April 20, 2023
Building on Bitcoin is currently the hottest thing in crypto town. What better way to dive into it than looking at the hottest Bitcoin layer, Stacks (STX). Other layers include Lightning, Liquid, and RSK, each bring various features to the larger Bitcoin ecosystem, but for this blog, we'll focus on the number 1 web3 project on Bitcoin, Stacks.
STX gained momentum in the past few weeks after having a more than 200% price run and we're not the only ones noticing. Andrew Kang of PleasrDAO (A group of DeFi leaders) categorised the ecosystem as "bear market resistant builders." Chris Burniske from Placeholder VC also showed his support for the Stacks ecosystem, and finally, thesis-driven hedge fund entity North Rock Digital published its thesis about the protocol. From the looks of it, Stacks is getting ready for its prime-time spotlight as Building on Bitcoin becomes the dominant narrative for 2023.
But “why” is the hype all about Bitcoin Layers?
”While Bitcoin is by far the largest, most well-known blockchain, most users do not associate Bitcoin with decentralised applications, smart contracts, non-fungible tokens (NFTs), and other crypto infrastructures.” - Trust Machines
This is changing as the new Stacks upgrade makes building apps for Bitcoin easier. Let's dive into it and simplify everything. STX has one of its two biggest mainnet updates happening in less than a few days. The target activation is Bitcoin block height 781,551, which promised to strengthen its connection to Bitcoin. The major one is called Nakamoto, which is set to launch this Q42023. You can expect a deep dive into Nakamoto later; for now, we’ll focus on 2.1.
Since you know we’re all about making easily digestible content here at Ryder, we will abstract the upgrade into the three most important themes.
- Better Stacking
- Better Bitcoin Integration
- Better Bitcoin Use Cases
Stacking is one of the more popular offerings of the Stacks ecosystem. Staking is different from Stacking in terms of semantics but in a nutshell, you earn rewards by holding certain cryptocurrencies. The key takeaway here is that STX is one of the first protocols that lets holders earn Bitcoin instead of its native token. Usually, when you stake ETH, you get ETH, the same could be said with other protocols; but with STX, it's different. There are a few hiccups within the STX stacking mechanism; for example, there's a cool-down period, and you can only lock a set amount at once but with the release of 2.1, these will be fixed.
Continuous Stacking: No more cool-down periods
Currently, if you stop Stacking, you have a two-week cooldown period during which you cannot Stack. If you want to change the amount of STX locked up, or your locking period, your STX tokens will sit idle for two weeks. This is a big hurdle for power users who want to optimise their yield. Continuous Stacking and the ability to opt-in or out at the end of each cycle is a feature the community has wanted for a while. With 2.1, you'll be able to avoid missing a cycle. Basically, stack whenever and wherever (of what we like to call "Stacking stats through Stack") and increase the amount of STX stacked per cycle. The 2.1 will enable "topping off", increasing your locked STX even with small amounts.
What does this mean for you as a Stacker?
There's only one action required for you as a current Stacker. All locked STX in Stacking, whether they are part of a stacking pool or solo stacking, will be unlocked as the consensus mechanism is upgraded. For this, you need to re-stack or delegate your STX again for Cycle 55 and expect to receive the payout in Cycle 56. We're currently on Cycle 54, which ends in 10 days.
Stacks 2.1 simplifies how developers can link to and trigger interactions with Bitcoin. Let's look how these new features strengthens Stacks' connection to Bitcoin.
New Smart Contract Functions
To give you a bit of background, Clarity is Stacks’ Smart Contract Language, which allows it to read the Bitcoin state and include Bitcoin-based logic. At the moment reading the state of Bitcoin from Clarity is not so straightforward. This will all be abstracted with 2.1, making it much easier to access the Bitcoin state.
With 2.1, all Bitcoin TXs can trigger STX chain actions and allows the conversion of Bitcoin public keys and signatures to Stacks addresses. This is important because it allows Bitcoin wallets to integrate Stacks into their product and vice-versa, allowing you to send BNS names with Hiro Wallet v4.5.0 and send your Ordinals (a Bitcoin native asset) to a STX based wallet such as Hiro or Xverse.
Bitcoin interoperability Another exciting feature is the ability to directly add a Stacks asset to a Bitcoin address. While this is possible today if the Bitcoin address owner is willing to create a Stacks address first, Stacks 2.1 removes that requirement altogether. This makes it easier for users and developers to get started with Stacks applications with only just a Bitcoin address.
Mining with Segwit and Taproot
2.1 adds the ability to send Bitcoin to a native segwit or taproot address. This saves users Bitcoin transaction fees and enables new stack features, such as decentralized stacking pools that pay BTC directly to their pool participants.
2.1 makes it very accessible to build Bitcoin applications via Stacks tooling; let’s look at possible use cases and what can be built more through its unique consensus mechanism.
Compounding Stacking yield
If you like Albert Einstein, you probably know he referred to “compound interest” as the eighth wonder of the world. Imagine if this compounding concept can be brought to Stacking. Upon receiving a BTC yield, a contract could react to that, swap the BTC through @magicstx to xBTC, swap with STX and re-stack it. This can all be automated, of course.
Continuous Stacking makes the Stacks consensus mechanism more efficient and composable, which is beneficial for DeFi products built on Stacks like Arkadiko, ALEX, Stackswap and more.
For example, Arkadiko—the self-repaying loan mechanism on Bitcoin—will have higher revenue from Stacking and will be more capital efficient. Currently, they stack for 3 cycles (due to vault liquidation logic), so every 4th cycle you would have a cooldown (losing ~25% of your yield). The Stacks 2.1 upgrade fixes that through the continuous stacking. They can simply stack and unstack when a vault gets liquidated..
STX version of Lido
Okay, a bit of backpedal, if you're not familiar with Lido -- it is a crypto staking solution available on Ethereum, Solana and Polkadot. A no-brainer use case would be to build a liquid stacking protocol on Ethereum in which you stack your STX and get a liquid nSTX token while still receiving the stacking yield.
Arbitrage Imagine you have more STX from the STX version Lido, you can then swap this with nSTX on @ALEXLabBTC and it will be probably at a premium price. To conclude these particular products enhance the efficiency of the financial markets within the STX ecosystem and Bitcoin in the future, which is much needed at the moment.
Trustless Native Bitcoin Assets Swapping
From our previous blog, we mentioned that the current trading market for Ordinals is OTC (over-the counter). There are a few platforms, such as https://ordswap.io/, that does a trust-less trading but the UI/UX could be improved. ALEX will soon launch their Trustless Ordinals Trading by leveraging Stacks infrastructure and we all know how we feel about its current user experience. Looking forward to seeing this one!
As the king of all blockchains, Bitcoin joins the protocol wars. Can it be the contender to become the internet global currency (web3’s ultra sound money)? The proposition, besides being the genesis of everything, is that it’s the most decentralized, stable and secure blockchain. These propositions make developers flock to it as they want a robust base for decentralised applications.
Disclaimer: Please note that the information provided is for educational purposes only. It is not intended to be a financial advice.