Rediscovering Stacks: Bitcoin's Longest-Running Layer 2 Completes Nakamoto Upgrade, Will BTC DeFi Be the Next Focus?

Original Title: "Revisiting Stacks: Bitcoin's Longest-Running Layer 2 Completes Nakamoto Upgrade, Will BTC DeFi Be the Next Focus?"

Original Author: TechFlow from DeepTech

As Bitcoin surged past $90,000, various ecosystems in the crypto market began their own celebrations.

The AI narrative continued to be hot, and the Meme trend continued to play out the myth of wealth creation... However, in this frenzy, the projects in the Bitcoin ecosystem seemed more like outsiders: while everyone else was partying, they were left with nothing.

Evidently, the positive effects of Bitcoin's rise did not spill over much into the projects within its own ecosystem.

Even compared to the "black sheep" Ethereum, whose proud DeFi sector occupies nearly 17% of Ethereum's total market value, Bitcoin has maintained around 50% of the market value of the entire market. Yet, its DeFi ecosystem's total value locked (TVL) is less than 1% of the entire market (data from CMC research report).

However, the crypto market has always followed the rule of attention and narrative rotation.

An oversized gap also contains opportunistic stages. After the era of inscriptions and staking gameplay, the BTC ecosystem fell silent; yet, there is always a possibility of ignition in the face of a huge gap.

Some projects that have been deeply rooted in the Bitcoin ecosystem for many years may also see their opportunity, often just lacking a catalyst.

As various Meme coins take turns to stage "explosive rallies," Stacks, as one of Bitcoin's earliest Layer 2 solutions, has chosen a quiet path—focusing on technical transformation—and has finally completed the long-awaited Nakamoto upgrade.

Don't forget, last year STX also had a Meme-like quality, and the price was once pumped 10x.

What will this upgrade bring, will it be a new opportunity for a launch?

In the current market environment with high speculation sentiment, how much room for imagination does a project like Stacks, which focuses on technical innovation, still have?

An old store with a new exploration, let's once again get to know this old friend Stacks.

The Nakamoto Upgrade, Not Just a Technical Restructuring

The core of the Nakamoto Upgrade lies in a comprehensive revamp of Stacks 2.0's PoX consensus mechanism. To understand the significance of this upgrade, we first need to understand the limitations of the current PoX mechanism.

In the current PoX mechanism, confirmation of Stacks blocks requires waiting for the Bitcoin network to generate a new block to be completed. While this mechanism inherits Bitcoin's security, it also brings about efficiency issues: even simple transactions require waiting for Bitcoin's block time of about 10 minutes. More importantly, since Stacks block confirmations rely on Bitcoin block accumulation, users often need to wait for multiple Bitcoin blocks (usually 6 blocks, about 1 hour) to ensure transaction finality.

Grayscale's analysis provides a more intuitive display of the potential performance gap before and after the upgrade:

(Source: Grayscale Report)

The new Nakamoto PoX addresses this performance issue by introducing a "fast block confirmation" mechanism. In the upgraded system, while waiting for Bitcoin block confirmations, transactions can be pre-confirmed through an internal consensus mechanism. This allows most transactions to be confirmed within minutes while still maintaining ties to the security of the Bitcoin network.

In terms of security architecture, the upgrade has brought substantial improvements. While the original Stacks wrote its block hash into Bitcoin transactions, this one-way security inheritance posed potential risks. In the new architecture, miners need to participate in both Bitcoin mining and Stacks validation, creating a two-way security verification mechanism. This not only increases the cost of attacks but also ensures honest behavior from validators through economic incentives.

Improvements in interoperability are reflected in the reengineering of the underlying architecture. Prior to this, the interaction between Stacks and the Bitcoin network required completion through a complex relay mechanism, which not only introduced delays but also added additional trust assumptions. The new architecture adopts a direct state verification mechanism, allowing Stacks nodes to directly read and validate the state of the Bitcoin network, greatly simplifying the complexity of cross-chain operations. This improvement laid the foundation for subsequent innovative applications, especially the implementation of sBTC.

We can also use a table to quickly understand the details and potential significance of the Nakamoto Upgrade:

Additionally, according to Grayscale's research report analysis, post-Nakamoto Upgrade, the Stacks protocol will offer unique features including:

(i) Bitcoin-collateralized stablecoins,

(ii) Bitcoin-based lending (and native Bitcoin rewards),

(iii) Bitcoin-based decentralized autonomous organizations.

Similar to the 2017 fundamental financial primitive driving the development of the Ethereum DeFi ecosystem, given Bitcoin's current prominent position, its ecosystem may now also experience robust growth.

sBTC, Innovative Application of Bitcoin on Stacks

This upgrade looks promising, but what substantial changes will it bring to the ecosystem and products?

From Stacks' first-party perspective, a new product that comes with the upgrade is sBTC.

As a decentralized two-way anchored Bitcoin protocol, sBTC's design intention is simple: to make Bitcoin, the "digital gold," more flexible and a truly programmable productive asset.

So, the aforementioned sBTC in the table can be understood as an innovative Bitcoin wrapping protocol that allows Bitcoin to operate on the Stacks network in the form of smart contracts.

Whether it's an infrastructure project or it needs to be closer to the issuance asset to garner more attention and create more gameplay.

This vision may not sound new. There have been many similar attempts in the market, such as the widely accepted wBTC on Ethereum, which, even in a centralized custody model, once reached locking amounts of 50-150 billion dollars. However, sBTC's ambition is clearly more than that—it aims to be a truly decentralized solution that aligns with the spirit of Bitcoin.

The core mechanism of sBTC is actually very intuitive: when a user locks BTC on the Bitcoin mainnet, the Stacks network mints an equivalent amount of sBTC, strictly maintaining a 1:1 pegged relationship. Users can use these sBTCs to participate in smart contract interactions, and when redemption is needed, simply burning the sBTC will automatically release the corresponding amount of BTC.

It sounds simple, but the real technical challenge lies in how to ensure the decentralization and security of this process, which is also what makes sBTC stand out.

It has no predefined manager but instead relies on an open and dynamic set of signers to operate the whole system. All key operations take place on the Bitcoin mainnet, inheriting Bitcoin's security features.

Signers earn BTC rewards through Stacks consensus, and this economic incentive ensures the system's sustainable operation. More importantly, sBTC directly achieves price oracle functionality on the Bitcoin mainnet without relying on any external data sources.

Timing is crucial. In the Bitcoin ecosystem, the emergence of sBTC is timely. With the completion of the Nakamoto upgrade, the technical foundations are in place.

From a market perspective, Bitcoin DeFi's TVL accounts for less than 1% of the total, showing a huge disparity compared to its market cap, indicating significant room for development. What's even more encouraging is that several major Bitcoin organizations have explicitly stated their support for the sBTC initiative, demonstrating the industry's recognition of this innovation.

Regarding sBTC, it is important to note that it is not a direct part of the Nakamoto upgrade but rather a key application supported by this upgrade. The Nakamoto upgrade has provided the necessary technical foundation for sBTC through improved interoperability and security architecture.

According to the latest news from the Stacks-related blog, the sBTC upgrade is expected to launch in early December 2024. Currently, the community is voting on the SIP-029 proposal, which will optimize the Stacks token issuance mechanism and pave the way for the launch of sBTC.

And if you want to learn more about sBTC, the official One-Pager can basically help you quickly understand the general idea.

In the current Bitcoin ecosystem's "price up, ecosystem stagnant" context, the emergence of sBTC may be a catalyst to change this situation. Just as Ethereum in 2017 drove the development of the DeFi ecosystem through foundational financial primitives, the Bitcoin ecosystem may only be lacking such an opportunity.

Ecosystem and Data Overview

Whether before or after the upgrade, Stacks itself remains infrastructure, and its development progress is inseparable from the construction of ecosystem projects.

After the Nakamoto upgrade, leveraging sBTC, Bitcoin smart contract functionality, and scalability improvements to unlock BTC ecosystem liquidity, various projects in the ecosystem may also benefit as a result.

The Stacks ecosystem has over 60 DApps, most of which are related to DeFi and NFTs. Among these, DeFi protocols have relatively benefited more from the upgrade bonus. Through the Nakamoto upgrade, users only need to lock their BTC to mint sBTC on Stacks and use sBTC in DeFi, such as stablecoin lending, borrowing, asset swapping, etc. For DeFi protocols built on Stacks, users can earn BTC rewards.

Currently, some good DeFi protocols are as follows:

· Alex Labs: Building the most comprehensive Bitcoin DeFi ecosystem through Stacks. Alex Labs extends products such as Lisa (Stacks' version of liquidity staking), launchpad, and cross-chain bridges to the Runes ecosystem;

· Arkadiko: Adopts a CDP (Collateralized Debt Position, similar to MakerDAO) model, allowing users to mint stablecoins, generating Bitcoin yields;

· StackingDAO: A liquidity staking protocol on Stacks that allows staking Stacks to generate additional yield;

· Zest: On-chain lending protocol;

· Bitflow Finance: DEX in the ecosystem;

According to data from Signal 121, most of the currently staked STX is flowing to StackingDAO, followed by LISA and Stackswap.

Correspondingly, the active addresses within the Stacks ecosystem are mostly in the DeFi protocols shown in the above graph, with the volume of funds in different ecosystem projects and the level of address activity being positively correlated. Protocols with the highest amount of staked funds often have the most active addresses.

However, when looking at the total TVL and the aggregated number of addresses, there is indeed a significant gap between DeFi on Stacks and on Ethereum, which, from another perspective, corroborates the opening point of the article – what we often need is a tipping point and a catalyst to turn the gap into upward potential.

Clearly, this gap is difficult to fill with a meme. It is worth noting that there are also some Meme projects on Stacks, but their cultural attributes, influence, market capitalization, and activity level still differ significantly from those on Solana.

Therefore, as the Stacks infrastructure matures, whether there will be more asset creation gameplay similar to those in the previous cycle of the BTC ecosystem, such as NFTs, will directly impact the vibrancy of the Stacks ecosystem.

However, the bridge has been built, and what kind of vehicle will ultimately run on it will still require time to observe.

Future Outlook: When Technological Innovation Meets Ecosystem Incentives

In the Bitcoin ecosystem, we often discuss a key question: What is the relationship between technological innovation and market acceptance?

Does having the technology mean the market will definitely adopt it? The answer is certainly no; many times, whether the market adopts it depends on the project's operational strategy and planning.

Technological upgrades are just the core, with sBTC as the potential force multiplier. Encouraging more people to participate in sBTC's development from both the supply and demand sides is the next critical move for Stacks.

Therefore, the recently launched "Best & Brightest" plan by Stacks is essentially a significant innovation project solicitation aimed at the Bitcoin ecosystem. In simple terms, it provides comprehensive support for developers and teams looking to build innovative applications on Bitcoin—kind of like a "Bitcoin ecosystem innovation accelerator."

This plan will gradually unfold starting from late November 2024, covering various key areas of the Bitcoin ecosystem such as miners, wallets, and exchanges. It caters to both individual developers' growth space and provides ample development funds for established teams.

To ensure the security and reliability of these innovations, Stacks has also specifically invited top-tier security teams to join. For instance, Immunefi (an on-chain security platform protecting over $190 billion in assets, with over 45,000 security researchers) will host a dedicated "Attackathon" event to allow white-hat hackers to test and fortify the security of these innovative projects in advance.

Interestingly, the timing of this plan's launch is just right. As Bitcoin price hits new highs and the market is generally engulfed in speculative frenzy, Stacks has chosen a seemingly slow but potentially more visionary path: through solid technical innovation and ecosystem development, it aims to provide more possibilities for the entire Bitcoin ecosystem.

From an institutional support perspective, sBTC has already garnered support from over 20 prominent institutions, including BitGo, Blockdaemon, Figment, Copper, and Asymmetric. This broad institutional endorsement is not just a recognition of the technical solution but also a vote of confidence in the future development of the entire ecosystem.

We are likely to witness a wave of Bitcoin-based innovation. This is not only about the expansion of the Bitcoin ecosystem but also about potentially redefining our understanding of "Bitcoin applications."

After all, as Satoshi Nakamoto said on the Bitcoin Talk forum, "In the next few decades, as the new supply drops, transaction fees will be the main compensation for nodes. I believe in 20 years, either there will be very large transaction volume or no volume." And now, through such an ecosystem innovation plan, Bitcoin seems to be moving towards the former.

However, technological innovation ultimately needs to be validated by the market. In the current Bitcoin ecosystem where "price increases but ecosystem does not," will Stacks' approach be able to gain market acceptance?

The answer to this question may have to wait until sBTC is officially launched and until more Stacks-based innovative applications emerge.

Source: Original Article