Stacks: Rome was not built in a day
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Table of Contents
Intro
Stacks’ Design Philosophy: Balance, Trade-offs, and Iteration
- Trade-offs in the Impossible Trinity
- Key Features of Nakomoto Upgrade
Three Reasons on Why We Are Bullish on Stacks: (Fundamental*Team）^{Catalyst}
- Solid and Promising Fundamentals
- Material and Ethereal Catalysts
- Now and Forever Alpha
Stacks’ New Decade: Dancing with Shackles
Tokenomics and Valuation
Conclusion
Intro
Stacks is the smart contract layer on Bitcoin. Stacks was started in 2017 by Princeton Computer scientists, with its initial version going live in 2021. Historically, Stacks faced hostility, viewed as an outsider by both BTC Maxis and Ethereum enthusiasts. However, as the narrative around BTC L2 solutions gained traction, and a cultural shift in Bitcoin brought about by projects like Ordinals, a variety of L2 solutions emerged. At this juncture, Stacks seems to have become an “outsider” once again — it has been steadily building in this direction for nearly a decade, vibrating in sync with the developmental trajectory of BTC L1, it is far from the vaporware projects often seen in crypto.
Stacks is committed to becoming the most useful Bitcoin layer, aiming for long-term construction with a long-term mindset within the Stacks community. This continuous effort has earned Stacks a unique position: its ecosystem is beginning to flourish, with TVL breaking $140m; the upcoming Nakomoto upgrade in Q2 promises faster blocks and enhanced security, potentially greatly improving the DeFi experience and attracting more liquidity; backed by long-term top-tier capital. In a competitive environment, a unique position means more resources and attention-grabbing ability, potentially leading to a virtuous cycle of attracting more liquidity.
During mid-February 2024, there was a surge in the price of Stacks, with its market capitalization currently at $3.6 billion. We believe that Stacks has solid and promising fundamentals, teams that continue to build through cycles, combined with strong catalysts such as the Nakamoto upgrade, making it an undeniable presence in the Bitcoin L2 space. If you are optimistic about the overall development of L2 and believe that Bitcoin will have more uses beyond being a Store of Value (becoming a productive asset), $STX can be considered as beta of the investment in the Bitcoin ecosystem. At the end of the article, we discuss its valuation possibilities.
Stacks’ Design Philosophy: Balance, Trade-offs, and Iteration
Trade-offs in the Impossible Trinity
Starting from the Bitcoin Impossible Triangle shared by Muneeb on Twitter, let’s look at the design philosophy of Stacks:
Under the premise of not changing the current L1, there are three optimal options: a) Open network, b) No independent token, c) Global virtual machine(VM):
- Open networks mean that anyone can participate in consensus, in contrast to federated systems where only a select group of entities can engage in mining.
- No independent token aligns with the desires of BTC Maxis, as it avoids competition with new assets against Bitcoin; however, tokens can provide incentives to miners, better aligning incentives and also aiding in network bootstrapping.
- The opposite of a global VM involves storing data off-chain, without a universal ledger, reducing data accessibility but potentially offering improved scalability and privacy, proving highly effective in certain scenarios.
Stacks has embraced options a) and c), while making a strategic compromise on b) by launching its independent token, $STX. This decision is partly driven by a commitment to enhancing user experience and empowering developers. Within a global VM, developers have more flexibility, enabling improved smart contract interactions, akin to their experiences on Ethereum and Solana. In most use cases, the global VM framework delivers a more refined experience.
Moreover, Stacks focuses on building DeFi capabilities, aspiring to elevate BTC from just a Store of Value to a productive asset. A critical aspect of attracting substantial capital is the secure movement of BTC between L1 and L2 layers. $STX plays a crucial role here, serving as an incentive for miners and validators, thus facilitating an open, trustless, and decentralized network. From a perspective of boosting the odds of business success, having well-structured incentives is undeniably crucial. While it comes at the cost of Stacks being labeled as an Affinity Scammer by some BTC maximalists, over the long haul, viability and logic will triumph over irrational sentiments.
The process is centered around the Proof of Transfer (POX) consensus, which can be seen as a reuse of POW without consuming additional energy. The mechanism works as follows:
Miners transfer BTC to Stackers to earn potential block rewards, with the probability of winning (becoming the leader) being directly proportional to the amount of BTC transferred. The leader is granted the right to write blocks on Stacks and receives rewards, including STX and transaction fees.
- Stackers earn BTC rewards by locking STX (this behavior is known as stacking), with the reward amount being directly proportional to the stacked STX.
- In terms of specific stacking methods, if users choose to stack independently, the cycle lasts for two weeks, with a minimum STX locking requirement (~100,000), resulting in a relatively rigid experience. With the launch of the liquid stacking protocol StackingDAO (similar to Lido), users can deposit STX to receive stSTX as tokenized representation, and can trade back to STX at any time on DEX, with no longer stacking quantity requirements, significantly enhancing flexibility, but requiring a 5% commission fee on yield. Besides StackingDAO, OKX, Xverse, and others also provide different pool stacking solutions. Currently, the stacking yields from StackingDAO and Xverse are about 6%.
Stackers are incentivized by their participation in a two-way decentralized Peg mechanism, the Bitcoin-linked asset known as sBTC:
- Peg in: When users lock BTC on L1 (deposit into the Peg wallet), corresponding sBTC can be generated on Stacks, valued 1:1 with BTC, without a wrapping fee.
- Peg out: Stackers perform threshold signing, and once 70% consensus is reached, sBTC is destroyed, and an equivalent amount of BTC is released on L1 from the Peg wallet to a specified BTC address. Since Stackers are motivated by BTC rewards and their locked assets exceed the BTC in the Peg wallet, acting dishonestly would be counterproductive. Thus, they are incentivized to make the correct choices to ensure the peg, achieving incentive compatibility. BTC peg-out requests are also broadcasted as BTC transactions. Given that Stackers can participate voluntarily, this process is entirely decentralized.
Key Features of Nakomoto Upgrade
The highlight of the Nakomoto upgrade lies in efficiency, with the speed of producing blocks improved to 5 seconds (currently tens of minutes). It’s conceivable that the implementation of fast blocks can significantly enhance the DeFi experience and make many meaningful use cases possible. The ability to achieve fast blocks is fundamentally due to the introduction of a Tenure-based block production mechanism — where the selected miner is responsible for producing all Stacks blocks during their tenure at a rapid pace, approximately every 5 seconds. The block time on L2 is decoupled from Bitcoin L1, no longer anchored on a 1:1 basis.
The second is the improvement in security mechanisms. Currently, Stacks has its own security budget, which depends on the amount of BTC spent by miners. After the upgrade, beyond two Bitcoin blocks, security can reach 100% Bitcoin finality. Finality means transactions are irreversible, implying that attacking Stacks would be as difficult as attacking Bitcoin. The reason behind this is that subsequent miners, in addition to submitting the hash of the Stacks block to L1, also need to submit the index block hash of the first block produced during the previous miner’s tenure. This allows aligning the Stacks chain’s history with L1 up to the range of the previous miner’s tenure, thereby achieving Bitcoin finality. In the whitepaper, the initial design was to have Bitcoin finality after more than 150 blocks, reducing this to 2 represents a significant improvement.
The security budget for the two newest blocks will also see an increase, in addition to miner expenses, with the addition of funds locked by Stackers. Considering the funds stacked on Stacks have reached the billion-dollar scale, based on a 70% threshold and the current STX price, it would require at least $780 million to launch an attack. A robust security budget is one of the most strongest barriers and a result of long-term foundational work. Other L2s planning to achieve higher immediate security through similar means would need more locked assets, which is not a small challenge.
Besides continuing to contribute to the network’s economic security, Stackers also need to verify and approve the blocks produced by miners. Given the increased speed of block production, verifiers must also work more efficiently, requiring tighter cooperation among different roles within the ecosystem. Moreover, Stackers will first internally reach a consensus on the chain tip and oversee that miners produce blocks after the latest Stacks block, otherwise, they will refuse to sign, thus eliminating forks.
There has been much debate on Crypto Twitter about whether Stacks is an L2. Since Stacks uses Bitcoin for finality and the leader election also occurs on L1, it fundamentally cannot exist independently of L1, and therefore cannot be considered an L1. Moreover, after the upgrade, since Stacks no longer has a separate security budget and begins to exhibit Bitcoin-like resistance to reorganization, this perspective will be closer to the traditional concept of L2. But from another perspective, rather than being constrained by definitions, we can simply begin by better utilizing BTC to focus on user scenarios and developer experiences, and then work backward to determine what kind of smart contract layer we need. As for whether it’s L1, L1.5, or L2, what does it really matter? :)
Third is the improvement of MEV. In previous designs, Bitcoin miners, being responsible for validation, could mine Stacks blocks at a lower cost than other Stacks miners during their Bitcoin block production period. For instance, large miners like F2Pool could spend just a few dollars to obtain Stacks blocks worth over $1000. This reduced the normal BTC rewards for Stackers, potentially disrupting the incentive compatibility. Given Stacking’s central role in the ecosystem, MEV has sparked intense discussion in forums.
Based on these discussions, the Nakomoto upgrade introduced some improvements to the selection mechanism (Sortition), making mining fairer and attempting to build a more loyal and stable miner cohort, such as:
- Miners must have participated in at least the past 10 blocks;
- The winning probability is calculated based on the median BTC bid of the past 10 blocks: if the median bid of the past 10 blocks is zero, then the winning probability for that round is also zero, as the system discourages abnormal bidding behavior;
- Introduction of an absolute total bid amount to consider miners’ bidding levels and loyalty to the network over a longer period.
The new rules emphasize the continuous activity and reliable participation of miners, ideally aiming to align the interests of miners with the overall network stability.
Additionally, Stacks features its own Clarity language, which improves upon Solidity with the aim of achieving safer coding practices and predictability. A key focus of the Nakamoto upgrade is the further introduction of Clarity Wasm to enhance the execution speed of smart contracts.
In summary, the Nakomoto upgrade and related enhancements focus on the two main themes of security and efficiency. This will create a more reliable and efficient trading environment for sBTC, laying a solid foundation for the potential mass adoption of sBTC. It provides fertile ground for the growth of the DeFi ecosystem, which could unlock its vitality in full. The security aspect, being linked to BTC, also serves as a significant confidence booster, enhancing its appeal to large capital. These strategic implications of the upgrade are too significant to overlook.
Three Reasons on Why We Are Bullish on Stacks:
Solid and Promising Fundamentals
- Vibrant DeFi Ecosystem on the Rise
It is a common trajectory to prioritize DeFi development, and the Stacks ecosystem is no exception. Recently, along with the rise in the price of $STX, TVL has surpassed $140 million:
Solid and Promising Fundamentals
- Vibrant DeFi Ecosystem on the Rise
It is a common trajectory to prioritize DeFi development, and the Stacks ecosystem is no exception. Recently, along with the rise in the price of $STX, TVL has surpassed $140 million:
Among these, ALEX stands out as a dominant protocol, contributing to 60% of the TVL. ALEX has developed a suite of DeFi-related components, including AMM, Orderbook, Oracles, Bridges, and more, along with additional Launchpad services. In December last year, ALEX launched aBTC. Compared to sBTC, aBTC sacrifices some decentralization for faster transaction speeds, aiming to complement sBTC and showcasing ambitions to become a financial layer on top of Bitcoin.
Other new protocols are also emerging. For instance, Bitflow, the first DEX aimed at addressing liquidity fragmentation in the Bitcoin ecosystem, has partnered with StackingDAO, which, similar to Lido, nearly doubled its TVL from January to February, reaching $62 million. Together, they launched the stSTX-STX pool, providing liquidity for stSTX, along with a reward system. Within a month of its launch, Bitflow’s TVL surpassed $30 million, showcasing rapid growth.
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b. Surging Trade Volume
Stacks’ monthly trade volume has surged into the hundreds of thousands. Over the past two months, driven by the flourishing development of STX20, the volume has shown a clear upward trend. In January, it crossed the 1 million mark, approaching 10% of Bitcoin’s overall trade volume, strongly indicating the ecosystem’s significant progress in adoption.
This has driven the overall monthly transaction fees to rise to hundreds of thousands of STX. The average fee per transaction ranges from 0.25 to 0.75 STX, approximately $0.75 based on January’s $STX price (around $1.5). When on-chain activity was less active and STX prices were lower, transaction costs were cheaper. Low transaction costs are vital for ecosystem prosperity.
c. Robust Developer Ecosystem
We can also gauge the vitality of the Stacks ecosystem from the changes in the number of developers:
It’s interesting to note that while the number of newcomer developers fluctuates (often tied to macro trends), the count of established developers (with 2+ years of experience in crypto) continues to steadily rise, with a YoY growth rate of +51%. Established developers form the backbone of the industry, and their consistent and steady growth can to some extent indicate their optimism towards Stacks, aligning with the long-term vision that Stacks has been building upon.
Material and Ethereal Catalysts
- Substantial Enhancement from the Nakomoto Upgrade
April’s Nakomoto upgrade, anticipated to be finished prior to Bitcoin’s halving, is eagerly anticipated by the Stacks community. From this perspective, recent TVL fluctuations can largely be ignored, as they may just be minor ripples until the upgrade brings about a qualitative change in the DeFi experience. The key question is how much BTC and other funds will be absorbed into Stacks post-upgrade, and whether efficiency and user experience will improve as expected, thereby generating more trading volume. For large capital, the core concern is whether they can obtain returns under secure conditions. An influx of more funds will also stimulate more dApp development, providing a better experience for end users, leading the overall ecosystem into a positive cycle.
b. Cultural Significance behind Inscriptions and L2 Narratives
Despite mixed reviews of Ordinal, its emergence has profound implications for the Bitcoin ecosystem. Beyond augmented transaction fees for miners, the crucial point is how Inscriptions have almost created something groundbreaking within Bitcoin’s confines, leaving even BTC Maxis helpless, as no centralized force can prevent such attempts, which is central to the ethos of decentralization revered by BTC Maxis. Following this precedent, people’s psychological boundaries have been opened, allowing for the construction of projects on BTC, which is not only allowed but should be fully explored. The liberation of spirit and creativity brought about by this cultural shift may be boundless. Coupled with the narrative of potential wealth effects stemming from capital inflows, more and more developers are venturing into the BTC ecosystem, and as the current leader, Stacks naturally benefits from this wave of enthusiasm.
The confluence of various factors and propulsion is essential to truly bring prosperity to the ecosystem. Considering the asset magnitude of Bitcoin, this could unlock a market worth hundreds of billions.
Now and Forever Alpha
So far, we have not mentioned the Stacks team and its co-creator Muneeb Ali. The reason why 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, as there is no centralized decision-making entity behind the billions of dollars in tokens of Stacks. On the Stacks forum, you can see many active contributors, among whom one of the key figures is Muneeb. Muneeb is a computer science Ph.D. from Stanford University who has been cultivating the BTC ecosystem for several cycles and is currently involved in building Stacks as the CEO of Trust Machines.
Muneeb is impressive for several reasons. Firstly, his original intention and perseverance. Despite the ups and downs of the Bitcoin ecosystem and the comings and goings of developers, Muneeb is one of the few OGs who has always been focused on deepening his involvement in the BTC ecosystem. He has mentioned that the method of survival is to choose a large, fundamental problem and delve into solving it, while he is obsessed with unlocking hundreds of billions of dollars worth of BTC into apps by building decentralized two-way hooks.
Secondly, his responsibility. Throughout its history, Stacks has faced hostility from both BTC Maxis and Ethereum enthusiasts, and Muneeb, as the most vocal spokesperson for Stacks, has been at the forefront. He has accepted many interviews to promote the ideas of Stacks, and he is also active on Twitter in expressing opinions and politely engaging in “debates” with people of different opinions. The importance of a core figure who can effectively convey ideas to the outside world is self-evident for any protocol/product.
Thirdly, pragmatism. Stacks has been defined as a sidechain in the past, and recently it has been more defined as leaning towards L2, which some people consider to be a deceptive behavior. However, from another perspective, being able to explain and disseminate along the lines that the market can better understand is also a more efficient marketing strategy, and there is nothing wrong with it from the perspective of adoption. At the same time, we can also see that Muneeb has always been sincerely explaining his design ideas, iteration ideas, current ecosystem pain points, why there is an L2 narrative, etc., consistently responding to external doubts and challenges. Continuous construction and expression, without compromising his ideals despite external fluctuations, while also adjusting communication methods in response to changing narrative trends, exemplifies pragmatic idealism. Qiao Wang from Alliance DAO praised Muneeb’s humility and intellectual honesty after an interview, which is very pertinent.
The other members of the core team are also highly talented individuals:
- 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 Advisory Committee.
- Rena Shah (@renapshah) currently serves as the VP of Product at Trust Machines. She previously held positions as the Head of Exchange at Binance US and has diverse experience in crypto fund strategy, management consulting, among others. In her spare time, she manages a renewable energy cryptocurrency mining pool.
- 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 distributed systems.
- Trevor Owens (@TO): The host of @TheOrdinalShow, and founder of @btcfrontierfund, which supports projects in the Bitcoin ecosystem. He frequently advocates for Stacks.
Besides, @herogamer21btc, a community governance resident of Stacks Foundation, has compiled a comprehensive list of recommended follows within the Stacks ecosystem.
A community’s vitality and long-term development momentum are greatly enhanced when it can bring together a sufficient number of intelligent individuals to collaborate, propose sound ideas, and reach consensus. This is where the enduring alpha through cycles lies.
Stacks’ New Decade: Dancing with Shackles
Changes to Bitcoin L1 require a lengthy process of consensus, and this is precisely one of the important reasons why Bitcoin is revered — it is not subject to the will of any individual. Having built on Bitcoin for so long, Stacks has gradually found its rhythm, knowing what can and should be done when L1 is static, and how to adjust design thinking when L1 eventually changes, thereby always being in sync with L1. This is the approach of long-termism, without complaints, without giving up, constantly moving forward, and this will remain the same for the next decade.
On another level, even if there are no major changes to L1, if BitVM becomes feasible, the trust minimization between L1 <> L2 could also be greatly improved. This means that the design of the sBTC peg can be reconsidered. Even if sBTC is the relatively optimal solution under current constraints, with the proposal of new technical solutions, new possibilities will open up. 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 basic work that can be done regarding unlocking the potentially huge Bitcoin DeFi market. For example, developing better infrastructure products, whether wallets or other tools, upgrading at the programming language level, and trying to find more clever use cases and ways to use Bitcoin. The faster blocks brought about by the Nakomoto upgrade are just the beginning. Good infrastructure and scenarios complement each other, and ultimately, a large PMF can be explored.
Considering that Stacks has its own Clarity language, it also needs to put in extra effort in developer outreach and set up good 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 fundraising support, and other assistance. Within the ecosystem, there are also programs for grant funding such as technical and research residents, and multiple community-driven initiatives (such as DeGrants, Local Chapters, etc.).
However, if the ecosystem can attract sufficient BTC funds and market opportunities continue to emerge, it can naturally attract developers to contribute voluntarily. Using demand to drive supply is also a common strategy, for example, currently, it can leverage the wave of enthusiasm and influx of funds surrounding the BTC L2 narrative to attract more developers. With an increasing number and diversity of individuals staying within the Stacks ecosystem, it will become increasingly resilient.
Tokenomics and Valuation
The genesis block of Stacks contains 1.32 billion STX, allocated as follows: token sale, equity investors, founders, team, independent entities related to the Stacks ecosystem, foundations, and universities.
By 2050, the total supply of STX will reach 1,818M. Muneeb and another Co-creator, Ryan Shea, each hold 89 million (approximately 4.9%), while other investors or independent entities also hold single-digit percentages.
The current (February 2024) circulating supply is approximately 1.443 billion STX (80% unlocked), among which 447 million STX are stacked.
In valuation, $STX currently has a market cap of $3.658 billion (22nd February 2024). When benchmarking against ETH L2s relative to ETH’s market value, we try to deduce valuation possibilities for Stacks:
As the table above indicates, $STX’s current ratio to BTC’s FDV is merely 0.43%, while the ETH L2/ETH ratio varies between 2%-8%, indicating a potential growth space of approximately 4–20x. If STX were to reach 1% of BTC’s valuation, its corresponding price would be around $5.9, marking a +134% increase from its current position. Should it approach the level of ARB/ETH (5% in the future), its price could soar to ~$30.
Another dimension to evaluate the valuation of various chains from TVL:
STX currently has an FDV/TVL ratio of 40, on par with APT, which is considered high. On one hand, the price of STX has significantly increased recently alongside BTC’s rise. On the other hand, investors might anticipate a substantial increase in TVL due to a combination of positive factors such as the BTC L2 narrative and the Nakamoto upgrade. The FDV/Forward TVL ratio could be relatively low. Key to this metric is observing the development momentum of the Stacks ecosystem’s DeFi following Nakomoto upgrade.
✨ April Target Price Forecast:
- 5% Doom Case ($0.5): Significant drop in BTC price, Nakamoto upgrade faces obstacles
- 20% Bear Case ($1.5): Narrative cool down, valuation levels decrease; facing competition from other L2 solutions, sentiment is pessimistic
- 60% Base Case ($3): Nakamoto upgrade proceeds as normal, TVL continues to rise; corresponding to a $5.45 billion FDV, if TVL rises to $300 million, then FDV/TVL ~ 18, matching current OP levels
- 15% Bull Case ($6): Narrative enthusiasm increases; as the leading L2 in the BTC ecosystem currently, valuation levels reach 1% of BTC, combined with substantial benefits from the Nakamoto upgrade and optimistic sentiment
Conclusion
Bitcoin has reclaimed its trillion-dollar market cap and is among the top ten global assets, with many new innovations and explorations emerging. Meanwhile, Stacks has been continuously building around bringing utility to Bitcoin in its ecosystem for the past decade. When determined to tackle a truly significant problem, we see top-tier funds, universities, developers, and other intelligent minds 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.
While this community is decentralized, it always has a direction: to enhance security, efficiency, and explore use cases. And when continuing to explore honestly in one direction for ten years, the understanding of L1, the experience of leveraging community intelligence, and reaching consensus, as well as the balance of key iterative elements, are profound. These are the core competencies it has accumulated and the engine driving its development over the next decade.
The hot topic of BTC L2 narrative has brought more funds and attention, providing a significant boost to the years of construction. The Nakamoto upgrade aligns different roles within the ecosystem more closely with the overall interests, and will result in faster blocks, making the prosperity of the DeFi ecosystem and the mass adoption of sBTC more feasible. Despite fierce competition in L2, the core is likely whether valuable, commercially viable products have been created for end-users on a large scale. In this competition, Stacks has its unique position and a team with long-term vision, pragmatism, and a sense of crossing cycles, which is worth looking forward to.
Currently, its price is not cheap, and some of the bullish factors from the upgrade may already be priced in based on the rise of BTC. However, considering its long-term potential for high development ceilings, it can be configured as a beta for BTC L2 at a certain price, with a focus on observing the progress of its DeFi ecosystem and the subsequent adoption of sBTC after the upgrade.
Reference:
https://stacks.org/halving-on-horizon-nakamoto?ref=stacksroadmap
