BTC Ecosystem Accelerator: Discussing the Investment Value of $STX from Stacks' Nakamoto Upgrade

Author: @JellyZhouishere, @GryphsisAcademy

TL;DR

• The long-term value of Stacks depends on the growth of the Stacks ecosystem and the relevant demand for Clarity smart contracts. Currently, the ecological construction of Stacks is relatively stagnant, with slow absolute numbers and growth of developers and actual users;

• The main price drivers for Stacks include: halving narrative, being the only circulating token project in the BTC Layer 2, compliance narrative, upgrades, and the emotional premium brought by the booming Ordinals ecosystem;

• The Nakamoto upgrade is the next major upgrade for Stacks, expected to launch in Q1 2024, and will be a potential important catalyst for $STX price movements. For Stacks, the Nakamoto upgrade means sharing network security with BTC, launching sBTC, supporting BTC atomic swaps, fast block times, and supporting multiple development languages.

• The roadmap for the Nakamoto upgrade is divided into three phases, currently in the second phase, with the Nakamoto consensus launched on the testnet; sBTC v0.1 has been launched as a smart contract, further starting early testing in a real-time environment. Full rollout is expected in the first quarter of next year. If progress goes smoothly, speculation on the upgrade event is expected to start early.

• In summary, as a chain, it currently has technology but lacks commercialization capability, market enthusiasm, has a roadmap but no ecosystem or TVL, yet possesses many potential speculative elements (upgrades, halving, compliance, one of the most famous and influential Layer 2s in BTC), and is recommended to be viewed as a BTC-related meme/High leveraged beta.

Features of Stacks

Stacks is a Bitcoin smart contract layer aimed at enabling smart contracts to use Bitcoin as an asset and settle transactions on the Bitcoin blockchain in a trustless manner. Stacks has the following features:

• Stacks has its own chain, compiler, and programming language called Clarity. It runs in sync with Bitcoin. Essentially, it builds a new chain outside the Bitcoin chain, with an independent governance structure and transaction model.

• It integrates with the Bitcoin main chain not by bridging assets through cross-chain bridges, but by submitting anchoring transactions on the Bitcoin main chain. These anchoring transactions contain a summary of the block header information from the Stacks chain and some additional information, which is broadcast to the Bitcoin network to ensure immutability.

• It allows applications and smart contracts to use BTC as their asset or currency, settling their transactions on the Bitcoin main chain.

• Stacks uses the PoX (Proof of Transfer) consensus algorithm: miners and transaction validators are two roles in Stacks, where transaction validators need to stake STX tokens (to mine BTC), while miners need to stake BTC on the Bitcoin main chain (to mine STX).

STX: Project Value Analysis

The long-term value of Stacks depends on the growth of the Stacks ecosystem and the relevant demand for Clarity smart contracts because:

• Due to high transaction fees, miners can see an increase in mining value, which incentivizes them to acquire STX to participate in consensus.

• STX is designed to pay for transaction fees and smart contract execution, and STX Stackers will be able to benefit from the growth of the Stacks ecosystem.

• However, currently, the ecological construction of Stacks is relatively weak, with almost no strong projects, and the absolute number and growth of developers and actual users are slow;

• TVL: 19.13M

• Main reason: high technical development difficulty and low market enthusiasm.

Source: Defillama (https://defillama.com/)

Source: https://defillama.com/chain/Stacks

Development History and Price Drivers of Stacks

Key milestones in the development history of Stacks are as follows:

• The evolution of Stacks began in 2013. The project was created by founders Muneeb Ali and Ryan Shea. Stacks is the product of Muneeb Ali's doctoral thesis, which detailed an internet framework that could be built around the Bitcoin blockchain. This framework is known as Blockstack.

• In 2014, it participated in the Y Combinator batch, making initial research and development possible. Muneeb Ali and Ryan Shea raised funds from Union Square Ventures, Naval Ravikant, SV Angel, Winklevoss Capital, and others in the early stages.

• In 2017, it raised $47 million through a token issuance and in 2019 raised $23 million through SEC-certified U.S. Reg A+ and Reg S offerings. Over 4,500 Stacks holders participated in these offerings, including USV, Lux, DCG, Winklevoss Capital, Blockchain Capital, Foundation Capital, Hashkey, Fenbushi, and others.

• Q4 2018 Mainnet launch

• Q4 2018 Official wallet Hiro Wallet released

• Q2 2019 Submitted $50 million to SEC for compliant token issuance

• Q2 2019 Stacks 2.0 white paper released

• Q2 2019 Introduced Clarity contract development oracle

• Q3 2019 Became the first SEC-compliant public offering project

• In 2020, Blockstacks was renamed to Stacks.

• Q1 2020 Implemented Proof of Transfer (PoX) consensus mechanism

• Q2 2020 Stacks 2.0 testnet launched

• Q2 2020 Submitted development report to SEC

• Q4 2020 After the launch of Stacks 2.0, STX is no longer considered a security regulated by U.S. law (the SEC has not publicly agreed to this view)

• In January 2021, Stacks 2.0 mainnet launched and became compatible with Clarity smart contracts.

• Q2 2021 Launched Stacks Accelerator ecosystem development project

• Q2 2021 Released Stacks scaling solution Hyperchain

• Q4 2021 Audited Clarity contracts

• Q2 2022 Released version 2.05.0.2.0

• Q1 2023 Stacks 2.1 version released

• Q1 2023 Launched Hiro developer platform

• Q4 2023 Major update, Nakamoto network release

• Q4 2023 Major update, sBTC release

Combining the development history of Stacks, it is not difficult to find that the main price drivers for Stacks are as follows:

• Halving: BTC halving will occur in about a year, and its post-halving security will bring more attention to BTC Layer 2, while the market is also looking for trading opportunities related to halving with higher volatility.

• The only circulating token project in BTC Layer 2: STX is currently the most complete BTC Layer 2 and the only circulating token project in BTC Layer 2, with a market cap still relatively small compared to Ethereum's L2.

• As network usage efficiency improves and block space becomes more valuable, the BTC costs that miners need to pay will also increase accordingly, which will simultaneously enhance the returns for STX stakers.

• Compliance narrative: The first compliant token issuance by the SEC

• Upgrades

• The booming Ordinals ecosystem brings funding and emotional premiums to BTC Layer 2.

Nakamoto Upgrade

The Nakamoto upgrade is the next major upgrade for Stacks, expected to launch in Q4 2023, and will be a potential important catalyst for $STX price movements. The main significance of the Nakamoto upgrade for Stacks is as follows:

(1) Sharing network security with BTC: Transactions are settled on the Bitcoin network. This feature makes Stacks transactions more secure and reliable, and it becomes a true Layer 2 rather than a sidechain with its own independent state.

(2) Launching sBTC: Introducing the Bitcoin-pegged asset sBTC allows smart contracts to run faster and cheaper, making it easy to transfer BTC in and out of Stacks L2. This is beneficial for the development of the Bitcoin DeFi market.

When converting BTC to sBTC: Send BTC to a multi-signature address and initiate a transaction on the Stacks network, triggering a smart contract that sends BTC to the multi-signature address and creates the corresponding amount of sBTC assets on the Stacks network.

When converting sBTC back to BTC: Send a message to the smart contract and initiate another transaction on the Stacks network, triggering another smart contract that destroys the corresponding amount of sBTC assets and sends the corresponding amount of BTC to the user.

The comparison between sBTC and WBTC is as follows:

(3) Supporting BTC atomic swaps: Bitcoin addresses can own and move assets defined on the Stacks layer, such as STX, stablecoins, and NFTs, and transfer them through Bitcoin L1 transactions.

(4) Clarity language: The security of on-chain smart contracts can be significantly improved.

(5) Bitcoin state reading: It can fully read data from the Bitcoin chain, supporting the reading of Bitcoin transactions and state changes, and executing smart contracts triggered by Bitcoin transactions. The Bitcoin reading function can keep the data of the Bitcoin L1 layer network and the L2 layer network in sync.

(6) Fast block times: The current block time is 10 minutes, which can be reduced to 4-5 seconds after the upgrade, breaking the 10-minute block limit of BTC, writing the transaction hash into Bitcoin to ensure network security with each Bitcoin block.

(7) Customized subnet supports multiple development languages: Scalability layers such as subnets can make different trade-offs in performance and decentralization compared to the Stacks mainnet. Subnets can support other programming languages and execution environments (such as Ethereum's Solidity and EVM), allowing all Ethereum smart contracts to use Bitcoin-pegged assets and settle on the Bitcoin chain.

The roadmap for the Nakamoto upgrade is as follows:

The sBTC to be launched in this upgrade is divided into three phases, and the second phase is currently underway.

Source: https://www.stacks.co/explore/events

Testing page:

Source: https://www.stacks.co/explore/events

The first phase lays the foundation for the upgrade, launching the MVP product of sBTC on the testnet, deploying the developer version to the mainnet and testnet, lasting 6 months; the second phase implements sBTC mainnet activation and Nakamoto network release, expected to last 6 months; the third phase will focus on scalability, building the flywheel of the application ecosystem, further expanding the Bitcoin economy, which is a relatively medium to long-term task.

Currently, sBTC has been launched and early testing is underway in a real-time environment. Full rollout is expected in early next year. If progress goes smoothly, speculation on the Stacks upgrade event is expected to start early.

Conclusion:

First, discussing the project itself:

• Stacks, as an old project traceable back to 2013, has significant recognition and influence in the BTC core community and the Western cryptocurrency space;

• Technology: It has a unique technology with its own chain, compiler, and programming language, running in sync with Bitcoin. Essentially, it builds a new chain outside the Bitcoin chain, with an independent governance structure and transaction model. The downside is that the technical development difficulty is relatively high;

• Ecological construction: Relatively lagging, with the entire chain's TVL at 19M, and has not exceeded 10M for most of its existence;

• Lack of representative projects, with slow absolute numbers and growth of developers and actual users;

• Low commercial sensitivity; the boom of Ordinals and Brc20 has not brought actual gains to the Stacks ecosystem; although Stacks has expressed interest in Ordinals afterward;

• Slow development progress; the pace of ecological construction is very slow;

• Future construction focus: Bitcoin DeFi, BTC NFT, and other applications; currently still slowly building infrastructure;

Secondly, regarding $STX:

• It remains in sync with BTC, often acting as a beta for the market; there was a brief period of alpha earlier this year due to speculation on the Nakamoto upgrade expectations at the end of the year;

• Speculative points:

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• Halving: BTC halving will occur in about a year, and its post-halving security will bring more attention to BTC Layer 2, while the market is also looking for trading opportunities related to halving with higher volatility;

• Nakamoto network upgrade;

• One of the few token issuance projects in BTC Layer 2, currently the most complete BTC Layer 2;

• As network usage efficiency improves and block space becomes more valuable, the BTC costs that miners need to pay will also increase accordingly, which will simultaneously enhance the returns for STX stakers;

• Compliance narrative: The SEC's first compliant token issuance, with many compliance narratives being speculated 21 years ago: became the first SEC-compliant public offering project in Q3 2019, and after the launch of Stacks 2.0 in Q4 2020, STX is no longer considered a security regulated by U.S. law (the SEC has not publicly agreed to this view, but has tacitly allowed it), and currently, compliance narratives are mentioned less frequently;

Finally, regarding the Nakamoto upgrade:

• What the upgrade entails:

• Enhancing the performance and security of Stacks;

• Launching the Bitcoin-pegged asset sBTC;

• Supporting multiple development languages: Subnets can support other programming languages and execution environments (such as Ethereum's Solidity and EVM), allowing all Ethereum smart contracts to use Bitcoin-pegged assets and settle on the Bitcoin chain.

• Roadmap:

• Currently, Nakamoto has launched on the testnet, with full rollout expected in early next year. If progress goes smoothly, speculation is expected to begin before the network upgrade is launched (which needs to be continuously tracked and confirmed).

In summary, as a chain, it currently has technology but lacks commercialization capability, market enthusiasm, has a roadmap but no ecosystem or TVL, yet possesses many potential speculative elements (upgrades, halving, compliance, one of the most qualified, famous, and influential Layer 2s in BTC), and is recommended to be viewed as a BTC-related meme/High leveraged beta.