What Is Stacks?
A Step-by-Step Guide to Using dApps on Bitcoin
By: Rahul Nambiampurath •DeFi Explainers
Bitcoin provides a global, decentralized payment network. It’s also a virtual wealth vault. But what if Bitcoin could become an ecosystem of dApps equivalent to Ethereum?
Is that possible?
Stacks aims to do that. It is a Layer 1 network that secures its dApps’ smart contracts directly on Bitcoin’s blockchain. This doesn’t alter or compromise Bitcoin’s security. On the contrary, Stacks extends Bitcoin usage with modular dApp deployment.
Stacks Origin and Purpose
Initially dubbed Blockstack in 2017, the Stacks project was rebranded in October 2020. Muneeb Ali and Ryan Shea, two engineers who met at Princeton University, are the key figures behind Stacks.
Under the company name Blockstack PBC, the project evolved into its blockchain version in 2018, as Stacks 1.0 blockchain network. A year later, they raised $23M in an initial coin offering.
In time, Stacks upgraded to Stacks 2.0.
Stacks’ Unique Features
At the heart of Stacks is a fundamental question: How do you harness Bitcoin’s Proof of Work network? This is no small task. The value of BTC itself depends on its function as sound money and a blockchain that has never been successfully hacked.
That’s why the Stacks team developed a unique consensus algorithm called Proof of Transfer (PoX). Moreover, they had to develop a brand-new programming language, Clarity, to write smart contracts.
Clarity was specifically designed to use simple syntax without compromising security. It is then up to PoX to directly connect Stacks blockchain to Bitcoin blockchain.
To do so, Stacks doesn’t use its own storage solution for hosting dApps. Instead, it relies on Gaia as a data storage solution.
While Gaia can tap into commercial cloud storage providers, it also allows Stacks users to store data themselves. Because Gaia is a decentralized open-source storage system, it is up to developers to decide where their dApps are plugged into.
How Does Stacks Connect to Bitcoin?
Stacks’ novel PoX is a modification of its original Proof of Burn (PoB) consensus, launched with Stacks 1.0. As its name implies, PoB allowed miners to burn crypto coins from another blockchain, by sending it to a dead address.
This is an address that is unretrievable because it doesn’t have private keys, which is why tokens sent there are described as “burned.”
Using PoB, Stacks settles all of its dApps transactions on the Bitcoin blockchain. By doing this, the consensus proves that a cost was exerted for generating new blocks.
This way, Stacks mimics Bitcoin’s PoW but doesn’t use computational energy. Instead, Stacks miners use BTC to generate blocks, which they get at the market’s spot price.
When PoB was upgraded to PoX, the tokens were no longer burned, but distributed to Stacks’ network participants as an incentive mechanism to secure the chain.
Stacks miners receive this reward as STX coins. Stacks miners generate blocks when they transfer Bitcoin to a predetermined but randomized cluster of BTC addresses. The more Stacks’ miner transfers Bitcoins, the more likely it is they get picked to generate Stacks blocks. In turn, they are more likely to receive STX rewards.
Like Bitcoin, Stacks miner rewards have a 4-year halving mechanism, but without going to zero:
- 1,000 STX per block generated in the first 4 years after Stacks mainnet launch
- 500 STX per block generated for the next 4 years
- 250 STX per block generated for the next 4 years
- 125 STX per block generated indefinitely
While BTC rewards will go to zero by 2140, STX miners will still have incentives to mine Bitcoin transfers.
Stacks is unique in that it doesn’t use either PoS or PoW. Nonetheless, it does have stakers. Because STX miners use Bitcoin transfers to receive mining rewards, those transfers have to go somewhere. Stacks stakers receive them.
For this reason, they have to register as one with a valid Bitcoin address. Furthermore, they have to register as STX holders, which are locked up to secure the network, just like post-Merge Ethereum validators.
While this sounds similar to Ethereum’s PoS, it is not in a fundamental way because Stacks stakers are secondary to miners.
To alleviate this confusion, Stacks’ stakers are called “stackers,” and the process itself is called stacking.
How Fast Is Stacks?
When a Layer 2 network is deployed to bundle up transactions off Layer 1 mainnet, this is called Layer 2 scalability solution. All that transaction data is unburdened from the mainnet and returned as a single block, whether it is Ethereum’s Arbitrum or Bitcoin’s Lightning Network.
This lowers the mainnet transfer fees, while simultaneously offering near-instant network transfers for end-users.
Stacks should not be confused with this approach. Because it is tapped into Bitcoin, Stacks block generation matches that of Bitcoin, at around 10min per block. With that said, Stacks is scalable thanks to its microblocks.
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The main Bitcoin blocks that Stacks uses for mining its own blocks are called anchor blocks. They are aligned with Bitcoin’s 10-minute output. While they are generated, Stacks also generates microblocks, which allow for fast transaction settlements as they are integrated into anchor blocks.
In other words, Stacks’ microblocks are generated as pre-confirmed transactions, making the Stacks network scalable. Moreover, PoX is not just limited to streaming Bitcoin block hash to Stacks. If another network stream is added to Stacks’ dApp, it can further upscale.
Where Are Stacks dApps?
Stacks dApps are the web front-end of smart contracts hosted on Stacks 2.0 blockchain. Secured by Bitcoin transfers, these dApps cover the entire gamut of DeFi. From DeFi and NFT to social and DAO, you can explore Stacks dApps here.
For instance, Arkadiko dApp collateralizes STX tokens to mint a USDA stablecoin, which is then used for yield farming in lending and exchange dApps. Because they remove inherent crypto volatility, algorithmic stablecoins are still in demand despite Terra’s UST depegging.
To connect to Stacks dApps, one first has to download Hiro Wallet.
Will Bitcoin’s Reputation Boost STX?
Stacks is a one-of-a-kind project. The crypto space is largely divided between a more conservative outlook, represented by Bitcoin, and a more VC-focused space, represented by PoS networks.
If Stacks adoption kicks in, we may see it unlocking Bitcoin’s enormous reputational value as an inviolable asset. In turn, the narrative may shift from “Ethereum killers” to Stacks displacement.
This series article is intended for general guidance and information purposes only for beginners participating in cryptocurrencies and DeFi. The contents of this article are not to be construed as legal, business, investment, or tax advice. You should consult with your advisors for all legal, business, investment, and tax implications and advice. The Defiant is not responsible for any lost funds. Please use your best judgment and practice due diligence before interacting with smart contracts.