Stacks: An Enhanced System for Bitcoin

Written by: Three body capital

Compiled by: MIM, Deep Tide

We first learned about the name Stacks in a book—specifically, from George Gilder's Life After Google, where we discovered its founder, Muneeb Ali. Subsequently, we participated in the STX token issuance in 2019—it's worth mentioning that it was the first token issuance to be fully compliant and registered, but we did not touch our allocation for several years afterward. It turns out that the STX team has been dedicated to building an outstanding new protocol.

You can ask your financial advisor what to invest in for huge returns. Finally, full disclosure— we still hold a position in STX.

Having said that, we can now talk about something exciting. The fundamental promise of Stacks is simple: to build a programmable, composable ecosystem that inherits the security and decentralization of Bitcoin.

Fairly speaking, this concept is not far from the ideas of sidechains and Rollups popular in the Ethereum world. While Ethereum itself is designed to be programmable, its original form has always faced issues of speed and cost. Everyone knows these problems and has been complaining about them. Compared to competitive "Layer 1" solutions like Solana and Avalanche, which exist as independent blockchains from Ethereum, the idea of Rollups is to perform a large portion of the computational work off-chain while settling the results on the Ethereum main chain, thereby avoiding the costs of on-chain processing.

So one might say that the relationship between Stacks and Bitcoin is similar to that between sidechains/Rollups and Ethereum, but that would be quite absurd.

Stacks has its own chain, compiler, and programming language called Clarity. It runs in sync with Bitcoin and is marked on Bitcoin's large assets (Bitcoin remains the largest market cap around) to ensure its transactions and integrity.

As usual, this event prompted us to revisit our old knowledge about Stacks and write an article. Why write about it now? The reason is that the CityCoins use case is likely to push Stacks into the mainstream.

In this article, we will clarify many things.

Bitcoin, Stacks, and PoX

We have written extensively about Ethereum's composability on this blog because it has a lot of content.

On the other hand, so far, whenever we write macroeconomic articles, we always mention Bitcoin: it is an alternative to gold, a store of value, and some celebrities buy it as a hedge against inflation, but beyond that, it pales in comparison to the exciting things happening in the Ethereum ecosystem.

This is to be expected; Bitcoin has not really changed much since its first version—although there have been forks attempting to improve transaction speed or reduce costs, most of them have faded away, with only a few speculative forks surviving. As stated in the original white paper, Bitcoin remains a "peer-to-peer electronic cash system." While its use has transcended this definition to become a store of value, its essence (the code it runs on) remains simple; it has no smart contracts, no specialized computation, and no frills.

If we can accept the fact that "Bitcoin, while clunky, can be said to be the most secure and immutable chain in existence," then the question is whether there exists a better new blockchain—one that has delightful synergies, can provide all the expected benefits of decentralized computation (low cost, reasonable throughput, etc.), but does not increase the risk of centralization, avoiding the fundamental historical slide being rewritten by a few validators.

And that is precisely the promise of Stacks—programmable, decentralized computation (similar to Ethereum), but potentially cheaper and faster (similar to more centralized tokens), while also possessing the true decentralization and immutability of a protocol like Bitcoin's anti-censorship capability. Could it be the best token in the world?

We do not need to delve too deeply into the mechanics of Stacks (details can be found on their website); the simplified idea of Proof of Transfer (PoX) is as follows: Stacks miners verify transactions by bidding Bitcoin to become the producer of the next block, and thus, by generating and validating blocks, they send the hash of the completed block header in the message field of Bitcoin transactions, which is then permanently recorded on the Bitcoin main blockchain.

The Stacks blockchain runs in sync with Bitcoin through its construction process to keep it aligned with the main chain. However, the ability to execute streaming transaction microblocks on an almost real-time basis will allow Stacks to operate at transaction speeds exceeding those of Bitcoin, which will be highly welcomed.

The Bitcoin transferred in this process will be sent to the STX users' account wallets, most of the BTC they receive are "stacked" rewards—this aligns perfectly with the spirit of "stacking." The remaining BTC will actually be sent to a burn address, permanently removing it from circulation (think of EIP-1559 style burning). These transfers occur as part of PoX, and it is this "consideration" payment that supports the consensus mechanism of Stacks—just as Bitcoin mines blocks by spending electricity, Stacks mines blocks by burning Bitcoin.

As blocks are produced, more STX tokens are minted (though at a decreasing rate, consistent with Bitcoin's halving) and are used to reward miners who validate blocks.

Interestingly, the existing incentive structure is not a direct punishment like bargaining, but a mechanism designed to encourage positive, honest behavior: miners of the current block receive the rewards earned from the previous block and have a short-term lockup—this further protects the mined STX to prevent dishonest and suboptimal mining.

Moreover, it encourages nodes to vote (again by submitting proof of BTC burn) to inform them of miners who are honest and timely in block production. This encourages more BTC to be added.

The bottom line of this mechanism is that Bitcoin is required to become an STX miner. Its entry barrier is low, encouraging competition, so trading behavior is fair and honest. Ultimately, there are many ways to reward good behavior, and this is one of them.

Overall, this diagram on the Stacks website provides sufficient background information:

Is Stacks the next big platform?

Fairly speaking, it may be too early to discuss this question now. The Stacks ecosystem has just begun to operate, with several DEXes, DeFi, and NFT dApps being built and deployed. The most notable project on this platform may be CityCoins, which promises to become a platform for city governance. So far, we have seen the deployment of Miami Coin and New York City Coin, and perhaps more will be added in the future.

Many people will ask, "Why not build it on Ethereum?" The way to answer this question is to put yourself in the shoes of the mayors and local governments managing these cities. Bitcoin has widespread public awareness and has embodied its broad narrative as a hedge against inflation and censorship resistance. Most importantly, Bitcoin is easy to understand—therefore, structurally, a smart contract system "built on Bitcoin" (even if technically not true) is also easy for people to grasp.

The CityCoins plan to adopt a mechanism similar to STX's relationship with BTC: individuals send STX to the contract to mine city coins, 30% of the STX is sent to the city's custodial wallet, and the remaining 70% is used to reward those who stake with city coins, allowing them to earn both STX and BTC. According to the currently published documents, CityCoins allows its holders to vote on how they want their city to be managed and developed. Perhaps, over time, these coins could become a medium of exchange for these specific cities.

Regardless of the situation, CityCoins could become a catalyst that pushes the Stacks ecosystem to the forefront. Will it become the "killer app" for Stacks, supported by local governments in the U.S. and around the world, with a potential market of hundreds of millions of users?

A large number of users will join the Stacks ecosystem, addressing the problem that often plagues new ecosystems. Some ecosystems adopt a guiding approach by investing cash into issues, creating economic incentives for adopting the ecosystem.

For others, perhaps these incentives are inherently more politicized.

The Second Coming of Bitcoin

All of this relates to Stacks, and we will continue to focus on what applications can be built on the Stacks platform.

But perhaps the ultimate goal of all this pursuit is to elevate Bitcoin beyond merely a static store of value. This small chart in the Stacks documentation summarizes its idea:

Beyond being a store of value, Stacks also unleashes Bitcoin's ability to participate in all activities on decentralized networks. Bitcoin is not programmable like Ethereum, so it has been excluded until now.

However, Stacks' solution does not fundamentally modify Bitcoin in any way: Bitcoin will continue to play its role as it has in the past. There are no code changes regarding mining blocks, halving, or store of value. So it is not a fork, not something like Bitcoin Cash or Bitcoin SV or Litecoin trying to "change" it and fork the community in the process. If it ain't broke, don't fix it.

By fixing the protocol's security on Bitcoin's immutability and incorporating a burn mechanism, when transactions and Stacks block mining occur, Bitcoin will be permanently removed from supply, allowing Bitcoin holders to participate in the benefits of DeFi and other smart contract-related developments (just like Ethereum), during which their Bitcoin will be locked.

In other words, with Stacks, Bitcoin Maxis can continue to maintain their identity (since Bitcoin remains unchanged) and benefit from composable, upgradeable smart contracts—these smart contracts have the capacity to evolve and create value on their own.

By bridging multiple blockchains, people can bring the intrinsic value of Bitcoin (the world's largest market cap token to date) into the world of DeFi, serving as collateral for lending, providing liquidity, and enjoying all the other wonderful things offered by decentralized networks. Projects like Thorchain have developed under such premises, and perhaps the Stacks ecosystem will achieve even greater success.

Apart from some wrapped Bitcoin (WBTC), it also requires a centralized entity to provide custody and accompanying ERC-20 wrappers to allow Bitcoin to be "bridged" to the Ethereum network and participate in DeFi, as well as capture and transfer its value to NFTs, games, and all the other decentralized network applications that have emerged over the years.

So far, Bitcoin has been left in a boring corner. But that situation may change soon.