Stacks: Bitcoin Layer 2 Could Be Huge (STX-USD)

Overview

Proposals to add scalability to Bitcoin (BTC-USD) bring up contentious debates in the Bitcoin community. Attempts to make Bitcoin scale by increasing its block size have led to splits from the Bitcoin network and the creation of new Bitcoin variants, known as hard forks. However, other blockchain networks have emerged that are scalable and do a lot more than send and receive peer-to-peer transactions. Advanced blockchain features have proven helpful in building decentralized applications (dApps).

Bitcoin inherently lacks advanced features like smart contracts execution and self-executing contracts. As one of the most secure and decentralized blockchain networks, the Bitcoin community largely frowns upon implementing changes to the Bitcoin network. These changes often result in a trade-off between the network’s security and scalability.

Muneeb Ali and Ryan Shea started the Stacks (STX-USD) project (initially called Blockstack) as a blockchain layer for Bitcoin. Stacks is the first blockchain project to receive a token sale approval from the US Securities and Exchange Commission (SEC), making STX, Stacks’ native token, regulatory compliant in the US.

What Makes Up Stacks’ Tech Stack?

Stack implements novel technologies that unlock the full potential of Bitcoin. To achieve faster throughput and programmability on the Bitcoin blockchain, Stacks uses a set of technologies that anchors the Bitcoin network.

Proof of Transfer (PoX)

Stacks uses the proof-of-transfer (PoX) consensus mechanism, which it calls “an extension of the proof-of-burn mechanism,” and a layer on top of the proof-of-work (PoW) mechanism.

An underlying PoW blockchain secures a PoX blockchain; therefore, Nodes that secure a PoX blockchain earn rewards in the cryptocurrency of the base blockchain.

A PoX network’s base blockchain is sometimes called its anchor chain, as they are anchored to a PoW network.

Stacks’ anchor chain is Bitcoin. Miners on Stacks’ PoX blockchain get BTC rewards. When stackers stake STX, they earn rewards in Stacks’ anchor cryptocurrency BTC.

The Stacks team says it chose Bitcoin as its anchor blockchain because the Bitcoin network is the oldest blockchain network, and it has stood the test of time. Bitcoin is also one of the most decentralized blockchain networks, and its native coin BTC has become the most recognized cryptocurrency.

Microblocks for High Throughput

Stacks uses a mechanism called microblocks to achieve increased transaction throughput. Stacks’ block creation time (block time) is at the same rate as that of the Bitcoin network; however, microblocks allow the Stacks blockchain to perform state transition between blocks of the anchor chain.

Block leaders are elected on the Stacks network to batch or stream transactions. In the streaming model, elected block leaders select transactions from the mempool and package them into microblocks. Using this approach, the transaction processing time is reduced.

Miners on Stack are incentivized to mine microblocks. Miners can choose not to mine macroblocks but opt for the batching model.

Clarity Programming Language

Stacks has a proprietary smart contract language designed for its blockchain. Smart Contract developers encode business logic on the Ethereum (ETH-USD) blockchain using the Solidity smart contract language, and web3 developers building on Stacks use Clarity.

Stacks says that in designing Clarity, it looked at the flaws and vulnerabilities of existing smart contract languages like Solidity. Drawing from the lessons learned from common Solidity exploits, Clarity was built to be secure by design.

Clarity is an interpreted smart contract language, unlike Solidity, a compiled language. Compiled languages are converted to byte-code before they are submitted on-chain. This poses a certain level of vulnerability as the compiler adds another layer of complexity. A compiler bug may cause the execution of an unintended byte-code, creating the risk of an exploit. Clarity, as an interpreted smart contract language, executes and commits to the chain as written.

Byte-codes, the format in which compiled smart contract codes are converted, is low-level and non-readable by humans. This makes verifying exactly what a smart contract does at runtime difficult.

An interpreted language like Clarity maintains its high-level, human-readable format, making verifying what a smart contract does easy.

What Has Been Built on Stacks Layer-2?

A blockchain network that offers NFT, DeFi, and smart contract capabilities can prove its worthiness by the number of real-world applications that have been built on its blockchain.

NFTs, DeFi, and Crypto Domains on Stacks

NFTs are tradable on Stacks’ NFT marketplaces. The popular Stacks NFT marketplaces are Gamma, Byzantion, Stacks Art, and Superfandom. Some of Stacks’ NFTs marketplaces offer cross-chain features.

NFTs on the Stacks blockchain are generally called Bitcoin NFTs. Some popular Bitcoin NFT collections include Bitcoin Monkeys, Megapont Ape Club, and Belle’s Witches.

DeFi functionalities such as lending and the launch of tokens have been made available on the Bitcoin network, thanks to Stack’s layer-2 solution. Stackswap is a Stacks-based DeFi platform that enables users to exchange tokens, mint and trade NFTs, and perform crypto lending on the Bitcoin network.

Stacks has also introduced Web3 domain names to Bitcoin. Like Ethereum Name Service, Stacks’ “.BTC” domain enables users to encapsulate their Web3 identity into a simple, easily-readable address format.

Technical Analysis

My long-term target for STX would take us at least into the $5.4 region:

This is the 1.618 ext of wave 1, using the arithmetic chart, since I see the log chart as too bullish. Still, this represents a rally of at least 400%.

In the more immediate term, I believe STX has already completed an impulse to the upside, and we should now see a significant retracement:

I am adding a buy order at $0.756

Takeaway

There are several layer-2 protocols built on Bitcoin; however, Stacks’ approach of enabling advanced features instead of focusing mainly on scaling makes it stand out.

Bitcoin is undoubtedly the most popular blockchain network. When retail and institutional investors discuss crypto investment, Bitcoin is the number choice. Stacks’ use of Bitcoin as its anchor chain already makes it stand on the shoulders of giants. As crypto continues to gain mass adoption and more institutional investors add Bitcoin to their portfolios, the need for asset tokenization, NFTs, and DeFi features on the Bitcoin network will become apparent. Stacks has begun an awesome journey to unlock Bitcoin’s full potential.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.