the Stacks blockchain and receives rewards, including STX and transaction fees.

Source: @godfred_xcuz

• On the other side, Stackers acquire BTC rewards by locking STX (this action is referred to as stacking), with the reward amount being directly proportional to the amount of STX locked.

Regarding the specific stacking methods, if a user chooses to stack independently, the stacking period lasts for two weeks, with a minimum STX lock-up requirement (approximately 100,000 STX), making the experience relatively average. With the launch of the liquid stacking protocol StackingDAO (similar to Lido), users deposit STX to receive stSTX as tokenized vouchers. They can then trade back to STX at any time on decentralized exchanges (DEX), eliminating the requirement for a minimum stacking amount and greatly increasing flexibility. However, users need to pay a 5% yield commission. Apart from StackingDAO, platforms like OKX and Xverse also offer different pooling stacking solutions. Currently, the stacking yields from StackingDAO and Xverse are approximately 6%.

Stackers are incentivized by their participation in the two-way decentralized Peg mechanism, a Bitcoin-pegged asset called sBTC.

• Peg in: When users lock BTC on Layer 1 (depositing into a Peg wallet), they can generate corresponding sBTC on the Stack, with a value pegged 1:1 to BTC, without paying a wrapping fee.
• Peg out: Stackers engage in threshold signatures, and once the 70% requirement is met, sBTC will be destroyed. An equivalent amount of BTC will then be released on Layer 1 and sent from the Peg wallet to a designated BTC address. Since Stackers aim to receive BTC rewards, and their locked assets exceed those in the Peg wallet, they have the incentive to consistently make the correct choices to achieve pegging, ensuring incentive compatibility. BTC peg-out requests are also broadcasted as BTC transactions. As Stackers can voluntarily participate, the process is fully decentralized.

Nakomoto upgrade elements

The Nakomoto upgrade’s main highlights are as follows-Efficiency boost, the production speed of blocks will be accelerated to 5 seconds, a substantial improvement from the current time frame of several tens of minutes. This rapid block generation is anticipated to significantly enhance the DeFi experience and unlock numerous meaningful use cases. The key to achieving fast block generation lies in the introduction of a block production mechanism based on Tenure. Under this mechanism, selected miners are tasked with producing all Stacks blocks within their tenure, doing so at a swift pace of approximately 5 seconds per block. Moreover, the block time of Layer 2 is decoupled from that of Bitcoin Layer 1, no longer anchored in a 1:1 ratio.

Secondly, enhancement in security measures. Presently, Stacks operates with an independent security budget contingent upon the amount of BTC spent by miners. However, following the upgrade, security can achieve a remarkable milestone - 100% Bitcoin finality after surpassing 2 Bitcoin blocks. Finality in this context signifies that transactions become irreversible, indicating that attacking Stacks becomes as challenging as attacking Bitcoin itself. This enhancement is attributed to subsequent miners, who, besides submitting the hash of Stacks blocks to Layer 1, are also required to submit the index block hash of the first block produced within the previous miner’s tenure. This alignment effectively synchronizes the history of the Stacks chain with Layer 1, ensuring Bitcoin finality. Notably, the original design stipulated achieving Bitcoin finality after exceeding 150 blocks, a number significantly reduced to 2, marking a substantial improvement in security measures.

https://www.youtube.com/watch?v=zIXY_49xbIY&t=188s

The latest two blocks’ security budgets will also see an increase, incorporating funds from Stackers’ stacking in addition to miners’ expenditures. Considering that the locked funds in Stacks have reached the billion-dollar level, and based on a 70% threshold and current STX prices, it would require at least 780 million USD to initiate an attack. A robust security budget serves as one of the most formidable barriers and is a result of long-term construction and accumulation efforts. If other Layer 2 solutions plan to achieve higher instantaneous security through similar means, they would need to lock up even higher assets, presenting considerable challenges.

Furthermore, besides contributing to the network’s economic security, Stackers also need to validate and approve blocks produced by miners. With the acceleration of block production speed, the efficiency of validators must keep pace, necessitating closer cooperation among different roles within the ecosystem. Additionally, Stackers will internally reach consensus on chain tips first and supervise miners to produce blocks after the latest Stacks block. Otherwise, they will refuse to sign, thereby avoiding forks.

There has been much debate on Crypto Twitter about whether Stacks is considered a Layer 2 solution. Due to Stacks’ reliance on Bitcoin for finality and leader election occurring on Layer 1, it cannot exist independently of Layer 1 and cannot be classified as Layer 1. Furthermore, with Stacks no longer having a separate security budget after the upgrade, and beginning to face resistance similar to Bitcoin’s reorganization, this aspect will be closer to the traditional concept of Layer 2. However, in another dimension, we need not be confined by definitions. We can also focus on better utilizing BTC as the origin point, considering user scenarios and developer experiences, to determine the type of smart contract layer we need. As for whether it is specifically considered Layer 1, Layer 1.5, or Layer 2, well, it’s open to interpretation :)

Lastly, there’s the issue of mitigating Miner Extractable Value (MEV) improvements. In previous designs, Bitcoin miners, due to their role in reviewing, could mine Stacks blocks during the production of Bitcoin blocks at a cost lower than other Stacks miners. For example, large miners like F2Pool could spend only a few dollars to obtain Stacks blocks worth over 1000 USD. This reduces the normal BTC rewards for Stackers and may disrupt incentive compatibility. Given Stacking’s pivotal role in the entire system, MEV has sparked intense discussions in the forum.

Based on these discussions, the Nakomoto upgrade introduces some improvements in filtering mechanisms (Sortition) to make mining more equitable and attempts to build a more loyal and stable miner community, such as:

• Miners need to have participated in at least the past 10 blocks;
• The probability of winning is calculated by considering the median BTC bid in the past 10 blocks. If the median bid in the past 10 blocks is zero, then the probability of winning for that particular instance is also zero. The system discourages abnormal bidding behavior in this way;

• Introducing the concept of absolute bidding amount allows for a longer-term consideration of miners’ bidding levels and their loyalty to the network.

As seen, the new regulations place more emphasis on miners’ sustained activity and reliable participation, ideally aiming to achieve synergy between miner interests and the overall network stability.

Additionally, Stacks has its own Clarity language, which is an improvement over Solidity, designed to achieve safer and more predictable coding. A key focus after the Nakomoto upgrade is further integrating Clarity Wasm to enhance the speed of smart contract execution.

In summary, the Nakomoto and related upgrades revolve around two main themes: security and efficiency. This will create a more reliable and efficient trading environment for sBTC, laying a solid foundation for its potential widespread adoption. With a promising ecosystem for DeFi, the ecosystem’s vitality may be fully unleashed. The integration of security with BTC also serves as a confidence booster, enhancing its attractiveness to large funds. These are all strategic significance of this upgrade that cannot be overlooked.

We have several reasons to be optimistic about Stacks:

Strong fundamental base

a. The burgeoning DeFi ecosystem

Leading with DeFi is a common path, and Stacks is no exception. With the recent increase in the price of $STX, the Total Value Locked (TVL) has surpassed $140 million:

Among them, ALEX stands out as a leading protocol, contributing to sixty percent of the Total Value Locked (TVL). ALEX has developed a suite of DeFi-related components, including Automated Market Maker (AMM), Orderbook, Oracle, Bridge, and additional Launchpad services. In December of last year, ALEX launched aBTC. Compared to sBTC, aBTC sacrifices some decentralization for faster transaction speeds, aiming to complement sBTC and demonstrate its ambition to become a financial layer on Bitcoin.

Other new protocols are also emerging, with the recent launch of Bitflow as a notable example. Bitflow, the first DEX aimed at addressing liquidity fragmentation in the Bitcoin ecosystem, has collaborated with StackingDAO. In February, StackingDAO’s TVL nearly doubled compared to January, reaching $62 million. They jointly launched the stSTX-STX pool, providing liquidity for stSTX, and implemented a reward system. Within a month of its launch, the TVL exceeded $30 million, showing rapid growth.

b. Significant increase in trading volume on Stacks.

The monthly trading volume has reached hundreds of thousands, with a noticeable uptrend over the past two months. Benefiting from the vibrant development of STX20, the trading volume surpassed the 1 million mark in January, approaching 10% of the overall Bitcoin trading volume. This robust growth demonstrates the promising progress of ecosystem adoption.

Source: Ortege, The Block

This has also led to a growth in the overall monthly transaction fees to hundreds of thousands of STX. The average transaction fee per transaction ranges from 0.25 to 0.75 STX, equivalent to approximately $0.75 based on the January price of $STX (around $1.5). Previously, when on-chain transaction activity was less active and the STX price was lower, individual transaction fees were cheaper. Low transaction costs are one of the necessary conditions for ecosystem prosperity.

Source: Ortege

c. A robust developer ecosystem

We can also observe the vitality of the Stacks ecosystem from the changes in the number of developers:

https://www.developerreport.com/ecosystems/stacks

Interestingly, while the number of new developers fluctuates (more related to macro trends), the number of experienced developers (with over 2 years of experience in crypto) continues to steadily increase, with an annual growth rate of +51%. Experienced developers are the backbone of the industry, and their consistent and steady growth can to some extent indicate their confidence in Stacks, it also aligns with Stacks’ long-standing philosophy of long-term building.

Catalyst for The Fusion of Virtual and Real.

1. The Nakamoto upgrade brings substantial improvements

The Nakomoto upgrade in April is eagerly anticipated by the Stacks community and is expected to be completed before the Bitcoin halving. From this perspective, we can essentially ignore the recent fluctuations in TVL, as they may just be minor ripples before the upgrade brings substantial changes to the DeFi experience. The key is how much BTC and other funds the upgrade can attract to Stacks, whether its efficiency and user experience improve as expected, thereby generating more transaction volume. For larger investors, their core concern is whether they can earn a certain profit under secure conditions. More funds flowing in will also stimulate more dApp development, leading to a better experience for end-users and creating a positive cycle for the overall ecosystem.

1. The cultural significance behind the inscription and the L2 narrative

Although opinions on Ordinal may vary, its emergence has profound implications for the Bitcoin ecosystem. Aside from miners earning more fees, the key point is that the inscription has almost done something groundbreaking within the confines of Bitcoin’s framework, leaving even BTC Maxis powerless, as no centralized force can prohibit such attempts, and decentralization is what BTC Maxis respect. After the inscription broke ground, people’s psychological boundaries were also opened, and it became permissible, even encouraged, to explore building things on BTC. The liberation of spirit and creativity brought about by this cultural shift could be limitless. Combined with the narrative of possible wealth effects brought about by the influx of funds, more and more developers are starting to build on the BTC ecosystem, and as the current leader, Stacks naturally stands to benefit from this wave of enthusiasm.

The coincidence and synergy of various factors are what truly bring about the prosperity of the ecosystem. Considering the scale of Bitcoin’s assets, this could potentially unlock a market worth hundreds of billions.

Consistent Alpha

Up to this point, we haven’t mentioned the Stacks team and its co-creator, Muneeb Ali. The reason he is referred to as a co-creator rather than a founder is that Stacks is essentially an open-source project. This may exceed the expectations of many people—behind the multi-billion-dollar token of Stacks, there isn’t a centralized decision-making entity. On the Stacks forum, one can see many active contributors, with Muneeb being one of the key figures. Muneeb holds a Ph.D. in computer science from Stanford University and has been deeply involved in the BTC ecosystem for many cycles. Currently, he is involved in the development of Stacks as the CEO of Trust Machines.

Muneeb is impressive for several reasons. Firstly, his dedication and resilience. Despite the ups and downs of the Bitcoin ecosystem and the coming and going of developers, Muneeb is one of the few OGs who has always remained focused on cultivating the BTC ecosystem. He has mentioned that his survival strategy is to choose a big, fundamental problem and dive in to solve it. He is passionate about unlocking the hundreds of billions of dollars of BTC into apps through building decentralized two-way pegs.

Secondly, his leadership. Throughout Stacks’ history, there has been hostility from both BTC Maxis and Ethereum enthusiasts. Muneeb, as the most vocal spokesperson for Stacks, has been at the forefront. He has accepted many interviews to advocate for the ideas of Stacks and actively expresses his views on Twitter, engaging in polite debates with people of different opinions. A core figure who can effectively convey ideas externally is invaluable to any protocol/product.

Thirdly, pragmatism. Stacks has been previously defined as a sidechain, and recently, its leaning towards L2 has been seen by some as deceptive. However, from another perspective, explaining and communicating along the lines that the market can better understand is also a more efficient marketing approach from the perspective of adoption. At the same time, we can see that Muneeb consistently explains his design principles, iteration ideas, current ecosystem pain points, and why there is an L2 narrative, responding consistently to external skepticism and challenges. Continuous construction and advocacy, not swayed by external fluctuations but adjusting communication methods in line with the migration of narrative hotspots, can be described as very pragmatic idealism. Qiao Wang of Alliance DAO praised Muneeb’s humility and intellectual honesty after an interview, which was very insightful and fair.

The core team also consists of other outstanding members, such as:

• Jude Nelson (@JudeCNelson) serves as a research scientist at the Stacks Foundation. He holds a Ph.D. in Computer Science from Princeton University and is an expert in distributed systems. Currently, he chairs the SIP Technical Steering Committee.
• Rena Shah (@renapshah) is the VP of Product at Trust Machines. She previously served as the Head of Exchange at Binance US and has diverse experience in crypto fund strategy, management consulting, and even manages a renewable energy cryptocurrency mining pool in her spare time.
• Aaron Blankstein holds a Ph.D. in Computer Science from Princeton University. His research interests include application performance improvement, memory security, information privacy, and he is also an expert in the field of distributed systems.
• Trevor Owens (@TO) is the host of @TheOrdinalShow and the founder of @btcfrontierfund, which supports projects in the Bitcoin ecosystem. He frequently advocates for Stacks and contributes to its visibility.

Additionally, @herogamer21btc, a community governance member from the Stacks Foundation, has compiled a comprehensive list of noteworthy projects within the Stacks ecosystem.

A community that gathers a sufficient amount of wisdom for collective construction, proposes good suggestions, and finds ways to achieve consensus, is likely to have a vibrant community and long-term momentum. This is where the sustained alpha across cycles lies.

The New Decade for Stacks: Dancing with Shackles

Changes to Bitcoin L1 require a lengthy process of consensus, which is one of the key reasons Bitcoin is revered—its resistance to individual whims. Stacks has been built on Bitcoin for so long and has gradually found its rhythm of adaptation. When L1 remains unchanged, knowing what to do and how to adjust design thinking when L1 eventually changes is crucial to staying in sync with L1. This is the approach of long-termism—no complaints, no giving up, steady progress. Over the next decade, this mindset remains unchanged.

On another level, even if L1 undergoes no major changes, if BitVM is feasible, it could greatly improve the trust minimization between L1 and L2. This means that the peg design of sBTC and others can be rethought. Even if sBTC is currently the relatively optimal solution under existing constraints, new technological solutions may open up new possibilities. To be a leader, one must consider these possibilities in advance, be prepared, and find a clearer path forward.

Moreover, although the specific development path is not yet clear, there is still much to be done regarding unlocking the potentially huge Bitcoin DeFi market. For example, developing better infrastructure products, whether wallets or other tools, upgrading programming languages, and exploring more clever ways to use Bitcoin. The faster block speed brought by the Nakomoto upgrade is just the beginning. Good infrastructure and scenarios promote each other, ultimately leading to the exploration of a large PMF (Product-Market Fit).

Considering that Stacks has its own Clarity language, it must also put in extra effort in developer outreach and set up incentive and reward mechanisms. It has launched the N21 program to help developers and teams build within its ecosystem, providing them with technical guidance, marketing, and funding support, among other assistance. In addition, there are various grant programs within the ecosystem, such as the Technical and Research Resident Program and several community-driven programs (such as DeGrants, Chapters, etc.).

However, if the ecosystem can attract enough BTC funds and market opportunities continue to emerge, it can naturally attract developers to join voluntarily. Using demand to stimulate supply is also a common strategy. For example, it can take full advantage of the current BTC L2 narrative and influx of funds to attract more developers. As more and more people stay within the Stacks ecosystem, it will become increasingly resilient.

Token Economics and Valuation Discussion

The genesis block of Stacks contains 1320M STX tokens, with specific allocations including token sales, equity investor allocations, founders, teams, independent entities related to the Stacks ecosystem, foundations, and universities, among others.

By 2050, the overall supply of STX will reach 1,818 million. Muneeb and another Co-creator, Ryan Shea, each hold 89 million STX (approximately 4.9%), while the proportions held by other investors or independent entities are also in single digits.

Currently (as of 2402), the circulating supply is approximately 1,443 million, with over 80% unlocked. Among these, there are 447 million STX being stacked.

In terms of valuation, the current market capitalization of $STX is $36.58 billion USD (as of 240223). To gauge the potential of Stacks compared to ETH L2 in relation to ETH market capitalization:

Source：CoinMarketCap

From the above table, it’s evident that currently $STX is only at 0.43% compared to BTC FDV, whereas ETH L2/ETH ranges from 2% to 8%, indicating there’s still nearly 4-20 times potential upside. If $STX could reach 1% of BTC’s valuation, its corresponding price would be approximately $5.9, representing a +134% increase from the current level. If it could approach the level of ARB/ETH (5%) in the future, its price would correspond to around $30.

Another perspective is to assess the valuation levels of various chains based on TVL:

Source：CoinMarketCap, Defillama

It can be observed that currently, $STX’s FDV/TVL ratio is 40, which is equivalent to APT and is at a high level. On the one hand, recently, $STX’s price has seen a significant increase along with BTC’s rise. On the other hand, investors may anticipate multiple bullish factors such as the BTC L2 narrative and the Nakomoto upgrade, leading to a substantial increase in TVL. The FDV/Forward TVL ratio might not be relatively high in terms of this indicator. Therefore, the focus is on observing the development momentum of Stacks ecosystem DeFi after the Nakomoto upgrade.

Summary

Bitcoin has recently reclaimed its trillion-dollar market cap, ranking among the top ten global assets, with many new innovations and explorations emerging. Meanwhile, Stacks has been continuously building its ecosystem around bringing utility to Bitcoin for 10 years. When determined to solve a truly important major problem, we see top funds, universities, developers, and other wise individuals in the blockchain space being attracted to this community to contribute together. This unparalleled centripetal force is driven by a good vision and pure original intention.

At the same time, although this community is decentralized, it has always had a direction: improving security, efficiency, and exploring scenarios. When it comes to maintaining honest exploration in one direction for 10 years, the accumulated understanding of L1, the experience of leveraging community intelligence, reaching consensus, and balancing critical iteration elements are profound. This is its core competitiveness accumulated over time and is the engine that drives its development in the next decade.

The hot topic of BTC L2 narrative has brought more funds and attention, providing a big boost to the years of construction. The Nakomoto upgrade aligns different roles in the ecosystem more closely with the overall interests of the ecosystem and will result in faster blocks. The prosperity of the DeFi ecosystem and the mass adoption of sBTC are beginning to seem feasible. Despite the fierce competition in L2, the core question is likely whether valuable and commercially viable products have been created for end users. In this competition, Stacks has its unique position, a team with a long-term and pragmatic approach, and is worth looking forward to.

Currently, its price is not cheap, and it may have partially priced in the bullish factors of the upgrade on the basis of BTC’s rise. However, considering its long-term high development potential, it can be considered for beta allocation as BTC L2 at a certain price. The focus can be on observing the progress of its DeFi ecosystem after the upgrade and the subsequent adoption of sBTC.

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