After a very uncertain period, the market is finally moving again.

Bitcoin has climbed back to $30k, a very important and symbolic support.

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As such, enthusiasm is slowly starting to spark.

Are we really going up?

I switch from max pain to max euphoria a few times a day.

Well, there’s no certainty on where we are right now, but one thing we do know: whenever there’s a market reversal towards the upside after a bottom, Bitcoin is the first asset to rise.

However, the returns of BTC may not be appealing enough for you crazy degens.

This article introduces Stacks, an interesting protocol trying to bring DeFi on top of BTC that may capture a big share of BTC upside.

Stacking Satoshis

The Bitcoin code base is very limited.

This is however to be intended as a feature, not a bug.

Bitcoin works exactly as it is intended to be.The code is written purposely to prioritize security, decentralization, and settlement on the network.

Any other functionality or feature introduced would come to the detriment of those.

Smart contract functionalities would, for example, introduce new logic and consequent risks to the code and the security model of Bitcoin would need to adapt accordingly.

This is an impossible scenario that would weaken the very reason why Bitcoin was created: Bitcoin is relatively slow and minimal by design and conservative in its evolution to preserve these powerful properties.

Therefore, let’s leave Bitcoin alone and just be mindful that everything that whenever people argue that Bitcoin is slow and limited, it helps us sleep better at night knowing that if everything in the world goes to shit we have Bitcoin to save us.

Still, the use case of DeFi and other crypto primitives on Bitcoin is too appealing to just be left alone.

And that’s where Stacks comes in.

What is Stacks?

The easiest way to describe Stacks is as an L2 built on top of Bitcoin both for scalability and for new functionalities: to allow everything that the limited codebase of Bitcoin doesn’t allow.

Stacks was initially launched in 2021 and is a protocol that enables smart contracts and the development of dApps that can leverage Bitcoin as an asset and settle transactions.

Q4 2023 will be a very important year for the protocol as Stacks is expected to release their Nakamoto Release, introducing:

In this way:

What is Stacks value proposition?

Bitcoin is now a $590B assets and Stacks wishes to open Bitcoin asset base to DeFi and wider uses, unlocking all the value currently not used efficiently.

Why Bitcoin though?

Bitcoin is the most secure and decentralized cryptocurrency protocol. Nonetheless, the limited expressivity of its language does not allow sophisticated dApps to be built on top of it.

While there are a lot of efforts to extend Bitcoin functionalities, such as RGB, and Lightning, it currently cannot support general-purpose application development.

Stacks wishes to extend and improve what can be done on Bitcoin without affecting the Bitcoin L1 directly.

It wishes to “unlock the deployment of hundreds of billions of dollars of latent Bitcoin capital into applications like decentralized Bitcoin-backed lending, Bitcoin-backed stablecoins, and more”.

Bitcoin is the most secure, durable, and valuable blockchain; it is already used as a store of value by millions of people. It is robust, "hard" money, with unprecedented non-custodial ownership and a lack of inflation. The Bitcoin blockchain is also the best settlement layer for transactions, as it is the most decentralized, censorship-resistant, and durable blockchain.

By building on top of Bitcoin Stacks benefits from :

With the Nakamoto Update, after 1 day Stacks’ blocks are secured by the entire hash of the Bitcoin blockchain (unlike in Merge mining).

In order to reorg the Stacks chain and transactions, miners would need to attack and reorg the whole Bitcoin chain.

Furthermore, Stacks blocks are visible on Bitcoin, making it easy to detect possible attacks.

A Revolutionary Consensus Model: the Proof-of-Transfer (PoX)

Novel consensus mechanism using both Stacks and Bitcoin layers that recycles POW energy.

Similar to Bitcoin POW:

In practice, POX reuses the electricity used by Bitcoin miners — it does not consume any additional electricity and pays BTC rewards to STX stakers.

Furthermore, the hashes of all Stacks smart contracts and transactions are settled and recorded on the Bitcoin blockchain.

Permissionless: anyone can become a miner. Any holder can lock STX to participate in the consensus and earn BTC rewards.

Stacks has a system of incentives in place to create value for the ecosystem, and disincentivize bad actors — but without slashing.

On-Chain Bitcoin Price Oracle: the price ratio of BTC/STX is always recorded and available on-chain

A graphical representation of the design of the POX consensus:

How is Stacks different than other Bitcoin Sidechain Solutions?

Previous attempts to scale Bitcoin have focused on building sidechains (e.g. RSK, Liquid).

The problem with sidechains is that they have “pegged” to a different blockchain as a 1:1 pegged assets. As such:

Lightning for example, directly interact with Bitcoin and settle transactions on L1.

What would we expect from a Bitcoin L2?

Stacks fulfills most of these objectives:

it has its own global ledger and execution environment, to support smart contracts and to not overwhelm the Bitcoin blockchain with additional transactions.

Furthermore, it also has unique properties and mechanisms such as

AND, it also has its own native asset: STX.

The STX token and the Positive Feedback Loop

In fact, all previous approaches lacked a native token.

As such there were only a few incentives to support a permissionless system.

What is the point of STX?

A central role in POX consensus:

What matters here is that STX does not compete with Bitcoin, but rather is instrumental in strengthening the network.

Clarity

It’s pretty hard to bootstrap a new programming language for a protocol.

Stacks is written using Clarity, a programming language deemed to be “much more secure” than Ethereum Solidity.

Clarity is non-turing complete, so devs will already know and predict what programs will do. As such this guarantees the correctness of the code when executed: smart contracts code will be visible on the blockchain, guaranteeing execution safety.

As mentioned, Stacks also leverage subnets, that allow devs to build on EVM or other languages…

sBTC: Scaling Bitcoin

The Problem: to truly use BTC, smart contracts on BTC must be able to modify the Bitcoin state, that is, signing txs on-chain with private keys.

It is, in fact, difficult to perform all updates on-chain on Bitcoin, as this would be slow and expensive.

Let’s have a practical example of the functioning of sBT:

The main issue with previous Bitcoin solutions is that they all sacrificed decentralization, as most pegs were managed by either centralized custodians or a federation of permissioned entities.

Instead, sBTC:

Those users lock (“stack” STX) and perform per-out signing.

In return, they are rewarded with BTC (proportionally to staked Stacks).

sBTC also allows Atomic Swaps, since running a Stacks node also provides full visibility into the Bitcoin transactions.

As such Stacks contracts can be triggered on Bitcoin.

Let’s imagine you want to swap BTC to a stablecoin in a fully trustless manner:

you send your BTC on L1, which is swapped for an asset on an L2 in the same transaction, or else the swap will fail.

Food for Thought

Stacks finds itself somewhere in the middle:

These are classic Mid-curve comments.

IMHO what matters is what follows:

This is also reflected in a switch in the general thesis about Bitcoin: from 2018-2021 the common thesis was that users liked to build on other chains, and there was not ot much going on on Bitcoin.

Nonetheless, the rise of Ordinals and BRC-20 among others, have contirbuted to a change in this thesis and highlighting new use cases for Bitcoin.

For instance, Bitcoin is now the #2 in terms of NFTs total volume, something totally unimaginable even just 6 months ago.

This is reflected in the number of new tools and wallets being developed to support these emerging use cases. Nonetheless, arguably Bitcoin..

..need to be much more mature to support Stacks vision.

I am personally looking forward to the Nakamoto upgrade as it will be a gamechanger for Stacks.

Francesco's Joint is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.