Original author: PAUL VERADITTAKIT

Original compilation: Deep Chao TechFlow

Amid the surge in new activity and transactions that require Bitcoins block space, its basic layer-one protocol faces inherent obstacles in scalability. Bitcoins design inherently imposes limits on transaction throughput, a decentralized consensus mechanism used to ensure security. These limitations are especially noticeable during periods of network congestion, when surges in activity can lead to delayed confirmation times and higher transaction fees. Additionally, the limited scripting capabilities of Bitcoin Layer 1 also limit the scope of viable applications, exacerbating issues related to scalability. While limited design space is both limited and often desirable, it has so far made it difficult or unfeasible to build more complex applications on the network.

In this context, Layer 2 solutions emerged as a concept designed to complement and enhance Layer 1 functionality. As its name suggests, Layer 2 solutions operate on top of existing blockchains, easing congestion and enabling the development of complex applications without compromising critical security and decentralization. The importance of Layer 2 solutions lies in their ability to create new network capabilities, enabling innovation without betraying the fundamental security and economic promises of the underlying blockchain.

Uncovering Stacks (STX)

Among the various layer 2 solutions for the Bitcoin network, Stacks (STX) stands out as an innovative platform that redefines the boundaries of scalability and functionality. Stacks operates as a layer 2 solution and integrates seamlessly with the Bitcoin blockchain, opening up new possibilities. Stacks introduces a groundbreaking methodology at its core, bridging the gap between Bitcoin’s base layer and ancillary layers optimized for use in complex applications.

Unlike conventional layer 2 solutions that focus solely on off-chain transaction management, Stacks enhances Bitcoin’s layer 1 functionality by empowering developers to design dynamic smart contracts on top of its layer 2. This approach facilitates a mutually beneficial connection between the two layers, ensuring that complex computations and interactions occur on Layer 2, while transaction security and finality rely firmly on the Bitcoin underlying blockchain.

This innovative architecture requires no changes to Bitcoin Layer 1, retains Bitcoin’s strong security, and prioritizes scalability, allowing a large number of applications to run seamlessly without burdening the mainnet. Stacks’ distinctive approach sets it apart, offering a more comprehensive solution that leverages the benefits of both layers to create an efficient decentralized application ecosystem.

Develop decentralized applications on Stacks

Developing decentralized applications on the Stacks network opens the door to a variety of possibilities, promoting innovation in areas such as finance, digital art, supply chain management, and decentralized finance (DeFi). By seamlessly integrating with the flagship cryptocurrency Bitcoin and leveraging its user base and security features, Stacks creates an environment where many types of DApps can thrive. Developing DApps on Stacks allows for enhanced scalability, ensuring a smooth user experience even during network peak periods. Stacks’ innovative architecture creates a secure DApp environment that leverages Bitcoin’s base layer security. This layered approach enhances trust, allowing developers to design applications with confidence that they can securely handle sensitive data and valuable assets. Interoperability with the Bitcoin network is another key advantage, enabling seamless interaction between DApps and Bitcoin’s native assets and ecosystem. As a result, Stacks empowers developers to bring their creative ideas to life while providing users with a powerful, user-friendly decentralized experience.

Nakamoto upgrades and developments

The upcoming Nakamoto upgrade marks a major milestone in the continued development of the Stacks network, bringing transformative enhancements. The Nakamoto upgrade introduces a series of technological advancements that work together to enhance the speed and security of the network. Coupled with the launch of sBTC, a 1:1 Bitcoin-backed asset, Stacks will soon enable writing to Bitcoin in a fully decentralized manner, making it easy to move Bitcoin in and out of Layer 2. This unlocks hundreds of billions of dollars in potential capital for web3. sBTC is a trust-minimized way to move BTC between Layer 1 and Layer 2; it does so through economic incentives rather than relying solely on cryptography. Threshold wallets are not managed by a centralized or predetermined set of entities, and users must delegate their BTC, unlike earlier sidechain approaches. Instead, threshold wallets are managed by a permissionless group of entities that allow economic incentives to join and leave to maintain the dynamics of the peg (following the philosophy of Bitcoin itself).

Using this mechanism, it is possible to issue an asset on the Bitcoin layer (here sBTC on the Stacks layer) that always maintains a 1:1 exchange rate with BTC. It is possible to execute fully expressive smart contracts on sBTC that are triggered by Bitcoin transactions, such as the current Stacks layer 2, and can also broadcast signed transactions on the Bitcoin blockchain without the need for a trusted entity. This solves the problem of trustless Bitcoin writes and allows smart contracts to effectively operate with BTC as their asset without the risk of converting to other non-pegged currencies. Unlike typical sidechains, Stacks Layer 2 transactions (and smart contracts) have other important properties: i) they are settled on the secure, durable Bitcoin blockchain; ii) exchange rate-related operations are implemented as Bitcoin Coin transactions cannot be censored by the Stacks layer or its miners; and iii) Stacks transactions and exchange rate operations achieve Bitcoin finality – i.e., they are backed by 100% of the Bitcoin base security/computing power, and iv) Stacks transactions and Exchange rate operations work seamlessly with Bitcoin forks, so no intervention is required when Bitcoin forks.

Additionally, the Nakamoto upgrade is designed to significantly reduce execution time from minutes to seconds. This achievement stems from groundbreaking research and development, allowing Stacks to provide users with an experience similar to Ethereum’s layer 2 solutions, while maintaining a strong tie to the security of the Bitcoin network. The Nakamoto upgrade underscores the Stacks community’s unwavering commitment to pushing boundaries on the Bitcoin blockchain, positioning the platform as the center of a new wave of decentralized applications.

Example

• Decentralized Finance (DeFi)

Stacks Layer 2 could become a hot spot for decentralized finance applications serving Bitcoin holders. Through Stacks, users can access a decentralized lending, lending and trading platform. DeFi projects on Stacks aim to provide financial services using Bitcoin as collateral. This approach provides Bitcoin holders with the opportunity to earn interest and use DeFi features within the Bitcoin ecosystem. Considering the potential Bitcoin capitalization of $500 billion, this could be a very large opportunity for developers and new use cases.

• Digital ownership and identity

Stacks facilitates the creation of digital assets that represent physical ownership, such as real estate or intellectual property. Users can establish verifiable digital identities and claim ownership of these assets on the blockchain. This has important implications for the tokenization of physical assets and the development of secure, tamper-proof records.

• Tokenization and NFTs

The Stacks ecosystem supports the creation of non-fungible tokens (NFTs) and tokenized assets. Artists, musicians, and content creators can tokenize their work and sell it on the Stacks-based marketplace. This empowers creators to retain ownership and royalties of their digital creations.

• Voting and governance

Stacks implements decentralized governance and voting mechanisms. Users can participate in decision-making processes such as protocol upgrades and community initiatives by staking STX tokens. This enhances the democratization of blockchain networks and ensures stakeholder participation in the evolution of the platform.

• Cross-chain integration

Stacks is exploring cross-chain integration, allowing assets and data to be moved seamlessly across different blockchains. This has the potential to bridge Bitcoin to other blockchain networks, extending the utility of Stacks and Bitcoin.

• Bitcoin mining with STX

By locking up Bitcoin (BTC) as collateral, miners can simultaneously participate in Bitcoin mining and support the Stacks ecosystem. This innovative proof-of-transfer (PoX) consensus mechanism reconciles the incentives of the Bitcoin and Stacks communities.

Stacks Ecosystem

The Stacks developer ecosystem is a testament to the power of collaborative innovation, as developers unite to shape the future of finance and technology. Let’s take a look at some of the popular leading projects and tools.

• Hiro PBC (formerly Blockstack PBC)

Hiro PBC built an early version of Stacks and is now a developer tools company for Bitcoin Layers 1 and 2. They played a key role in developing early versions of Stacks and its related technologies and continue to contribute to recent developments. Hiro PBC provides tools and resources for developers and projects building on Bitcoin Layer 1 and Stacks Layer 2, such as the Ordinals API, Chainhook Indexer, and subnets. Their work aims to drive developer adoption of Bitcoin Layers 1 and 2.

• Trust Machines

Trust Machines is building the maximum Bitcoin application ecosystem to maximize the value of the Bitcoin network. Trust Machines is building Bitcoin DeFi projects and exploring applications where Bitcoin-backed assets and identities can be unlocked, such as Console, a Web3 chat application protected by your identity. Trust Machines contributes open source code for Bitcoin Layer 2 (such as Stacks) and Bitcoin Layer 1 technologies (such as DLC).

• Stacks Foundation

The Stacks Foundation supports builders who are energizing the Bitcoin economy through broader adoption. The Stacks Foundation funds critical open source technology development, educational efforts, community development and event resources, developer education resources, and contributes to the open source Stacks development and SIP (Stacks Improvement Proposal) processes.

• Bitcoin Frontier Fund

Investing in great teams developing new use cases using Bitcoin tools and layers; recently launched Ordinals startup accelerator program.

• wallet

Leather Wallet (formerly Hiro Wallet) and Xverse Wallet are both ways for users to manage their STX tokens, Bitcoin and Bitcoin-based assets (including Stamps and Ordinals) and interact with decentralized applications on the Stacks blockchain Essential app. They provide a user-friendly interface for securely storing, sending and receiving BTC and STX tokens, making it easy for individuals to participate in the ecosystem.

• ALEX

The Bitcoin DeFi protocol and decentralized exchange (DEX) released the first-ever cross-chain bridge between the Ethereum and Stacks layers in Q2 2023, allowing users to transfer assets between blockchains.

• Gamma

The Bitcoin NFT market and creator launch platform has launched its own Ordinals market and guest artist program, bringing together 60 first-time artists from the Bitcoin and traditional art worlds.

• BNS (Bitcoin Domain Name System)

The oldest Bitcoin domain name system, launched in 2015 on Bitcoin layer 1, only. The BTC domain name space alone has more than 300,000 registered names, and Leather and Xverse support sending and receiving BTC to unique, human-readable names.

• Clarity Smart Contract

Clarity is a smart contract language developed for Stacks that ensures security and predictability. Developers can use Clarity to build decentralized applications and smart contracts that promote trust and reliability in the ecosystem. Clarity’s design eliminates a number of common smart contract errors seen on other networks.

• Stacking pool, such as Fast Pool:

Fast Pool allows users to share and stack STX with them, making rewards more accessible to users with less than the protocol’s minimum stack. The Stacking protocol allows people to choose to lock STX and qualify for BTC rewards sent by miners mining STX. Fast Pool is a self-service pool where smart contracts are the pool operators. Fast Pool sends payments via STX instead of BTC to reduce transaction fees.

• Bitcoin Frontier Fund

Bitcoin Frontier Fund (formerly Stacks Ventures) has launched its first-ever Bitcoin Ordinals accelerator program. The program aims to promote innovation in the Ordinals space and provide startups with seed capital, access to capital, and mentorship. In return for participating, Bitcoin Frontier Fund provides a $100,000 investment and a supportive community, and receives 2-3% common stock equity. Startups that have not received significant prior funding will hand over 3% of their equity, while companies that have received more than $600,000 in recent funding will hand over 2% of their equity. Areas of interest include infrastructure, proven Web 3.0 use cases, developer tools, and accessibility.

• Bitcoin Layer 2 Labs

Bitcoin Layer 2 Labs is a Pakistan-based core development-focused entity that plays a key role in advancing Bitcoin’s Layer 2 solutions. The organization places a high priority on developing Bitcoin infrastructure, positioning itself at the forefront of blockchain innovation in Pakistan. Bitcoin Layer 2 Labs is actively involved in the research, development, and implementation of Layer 2 scalable solutions, greatly advancing the scalability and functionality of the Bitcoin network. In the rapidly evolving blockchain landscape, their work highlights Pakistan’s growing influence in the global blockchain community and its dedication to the continued development of blockchain technology.

• DeSpread

DeSpread has been committed to cultivating a healthy blockchain ecosystem, paying special attention to the language and cultural barriers unique to the Korean market. In the past four years, the company has grown rapidly and now has a team of 21 blockchain experts, all without outside investment. DeSpread specializes in providing growth and market strategy consulting services to blockchain projects, leveraging its extensive market knowledge. In addition, they actively contribute to the industry by publishing educational materials and research publications, promoting the mutual growth of the blockchain community. DeSpread Labs, their in-house development team, plays a key role by running validating nodes, driving on-chain activity, and creating the web3 community platform, demonstrating their commitment to blockchain innovation.

• HireVibes

HireVibes is a platform focused on transforming the traditional job market by integrating blockchain technology and decentralization principles. Through its innovative approach, HireVibes aims to create a fairer and more efficient job search experience for both job seekers and employers. By leveraging the power of blockchain, they facilitate transparent and fair recruitment processes, giving individuals greater control over their career paths. This platform not only connects talent to exciting opportunities, it also drives values ​​like sustainability and social impact by allocating a portion of position fees to philanthropic causes. With a mission to transform the job market, HireVibes represents a pioneer in the intersection of blockchain technology and human resources.

• Sustainable Bitcoin Protocol

The Sustainable Bitcoin Protocol is a groundbreaking initiative that aims to solve one of the most pressing issues in the cryptocurrency world – carbon emissions. Recognizing the environmental impact of Bitcoin mining and trading, the protocol seeks to offset and reduce the carbon emissions associated with operating the network. The initiative strives to make Bitcoin more environmentally friendly and socially responsible by implementing sustainable practices and technologies such as renewable energy and carbon offset schemes. It represents a critical step towards mitigating the ecological footprint of cryptocurrencies, aligning the growth of digital currencies with global sustainable development goals. The Sustainable Bitcoin Protocol is a testament to the growing environmental awareness within the crypto community and serves as a role model for making blockchain technology more environmentally sustainable.

Inspire innovation and creativity

Bitcoin’s transformative potential is reignited by “Ordinals,” an innovative concept budding in the Bitcoin ecosystem. Ordinals mark an epochal change in thinking about how to relate data to Bitcoin’s smallest unit, the Satoshi. This innovation gives each satoshi a unique digital identity, enabling new types of applications that exploit their unique properties. One practical application is the creation of non-fungible tokens (NFTs) on the Bitcoin blockchain, linking data to individual satoshis to establish secure and immutable ownership. Beyond art and collectibles, this innovation has the potential to revolutionize provenance tracking, supply chain management and decentralized identity verification. The introduction of Ordinals brings unprecedented granularity to the Bitcoin network, opening up a new realm of innovation and creativity, with the potential to reshape digital assets and decentralized applications, but only if it succeeds as previously discussed Extend the activity to level 2.

Future outlook and concluding thoughts

In summary, Stacks’s journey within the Bitcoin ecosystem has been characterized by its creative approach to addressing scalability challenges and facilitating the development of new applications. This layer 2 solution demonstrates its ability to increase Bitcoin’s scalability while maintaining the core concepts of security and decentralization. The blend of Stacks’ unique attributes, innovative utilization of Ordinals, and upcoming Nakamoto upgrades combine to position it as a pioneer in the cryptocurrency space.

As the broader cryptocurrency community recognizes the importance of Layer 2 solutions in shaping Bitcoins future, Stacks is poised to play a key role in the evolving landscape. Collaboration, technological innovation, and the exploration of new use cases will shape Stacks and the broader Bitcoin developer ecosystem. Releasing $500 billion of Bitcoin liquidity into DeFi, providing faster and cheaper BTC transaction channels, continued DApp development, and the integration of cutting-edge technologies, let us get a glimpse of the huge potential in the development process of Nakamoto version Stacks.