Cryptocurrencies that make Bitcoin more valuable are an investment opportunity not to be missed.

An in-depth fundamental analysis of Stacks.

A lot happened in December 2010. Some of these events include SpaceX's launch of the Dragon spacecraft, making it the first private company to launch, orbit, and retrieve a spacecraft successfully. Stockholm suffered a terror attack involving two explosions in a busy shopping area. Barack Obama signed the repeal of the "Don't Ask, Don't Tell policy", which openly banned homosexuals from serving in the US military. And Frank de Boer succeeded Martin Jol as coach of AFC Ajax. As an Ajax supporter, certainly not an insignificant event. Despite winning four league titles, his unattractive style of play was unpalatable during his following years.

Nonetheless, the pseudonym Satoshi Nakamoto was busy brainstorming about very different things in that period. He came up with the idea that later partly laid the foundation for bringing programmability and scalability to Bitcoin. What Nakamoto saw back then was the opportunity for Bitcoin to be more than just money.

In this report, I will first describe Bitcoin’s progress in evolving from a peer-to-peer digital cash system to a multi-layered network. Then, based on this, I will explain why it is essential that different protocols are built precisely on the Bitcoin network. Finally, I end by explaining why the Stacks project is best suited to this purpose and why, in my view, it is currently highly undervalued.

Namecoin

In December 2010, Satoshi Nakamoto proposed the idea of connecting separate blockchains and networks using the Bitcoin network’s computing power. [1] This idea laid the foundation for Namecoin, an open-source project originally forked from Bitcoin. The original proposal was to insert data into bitcoin’s blockchain directly. Merged mining was activated at bitcoin block 19200, which made it possible to mine Bitcoin and Namecoin simultaneously. Namecoin made it possible to link profile information to identities on the Namecoin blockchain, allowing you to log in to various websites. Although Namecoin is active to some extent to this day, it never managed to become a successful project. [2]

The Road to Bitcoin-based protocols

Bitcoin has navigated through a maze of narratives since its inception. Beginning as a speculative digital collectible, moving to a novel peer-to-peer form of digital cash, evolving to digital gold, and now transforming into base-layer money with different layers on top, to possibly the foundation of digital capital markets in the future. Bitcoin was initially conceptualized as a blockchain that would handle all the transactional requirements of its users. However, it soon became clear that the underlying network was too slow and inefficient for daily payments and modern digital solutions. As Bitcoin moves through various stages of maturity, it gains credibility. Ultimately its slow and steady pace will eventually be its superpower.

A Root of Trust

The lack of transaction speed is due to its core design principle. Transactions are bundled into blocks which are created roughly every ten minutes. The expected block time is set at a constant value of ten minutes to ensure miners cannot impact the network’s security by adding more computational power. Every 2016 blocks, the average block time is evaluated, and difficulty adjudgments will be made. If it is less than ten minutes, Bitcoin will raise the difficulty of the mathematical problems needed to unlock the mining rewards, and if it is more than ten minutes, it will be less difficult. (Ammous, 2018, p. 173.) A hash identifies each block within the blockchain, generated using the SHA256 cryptographic hash algorithm on the block’s header, and each block also references to its previous block. The sequence of hashes linking each block to its current block creates a chain going back to the first block, known as the genesis block. The Root of Trust for Bitcoin is its principle of using the genesis block to its current block as the longest chain of trust (Antonopoulos, 2017, p. 271.). Bitcoin’s hash rate makes it the most secure, immutable blockchain network in existence. [5]

Base-layer

Bitcoin is a secure global settlement network with a native store of value assets at its base layer. Bitcoin’s development community has been conservative in pushing changes to its base layer. Modifying its core protocol takes months, if not years, to implement. They are discussed at length in ‘Bitcoin Improvement Proposals (BIPs) to ensure that Bitcoin’s core values of decentralization, stability and security are not traded for more functionality which could result in vulnerabilities within its core technology. The Bitcoin community has constantly signalled that Bitcoin’s intentionally limited use cases are its defining feature and not a bug. [6] After all, when designing complex applications consisting of services on different layers, you should carefully examine the security architecture to ascertain where trust is being placed. Ultimately, the only thing that should be explicitly trusted is a fully validated blockchain.

Outside the base-layer

Bitcoin’s relatively long block time discourages its use in applications that require more rapid transaction confirmations. Also, fees for individual transactions on Bitcoin are relatively high. Besides, its scripting language does not directly support the creation of smart contracts and applications on its base layer, making it very difficult to build on top of Bitcoin. [7]

As other blockchains like Ethereum introduced Decentralized Apps (D’Apps), a need for further layers on the Ethereum platform was also realized. However, the end game for Bitcoin-based projects is to turn Bitcoin into more than just a digital currency. Projects building on Bitcoin hope to make it a foundation for DeFi, NFTs, apps, and more while simultaneously making the network scalable for millions of users. Attempts to bring programmability and scalability to Bitcoin started as early as 2012. As displayed in the timeline below, a new class of Bitcoin-related protocols has since emerged and begun to deploy new technologies into production starting in 2018.

Nowadays, an overwhelming majority of the DeFi market is built on Ethereum. However, for DeFi to succeed, you need stability and security that only Bitcoin can provide. Since Bitcoin does not have advanced smart contract capabilities, it is nowadays not user-friendly nor secure for Bitcoiners who want to put their BTC to work and earn some yield. The most often choice nowadays is wrapping your BTC to WBTC on the Ethereum network. [8] Meaning, they must trust third-party custodians with their precious BTC; which is not my cup of tea. Although, if it takes ten minutes for transactions to settle, it is far too slow for global payments. Let alone use applications with a high volume of transactions, such as DEXs or NFT marketplaces. This must and can change.

Discover all apps built on Stacks

Meet Stacks:

Unleashing Bitcoin's full potential

The Stacks Ecosystem, formerly Blockstack, is a collection of independent entities, developers, and community members all working together to build a user-owned Internet on Bitcoin. Stacks is a smart contract layer that makes Bitcoin programmable, enabling decentralized apps and smart contracts that inherit all of Bitcoin’s powers. [9] Derived from Satoshi’s vision, Stacks created a novel cross-chain consensus mechanism called Proof-of-Transfer (PoX). It connects to Bitcoin by embedding the hash of its state into every Bitcoin block. Like Bitcoin, Stacks’ monetary policy implements a declining block subsidy schedule that halves every four years.

Untapped potential

Due to its ability to read the native Bitcoin state, Stacks is uniquely positioned to host DeFi on top of Bitcoin and turn Bitcoin into a productive asset. Currently, $ 367 billion [10] of latent capital is waiting for opportunities to be leveraged; this is the true Holy Grail of crypto.

"Ethereum is roughly $500 billion of network value. But there are $500 billion of applications built on top [of it]. If you look at Bitcoin, it’s a trillion-dollar [network] but has few applications built on top [of it]. In the long run, I don’t see a world where it stays that way. I think there is going to be a ton of value created on top of Bitcoin” — Muneeb Ali, CEO at Trust Machines (CoinDesk Interview, February 2022)

Proof-of-Transfer (PoX)

PoX is a new approach to consensus requiring miners to spend BTC in commitment transactions on the Bitcoin network if they wish to mine a Stacks block. One of the miners is selected by Stacks via a Verifiable Random Function, and this miner must produce a Stacks block. The BTC sent by all bidding miners is distributed among those who lock capital or stack STX, and some BTC is burned. In exchange for transferring BTC, miners get STX (block subsidies and transaction fees). Stackers get BTC from miners for locking STX capital. [11]

Stacks block producers produce two types of blocks:

1. Anchor blocks are used to tether Stacks to Bitcoin for finality;
2. microblocks which are used to power applications that need lower latency. Microblocks allow rapid transactions with a high degree of confidence and are confirmed when the subsequent anchor block is mined. [12]

Clarity

Clarity is a safe and predictable language for smart contracts and an upgrade to existing smart contract languages. Bugs or malice in smart contracts causes large-scale irreversible harm. With Clarity, smart contract code is available directly on-chain for all to see. In addition, developers and users can see precisely what a Clarity contract will do before running it. [13] Further, post-conditions enable the user or their wallets to set conditions that must be true when the contract finishes running. If these conditions are not met because the contract tries to transfer more tokens, the transaction will abort.

What’s next for Stacks?

Mainnet 2.1

Stacks will have a significant upgrade of the network In Q4 2022. Stacks 2.1 enables more efficient Bitcoin yield via Stacking, makes bridges to other networks more robust, and simplifies how developers can link and trigger interactions between Stacks and Bitcoin. Finally: it will lay some helpful groundwork for subnets, which can bring additional speed and scalability to the network when launched. [14]

Another big step for the Stacks ecosystem is based on the success of the well-known NFT project Satoshibles, which for the first time, using a bridge, moved NFTs from Ethereum to the Bitcoin network. Due to integration by Orbit Bridge, users can bridge assets in and out of STX from 11 well-known projects such as Ethereum, Avalanche, Fantom, Celo, BNB, Polygon, Orbit, Klaytn, HECO, Icon, OEC, and xDAI. [15]

Scaling

Stacks believes in layering, the idea that different blockchains can be layered on top of each other to scale a system. By design, Stacks also minimizes their global state and keeps as much data off-chain as possible. In their opinion, this is what makes the Stacks architecture more amenable to different scalability solutions. With the upcoming mainnet 2.1 upgrade, the ecosystem is furthering its research into a layering approach to scalability through the creation of L2 blockchains in two projects called:

• Appchains: Appchains are another scaling solution that is being explored. Appchains allow for the creation of new Proof-of-Transfer blockchains, essentially clones of the Stacks blockchain, that settle on Stacks in the same way Stacks settles on Bitcoin. So you could have multiple Appchains existing on top of Stacks and even have Appchains built on top of Appchains. [16]
• Subnets: Subnets are a Layer-2 blockchain for the Stacks mainchain. If the Stacks blockchain is the main network, you can consider subnets as a sub-network that helps scale the overall Stacks network. Subnets also offer a solution for specific applications since microblocks in subnets offers finality; subnets can be helpful for NFT marketplaces. Picture a marketplace where you want to enable bidding functionality for your users. Those bids would be confirmed in near real-time, so you can have auction-style bidding with new offers coming in and getting confirmed with finality in close to real-time. [17]

Why is Stacks undervalued right now?

First, the Stacks cryptocurrency (STX) fuels networking activity and contract execution. As the ecosystem continues to grow and more and more projects are built on Stacks, the demand for STX automatically increases.

BNS domains

In recent weeks, there has been an explosion in registrations of BNS domains. BNS is the “Blockchain Name System”, a decentralized name registration app that can be compared to its Ethereum counterpart ENS. Transactions are completed on Bitcoin. BTC names are fundamentally under your control and resistant to seizure or censorship. [18] BTC names are registered by sending two transactions to the smart BNS contract on the Stacks chain. Imagine one million BNS registrations by 2024. That means 2 million STX will have been burnt. In addition, about 400,000 STX will be burnt for renewals every year. So, BNS is good for the Stacks Ecosystem in many ways. As more users join, the adoption of BNS will increase, and demand naturally increases.

https://stacksonchain.com/dashboards/BNS/130

Stacking

Currently, there are 1.34B STX tokens in circulation. Of these, 492 million have been taken out of circulation and locked by stacking. As more and more people become familiar with the principle that you can earn bitcoin by stacking STX, this number will continue to grow. The moment the demand for STX increases, which, as described earlier, is to be expected in my view, then this lack of liquidity will cause STX to become volatile and gain considerable upward momentum. [19]

Liquidity and growth of DeFi and NFT platforms

The growth of an ecosystem is strictly linked to chain liquidity. More capital leads to new developers, users & entities joining an ecosystem. As liquidity increases, better opportunities are unlocked for the whole ecosystem. Stacks is taking different approaches in trying to attract new capital.

• Different funding programs have been developed to help teams build novel projects on Stacks;
• Grants, Startup Labs, and Incubators aim to fund individuals or more experienced teams based on the utility their projects will bring to Stacks;
• Multi-chain NFT collection mints, for example, Megapont, has launched the Kongs collection on Ethereum to get new members on board the project and on Stacks. Using the dual chain will help Ethereum members become familiar with Stacks since, for example, the Megapont DAO is on Stacks;
• The integration of Orbit Bridge will make it possible to move Stacks tokens that are not NFT on other chains;
• The Byzantion marketplace will serve collectors, artists, and builders on STX and NEAR protocols. It will raise awareness about Stacks and open the possibility of exciting collaborations between the NFT projects of both chains. It creates the opportunity to collaborate with other chains’ DeFi projects and work on new innovative features;
• The DeFi platforms, ALEX and Zest Protocol, could bring institutional liquidity to the ecosystem. [20]

Last week, Muneeb, co-founder of Stacks, dropped a bombshell into the Stacks community by mentioning between the lines that he is busy working on a trustless 2-way non-custodial peg for bitcoin. This means that the ‘Bitcoin write problem’ has been solved. Direct writing to and executing Bitcoin transactions would be possible, with no central intermediary, using Stacks as an invisible smart contract layer. [21] It is currently under development, but eventually, just as bitcoin has BIPs, this could be added to the network as functionality via Stacks Improvement Proposals (SIPs). [22]

It’s time for Bitcoin.