Stacks: Enhancing Bitcoin
Source: Stacks.co
We first came across Stacks when we read about its founder, Muneeb Ali, in the book Life After Google, by George Gilder. We subsequently participated in the token offering of STX – interestingly the first fully regulated and registered token offering – in 2019, although we subsequently left our allocations untouched for many years. It turns out that the team have been busy building what is turning out to be a fascinating new protocol.
Usual disclaimers apply: this note isn’t meant to be construed as financial advice, or a solicitation to buy or sell anything. Ask your friendly advisors whom you pay good money for financial advice. Finally, full disclosure – we maintain positions in the Stacks token, STX.
With that out of the way, we can now get down to the exciting bits. The fundamental promise of Stacks is simple: to build a programmable, composable ecosystem that inherits the security and decentralisation of Bitcoin.
To be fair, this is a concept that isn’t far off from the idea of side chains and rollups which have become popular in the world of Ethereum. While Ethereum itself was inherently programmable by design, the issues of speed and cost that plague it in its original form are well-known (and well-complained about). In contrast with competing “Layer 1” chains like Solana and Avalanche which exist as intrinsically separate blockchains to Ethereum, the idea of a rollup is that of having a large proportion of the computing work done off-chain, while having the results “settle” on the main Ethereum chain, thereby evading the costs of processing on-chain.
The temptation is to therefore say that Stacks is to Bitcoin what a side chain/rollup is to Ethereum. Nothing could be further from the truth.
Stacks is its own chain, with its own compiler and programming language, called Clarity. It runs in sync with Bitcoin, tagging onto Bitcoin’s bulk (still the #1 market cap around, as Bitcoin fans would never fail to remind everyone else) to secure its transactions and integrity. It brings programmability and smart contract capabilities that we see in Ethereum and gives Bitcoin a bigger role to play than being simply a store of value.
As always, there was a trigger for us dusting off our old notes on Stacks and writing this up. Why now? Because the emergence of CityCoins could well be the use case that launches Stacks into the mainstream.
There is much to go through, so down the rabbit hole we go.
Bitcoin, Stacks and PoX
We’ve written much about the composability of Ethereum on this blog, and rightly so, for there is much to be written about.
On the other hand, Bitcoin has till now been something we write about in macroeconomic terms: it’s an alternative to gold, it’s a store of value, some famous people have bought it as an inflation hedge but other than that, it pales in comparison to the exciting things that take place in the Ethereum ecosystem.
That is to be expected, since Bitcoin hasn’t really changed much from its first incarnation – yes, there have been forks to try and improve the speed of transactions or lower transaction costs, but those forks have largely faded into obscurity with the exception of some sort of speculative purpose. Bitcoin remains, as written in the whitepaper that started it all, a “peer to peer electronic cash system.” Yes, its use has evolved beyond that, becoming a store of value. But its nature – the code on which it runs – remains simple: no smart contracts, no specialised compute, none of the bells and whistles.
What Bitcoin does have, that no other can compete with, is age. By virtue of it being the oldest blockchain in existence, added to its proof of work mechanism (much has been written about the cost of electricity needed to secure the chain), the probability that a malicious actor can rush in and stage a 51% attack on the Bitcoin blockchain and steal everyone’s money is minuscule. And even if they could technically manage to, the economics of marshalling the energy and computing capacity to do so would largely negate prospective gains.
If we accept that Bitcoin is, clunkiness notwithstanding, arguably the most secured, immutable chain in existence, then the question is whether there is a happy synergy where a new chain could provide all the desired benefits of decentralised compute (low cost, reasonable throughput etc) without the risk of increasing centralisation, and the fundamental slippery slope of history being rewritten by a small number of validators.
That is the promise of Stacks: programmable decentralised computing (like Ethereum), but potentially cheaper and quicker (as if it were more centralised), but with the censorship resistance of a truly decentralised, immutable protocol like Bitcoin. Best of all worlds? Maybe.
Without going too much into the mechanics of Stacks (more on their website here), the simplified idea of Proof of Transfer (PoX) is this: a Stacks miner validates transactions by bidding in Bitcoin to be the producer of the next block, and does so by generating the block and validating it, sending the hashed block header of the completed block in the message field of a Bitcoin transaction which then gets logged immutably on the main Bitcoin blockchain.
By construction, the Stacks blockchain runs in sync with Bitcoin, so that messages are synced up into the main chain. However, the ability to stream microblocks of transactions on an almost real-time basis potentially allows Stacks to run at a much higher transaction speed than Bitcoin, which would be a welcome sight.
The Bitcoin that is transferred in the process is sent to the wallets of accounts who stake their STX, who receive the majority of the BTC paid as a reward for “stacking” – very much in the spirit of “stacking sats”. The remaining BTC is actually sent to a burn address, permanently removed from circulation (think EIP-1559 style burning). These are the transfers that take place as part of PoX, and it is this payment of “consideration” which underpins the consensus mechanism of Stacks – just as Bitcoin burns electricity to mine blocks, Stacks burns Bitcoin to mine blocks.
As blocks are produced, more STX is minted, albeit at a decreasing rate (coinciding with Bitcoin’s halvings) and are paid as a reward to the miners which validated the blocks.
Interestingly, the incentive structure in place isn’t one of outright penalties like slashing, but rather one that is designed to encourage positive and honest behaviour: the miner of the current block is paid the rewards earned by the previous block, with a short lock-up on the mined STX as further protection against dishonest and sub-optimal mining.
Furthermore, nodes are encouraged to vote (once more by submitting a proof-of-burn of BTC) for miners which they know are honest and timely with block production. More BTC is burnt in the process, while honest, cooperative behaviour is encouraged.
The bottom line here is that to become a STX miner, all you need is Bitcoin. The barriers to entry are low, encouraging competition and therefore fair, honest behaviour. There are, ultimately, many ways to attain good behaviour, and this is one of them.
On the whole, this should give sufficient context for understanding this diagram on the Stackss website:
Is Stacks the next big thing?
To be fair, it’s probably too early to tell. The Stacks ecosystem is just starting to get going, with a couple of DEXes, DeFi and NFT dApps getting built and deployed. Perhaps the most high-profile project on the platform is CityCoins, which promises to be a platform which allows tokenholders to fund and deploy improvements and governance for cities. So far, we’re seeing Miami Coin and NYC Coin as the first two deployments – could there be more? Possibly.
The question many would ask is: “Why not build on Ethereum?”. Taking a guess at the answer to this would involve putting ourselves into the shoes of the mayors and local governments that run these cities. Bitcoin has broad public awareness and embodies the broad narrative of being an inflation hedge, free of censorship etc. Most importantly, Bitcoin is easy to understand – by construction, therefore, a smart contract system that’s “built on Bitcoin” (even if not technically true) is also easy to understand.
CityCoins are slated to employ a mechanism similar to what STX does with BTC: individuals send STX to a contract to mine CityCoins, 30% of the STX is sent to the city’s custodied wallet, and the balance 70% is used to pay out rewards to stakers who stake up their CityCoins, thereby earning them both STX and BTC. Based on the documentation available so far, CityCoins allow their holders the rights to vote on how they would like their city to be managed and developed. Who knows, these coins may become a medium of exchange for those particular cities over time.
Whatever the case may be, CityCoins MAY be the catalyst that puts the Stacks ecosystem into the limelight. Could CityCoins be the “killer app” for Stacks, with hundreds of millions of potential users as an addressable market, supported by local governments all around the US, or even the world?
That would certainly be a great catalyst for getting a critical mass of users onboarded onto the Stacks ecosystem, solving the catch-22 that often plagues new ecosystems. For some, the bootstrap method is to chuck cash at a problem, creating financial incentives for adoption.
For others, perhaps the incentives are much more political in nature.
Bitcoin’s second coming
All of this might be interesting for Stacks, and we continue to watch with great interest to see what other applications can be built on top of it.
But perhaps the holy grail in all of this is the ability to elevate Bitcoin beyond being simply a static store of value. This little diagram in the Stacks documentation sums up the idea:
In addition to being a store of value, Stacks unlocks the ability of Bitcoin to participate in all the activities on the decentralised web which it was previously excluded from, as a result of Bitcoin’s inability to be programmable the same way Ethereum et al are.
But the Stacks solution doesn’t fundamentally modify Bitcoin in any way: Bitcoin continues to do its Bitcoin thing. Mining blocks, halving, store of value – none of the code changes. This isn’t a fork, this isn’t Bitcoin Cash or Bitcoin SV or Litecoin trying to “improve” on things and forking the community in the process. If it ain’t broken, don’t fix it.
By anchoring the security of the protocol on Bitcoin’s immutability and including a burn mechanism which permanently takes Bitcoin out of supply when transactions are made and blocks are mined by Stacks, Bitcoin holders are able to participate in the upside from the development of DeFi and other smart contract related developments – just like Ethereum – where they would’ve been locked out before.
Put differently, with Stacks, Bitcoin Maxis can continue to be Bitcoin Maxis (since nothing changes for Bitcoin) AND get the upside from composable, upgradable smart contracts that have the ability to evolve, having their cake and eating it.
Where projects like Thorchain have grown on the premise that bridging multiple chains would allow for the intrinsic value of Bitcoin, by far the #1 market cap token in the world, to be brough into the world of DeFi and serve as lending collateral, liquidity and everything else wonderful that the decentralised web has to offer, perhaps Stacks will have greater success.
With the exception of some wrapped Bitcoin (WBTC), which requires a centralised entity to provide the custody and the accompanying ERC-20 wrapper to allow Bitcoin to be “bridged” into the Ethereum network and participate in DeFi, Bitcoin has been excluded from all of the action in Defi, not to mention the value captured and transferred into NFTs, gaming and all the other decentralised web apps that have sprung up over the years.
Bitcoin has been left in the boring corner so far. But things might soon change.