Bitcoin and Smart Contracts.
Did you know that smart contracts cannot run on the Bitcoin network?
But what if I told you that there is a solution that could solve that problem? This is where Stacks comes in!
Stacks, also known by the market ticker STX, is a Layer-2 blockchain designed for running smart contracts and scaling up the speed of the Bitcoin network.
At its core, Stacks aims to provide similar levels of smart contract functionality to the Bitcoin network as can be seen on the Ethereum network, while also improving the speed of transactions on the Bitcoin network overall.
But, how does Stacks achieve this when Bitcoin wasn’t designed with smart contract functionality in mind?
Today we find out!
What is Stacks?
Stacks was founded by Muneeb Ali and Ryan Shea, originally as a project named Blockstack back in 2017, before rebranding to Stacks in 2019.
Fundamentally, Stacks is a layer-2 smart contract blockchain that enhances the Bitcoin blockchain by adopting it as its data settlement layer and provides the Bitcoin network with additional speed and smart contract functionality.
But what exactly does all that mean?
To keep it short and simple, a layer-1 blockchain would be the fundamental, base layer of a blockchain network.
In the case of Stacks, the Layer-1 network would be Bitcoin, and the Layer-2 would be Stacks which sits on top of the Bitcoin network and provides additional functionality for the Layer-1 network.
Next, the data availability layer in blockchain networks refers to the infrastructure or protocol mechanisms responsible for ensuring that data, such as transactions or smart contract data, is reliably accessible to all participants in the network and plays a crucial role in maintaining the integrity of the blockchain network.
And finally, by additional speed, I mean the Bitcoin blockchain’s ability to process more transactions per second than is standard for the Bitcoin network.
But, to really explain the benefits of this arrangement, we need to talk a bit about how Stacks works.
How Does Stacks Work?
Stacks works by utilising the Bitcoin network for security and decentralisation, and in exchange offers an execution layer that offers an improved user experience and more utility than simple financial transactions between individuals.
You can think of Stacks as a “semi-independent” layer for the Bitcoin network, as while it does run its own autonomous consensus mechanism, it ultimately relies on Bitcoin for its security and transaction validation.
To break that down, Stacks lets Bitcoin do most of the heavy lifting in regards to running the blockchain, which given the strength, decentralisation, and longevity of the Bitcoin network is likely a good decision.
The benefit here is Stacks can let Bitcoin focus on running and securing the network and instead use 100% of its resources to help Bitcoin with a specific objective – which is to enable smart contract functionality and to speed up the transaction speed of the Bitcoin network.
Stacks still publish proof of transactions on the Bitcoin network, which Bitcoin then verifies and adds to its ledger, but it uses its own consensus mechanism to do so, known as Proof-of-Transfer. But what exactly is Proof-of-Transfer?
To keep it short, Proof-of-Transfer can be thought of as a mix of Proof-of-Stake and Proof-of-Burn.
To keep it simple, Proof-of-Transfer comes down to two main components, Miners and Stackers.
Miners spend Bitcoin to earn new STX tokens, plus the transaction processing fees of the block.
Stackers, which are similar to Stakers under Proof-of-Stake, signal their support by Stacking their STX tokens to earn Bitcoin as a reward.
Under Proof-of-Transfer, STX miners bid to become the leader to mine the next block.
To achieve this, they bid in Bitcoin, and the protocol then selects the winning miner, or leader, through a Verifiable Random Function to ensure a fair chance for all participants.
Once elected, the leader writes the Stacks blockchain’s new block and also mints the rewards, which are the newly minted STX tokens, plus the fees for any smart contracts and transactions on that block.
The Bitcoin used for the miner bids is then sent to addresses corresponding to STX token holders that actively participated in the consensus.
As with the Miners, these Stacker reward addresses are also selected at random with the help of the Verifiable Random Function to ensure a level playing field.
This completes a cycle where the Bitcoin consumed in the mining process goes directly to the productive Stackers as a reward based on their holdings of Stacks and participation in the network’s consensus.
But what really makes Stacks a game-changer?
What makes Stacks unique?
In short, enabling smart contract functionality is the unique proposition with Stacks.
But one unique feature is the difference between Stacking and Staking.
While I said Stacking works similarly to Staking on networks such as Ethereum, there are some key differences which set Stacks apart from regular Proof-of-Stake networks.
For example, Proof-of-Stake can have their funds slashed based on their network activity since they are staked to a network.
However, under Proof-of-Transfer, user’s funds never leave their wallet so there’s no chance of losing them or having them slashed for inactivity.
But perhaps more fundamentally, under Proof-of-Stake rewards received from staking are often sold to offset maintenance and uptime costs which can create selling pressure on the asset.
However, under Stack’s Proof-of-Transfer, as earnings are paid in BTC, but the reward that generates that BTC is STX, this incentivises holding STX as it generates BTC, thus minimising any selling pressure as that is more likely to occur with BTC than STX.
But how about the tokenomics?
STX Tokenomics
In total, there will only ever be 1.8 billion STX tokens, which are created and released through the transfer mechanisms mentioned previously.
By the time all STX tokens are released, the Initial Distribution will look as follows:
29.2% will have been sold during the 2017 token sales, Hiro PBC Treasury will acquire 14.2%, the 2019 token sales will have been worth 8.9%, Equity investor distribution will be 8%, the Team will also take 7.9%, and the Stacks Foundation Treasury will receive, 7.4%.
Followed by Liberated Software LLC with 6.6%, co-founder Muneeb Ali also at 6.6%, Independent Entitles receiving 4.1%, Research Universities will acquire 3.8%, Blockchain.com will be allocated 2.4%, and the final 0.9% has been allocated to ‘Others’.
There is a reason why Stacks is ranked so highly in the crypto market rankings and that is ultimately because it has a clear use case, which was both needed and in demand.
In short, Stacks enables smart contract functionality on the world’s largest, and oldest cryptocurrency blockchain.
As such, as long as Stacks can avoid any mishaps in management, I believe it is likely the best days for Stacks will still be ahead.
Though, of course, as always, nothing is ever guaranteed in crypto.
How to create a Stacks wallet
Step 1: Visit https://www.xverse.app/
Step 2: Download and install xverse wallet from your mobile app store or your browser.
If you want to support the blog, please donate STX to this address: SP2ATB6AV7W5N6WKCHCJT3P1NVKHXMRCT0XNA1247