Stacks is a scaling solution bringing smart contracts and other functionality to Bitcoin.
Summary
The launch of Ordinals in 2023 kicked off a new phase of development for Bitcoin, the oldest and largest[1] public blockchain. Although Bitcoin has been heralded as a “store of value” asset, it arguably has less functionality than other blockchains due to its relatively slow transaction speeds and a more limited programming language. Today, however, developers are expanding the range of potential Bitcoin applications through Layer 2 networks and other scaling solutions (for more detail see our report Bitcoin Renaissance: The Evolution of the World’s First Public Blockchain). Stacks is a leading Bitcoin scaling solution, and is a component of the Smart Contract Platforms Crypto Sector (Exhibit 1). Structured as a Layer 2, Stacks brings smart contacts and decentralized applications (dApps) to Bitcoin—while benefiting from Bitcoin’s security, scarce supply, and widespread user base.
Exhibit 1: STX represents <1% of the Smart Contract Platforms Crypto Sector by market capitalization
The Token
STX is the native token of the Stacks network and represents a piece of ownership in the ecosystem (Exhibit 2). The STX token is used for (i) paying for transaction fees, (ii) acting as a medium of exchange on the network, (iii) rewarding miners who commit Bitcoin to secure the network, and (iv) “stacking”—a component of the network’s novel consensus mechanism.
Exhibit 2: STX token basics
The Network and Technology
The Bitcoin blockchain processes approximately seven transactions per second, and does not natively offer smart contract functionality. However, the network is highly secure, and developers have long debated whether it would be possible to bring a richer array of functionality to Bitcoin. Although the Stacks project began as early as 2013[2], its vision now appears to be delivering results, thanks in part to the success of Ordinals.
The Stacks network is structured as a sidechain—one type of blockchain scaling technology—and secured through a novel “proof-of-transfer” consensus mechanism. Under this structure, miners commit Bitcoin and create Stacks blocks in exchange for the possibility of earnings STX rewards. In this way, the Stacks network partly shares the Bitcoin network’s security. Unlike the Bitcoin mainnet, Stacks offers smart contract functionality and dApps.
In addition to the growth in Bitcoin development, the Stacks protocol is nearing a critical upgrade called Nakamoto, designed to enhance its performance by reducing block times from 10-30 minutes to about five seconds. The upgrade will also introduce a new asset, sBTC, which will be pegged to Bitcoin and can serve as collateral in financial applications. With increased transaction activity on the main Bitcoin chain driving up costs, the Nakamoto upgrade positions Stacks as a more efficient and cost-effective alternative, making this a pivotal moment for the protocol.
Exhibit 3: Stacks features cheaper transactions and faster blocks compared to Bitcoin
Use Cases
Like most other smart contract blockchains, Stacks is a general purpose blockchain for decentralized applications (dApps), albeit at an early stage of development. Stacks currently features nearly 50 dApps[3] with functions primarily related to decentralized finance (DeFi). Over time, we expect that the network will host additional dApps like those found on other smart contract platform blockchains.
Factors to Consider
The Bitcoin ecosystem is changing. The launch of Ordinals, BRC-20 tokens, and Runes have demonstrated that more can be built on the Bitcoin network, and the introduction of spot Bitcoin ETFs in the US market has brought further attention to the first public blockchain. While Bitcoin has created a narrative as a “store of value” asset, a new wave of development seeks to find more uses for the token and its underlying network.
Among investable tokens, STX could benefit from the Bitcoin renaissance. Among Bitcoin scaling solutions, Stacks is the oldest project and has the second highest number of active developers, after the Lightning Network.[4] Stacks offers users the security of Bitcoin, but with faster transactions, lower fees, and more functionality. Bitcoin is still in its infancy as a smart contract platform relative to Ethereum or Solana. If you compare Bitcoin’s total value locked (TVL) relative to market cap ratio to existing smart contract platforms, the difference is stark (Exhibit 4). Given Bitcoin’s popularity, the potential for growth in TVL and demand for related dApps could be significant.
In addition, after the Nakamoto upgrade the Stacks protocol will offer unique features, including: (i) Bitcoin collateralized stablecoins, (ii) Bitcoin-based lending (and therefore Bitcoin native reward), and (iii) Bitcoin-based decentralized autonomous organizations. Similar to how basic financial primitives enabled the growth of Ethereum’s DeFi ecosystem in 2017, Bitcoin’s ecosystem may now similarly flourish given its current place in the spotlight.
Exhibit 4: Bitcoin’s existing opportunity set remains large
Investment risks
Stacks faces several possible risks specific to the network, which include, but are not limited to:
- Competing networks: Stacks faces competition from other blockchains with smart contract functionality, such as Ethereum, Solana, Binance Smart Chain, Avalanche, and others. In addition, Stacks faces competition from new Bitcoin Layer 2 projects that also want to take advantage of the increased interest on Bitcoin.
- Economics and valuation: As of May 21 2024, Stacks network fee revenue remains low[5] compared to other blockchains, such as Ethereum.
- Network resilience: Stacks leverages several new technology approaches; the Stacks Proof-of-Transfer consensus mechanism is not widely used, and may not function as intended. There may be flaws in the cryptography underlying the network, including flaws that affect the functionality of the Stacks Network or make the network vulnerable to attack. Stacks’ economic incentives in the Proof-of-Transfer model may not function as intended, which may cause the network to be insecure or perform sub-optimally.
[1] By market capitalization as of May 14, 2024
[2] As founder Muneeb Ali’s PhD thesis, then called Blockstack.
[3] Source: DappRadar.
[4] Source: Electric Capital’s Developer Report, as of May 21, 2024
[5] Source: Artemis.xyz
Investments in digital assets are speculative investments that involve high degrees of risk, including a partial or total loss of invested funds. Investments in digital assets are not suitable for any investor that cannot afford loss of the entire investment.
All content is original and has been researched and produced by Grayscale Investments, LLC (“Grayscale”) unless otherwise stated herein. No part of this content may be reproduced in any form, or referred to in any other publication, without the express consent of Grayscale.
This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any investment in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change. This content does not constitute an offer to sell or the solicitation of an offer to sell or buy any security in any jurisdiction where such an offer or solicitation would be illegal. There is not enough information contained in this content to make an investment decision and any information contained herein should not be used as a basis for this purpose.
This content does not constitute a recommendation or take into account the particular investment objectives, financial situations, or needs of investors.
Investors are not to construe this content as legal, tax or investment advice, and should consult their own advisors concerning an investment in digital assets. The price and value of assets referred to in this content and the income from them may fluctuate. Past performance is not indicative of the future performance of any assets referred to herein. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on Grayscale’s views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements. In addition to statements that are forward-looking by reason of context, the words “may, will, should, could, can, expects, plans, intends, anticipates, believes, estimates, predicts, potential, projected, or continue” and similar expressions identify forward-looking statements. Grayscale assumes no obligation to update any forward-looking statements contained herein and you should not place undue reliance on such statements, which speak only as of the date hereof. Although Grayscale has taken reasonable care to ensure that the information contained herein is accurate, no representation or warranty (including liability towards third parties), expressed or implied, is made by Grayscale as to its accuracy, reliability, or completeness. You should not make any investment decisions based on these estimates and forward-looking statements.
There is no guarantee that the market conditions during the past period will be present in the future. Rather, it is most likely that the future market conditions will differ significantly from those of this past period, which could have a materially adverse impact on future returns. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. We selected the timeframe for our analysis because we believe it broadly constitutes the most complete historical dataset for the digital assets that we have chosen to analyze.
Related content