KEY TAKEAWAYS
Stacks enables smart contracts capabilities in the Bitcoin network, opening up new possibilities for decentralized applications.
Stacks uses Bitcoin’s strong security, providing a reliable and trustworthy platform for developers and users.
To create new blocks on its blockchain, Stacks uses a method called proof-of-transfer (PoX).
Users can purchase Stacks (STX) for various purposes within the ecosystem, including staking, governance, and payments.
What Is Stacks Blockchain?
“Stacks is a unique layer-2 platform that operates on the Bitcoin blockchain, enabling smart contracts and decentralized applications (dApps)”. One of its primary functions is creating a bridge similar to those usually on Ethereum. It connects Bitcoin with the world of smart contracts and allows developers to build applications on the blockchain.
The U.S. Securities and Exchange Commission (SEC) concluded its investigation into Stacks in July 2024. The project had faced uncertainty regarding its regulatory standing due to its unique approach to aligning its features and the STX token, its native cryptocurrency, with existing securities regulations. When the SEC finished the investigation, the price of stacks Jumped 10%.
Who Are the Founders of Stacks?
Stacks, originally created as Blockstack, was co-founded by computer scientist Muneeb Ali and engineer Ryan Shea in 2013. They aimed to create a decentralized internet by leveraging Bitcoin’s blockchain.
The project has received backing from prominent investors such as Union Square Ventures and Winklevoss Capital.
What Gives Stacks Value?
Stacks derives its value from its unique features in the blockchain ecosystem in general, particularly in relation to Bitcoin, arguably the most established network.
Stacks’ value primarily comes from its role in extending Bitcoin’s utility. By anchoring to it, Stacks ensures that its transactions benefit from the security of the underlying network while introducing innovative features.
Moreover, the increasing demand for dApps and the potential for Stacks to become a leading platform in the crypto landscape, pumping up the price of STX, adds to its growth potential and, therefore, its value.
Key Features and Benefits of Stacks
Some key factors contributing to Stacks’ value include:
Security: As a Layer 2 solution on Bitcoin, Stacks inherits the robust security of the Bitcoin network while operating as a separate, functional layer.
Proof of transfer (PoX): This consensus mechanism leverages Bitcoin’s PoW by requiring participants to transfer Bitcoin to engage in mining activities.
Interoperability: Stacks’ ability to bridge Bitcoin with smart contracts opens up new possibilities for dApps.
Scalability: By operating as a Layer 2 solution, Stacks can potentially improve the scalability of Bitcoin and handle a higher volume of transactions.
STX token utility: STX tokens are used for transaction fees, smart contract execution, and participating in Stacks’ governance model.
Their website states that “Stacks is the leading Bitcoin Layer-2, enabling smart contracts and decentralized applications to use Bitcoin as a secure base layer.”
However, it is important to note that Stacks is often considered a Layer 1 blockchain that leverages Bitcoin for security rather than a typical Layer 2 solution. Layer 2 solutions generally operate on top of another blockchain without creating their own blocks, whereas Stacks does create its own blocks and primarily uses Bitcoin for consensus and security.
How Does Stacks Work?
Stacks represents a significant advancement in blockchain technology, using a unique approach to integrate the following elements:
The Stacks Protocol and Its Components
The Stacks protocol consists of multiple components that work together to bring smart contracts and decentralized applications to Bitcoin. These include Clarity, the smart contract language used by Stacks, and its consensus mechanism, PoX, responsible for securing and aligning the network with Bitcoin.
In PoX, miners on the Stacks blockchain transfer Bitcoin to participate in the mining process, effectively linking Stacks to Bitcoin. This transfer helps secure the Stacks chain while maintaining Bitcoin’s energy-efficient PoW security model.
Participants, called “Stackers,” lock their Stacks tokens (STX) to support network consensus and governance. In return, they are rewarded with Bitcoin from the transferred mining funds, making PoX one of the few mechanisms where participants can earn BTC as a reward for securing another blockchain.
The Two-way Peg Between Bitcoin and Stacks
A key feature of the Stacks blockchain is its two-way peg with Bitcoin, allowing assets and data to flow between the two networks. This ensures that the two blockchains remain synchronized and secure.
In Stacks, miners or stackers transfer the committed cryptocurrency to other network participants as an extension of the proof of burn consensus mechanism process.
The Stacks Blockchain Architecture
Stacks’ architecture is layered to operate on top of Bitcoin, ensuring that all transactions are anchored in the blockchain’s security. This architecture allows for scalability, enabling more complex operations while avoiding congestion on the Bitcoin network
Consensus Mechanism and Transaction Validation
Stacks’ PoX is distinct from both proof-of-work (PoW) and proof-of-stake (PoS) since it involves transferring Bitcoin as part of the mining process.
On Stacks, miners bid BTC to be chosen to write a new block to the blockchain. The likelihood of being chosen is proportional to the amount of BTC they bid.
STX users or stackers lock up their STX tokens to participate in the network’s consensus mechanism. This is similar to staking in other blockchain networks. In return, they receive rewards.
The Role of Stacks (STX) Tokens in the Stacks Ecosystem
The value proposition of STX tokens is tied to the success and growth of the ecosystem. In the Stacks ecosystem, STX tokens can be used for the following purposes:
Staking: STX token holders can stake their tokens to participate in the network’s consensus mechanism and earn rewards.
Governance: STX token holders have a say in the governance of the Stacks network, allowing them to vote on proposals and changes.
Payment: STX tokens are a means of payment within the Stacks ecosystem.
How STX Tokens Are Distributed
The initial distribution of STX tokens was indeed through an initial coin offering (ICO) in 2017. This ICO raised approximately $47 million, which was then used to fund the development of the Stacks project.
A portion of the total tokens was allocated to the Stacks Foundation Treasury, a non-profit organization responsible for overseeing the project’s development and governance.
Additionally, a portion was distributed to the founders and early contributors, advisors, and other key stakeholders including universities.
Users can now follow earn stacks by:
Stacking: STX token holders can commit their tokens to participate in the network’s consensus mechanism and earn rewards.
Airdrops: Stacks has conducted airdrops to distribute STX tokens to the community, often to incentivize participation and adoption.
How To Buy Stacks (STX)
Buying Stacks (STX) is straightforward. Users can purchase them on major cryptocurrency exchanges like Binance, Coinbase, and Kraken. These platforms offer trading pairs for STX against various fiat currencies and cryptocurrencies, making it accessible to a broad audience.
How To Make Passive Income With Stacks (STX)?
One of the primary ways to earn passive income with Stacks is through stacking. By stacking STX tokens, users can contribute to the network’s security and earn rewards in the form of BTC.
Solo Stacking or Participate in Stacking Pools
To engage in Stacking, you must have a minimum quantity of STX (which fluctuates per cycle but is typically approximately 100,000 STX). If you have fewer tokens, you can still join a Stacking pool.
Pooling allows users to combine their STX with others to meet the required threshold for Stacking, and rewards are distributed proportionally to each participant’s contribution.
As part of the PoX consensus process, miners transfer Bitcoin to you in return (not the native token). Every cycle, Stackers receive Bitcoin rewards (roughly two weeks). The number of persons stacking and the total amount of STX locked up determine the reward rate.
Runs a Stacks Node
By running a Stacks node, you help secure the network and participate in its governance. Although not strictly passive (since it requires some technical setup and maintenance), node operators may be able to earn rewards over time for their contribution to the network.
Lend STX Tokens or Earn Interest through DeFi Protocols
On certain platforms, you can lend out your STX tokens to other users and get paid interest. DeFi platforms that facilitate Stacks can be used for this.
Lending STX has variable interest rates according to the platform and demand in the market, but it’s an additional opportunity to generate passive income without getting involved in network governance.
Similarly, as DeFi grows on the Stacks blockchain, you can participate in yield farming or liquidity mining by providing liquidity to various DeFi protocols. These protocols reward you with interest or additional tokens for locking up your STX in liquidity pools, offering another passive income stream.
It’s important to note that stacking policies and rewards can vary between exchanges or platforms. You should always assess risks before investing in any passive income strategy.
Risks of Using Stacks
As with any other cryptocurrency, there are some risks associated with Stacks that are essentially linked to its nature.
Market volatility: The cryptocurrency market is known for its high volatility. The value of STX tokens can experience significant fluctuations.
Technological risks: Like any blockchain network, Stacks faces technological issues or security breaches that could impact its functionality and security.
Regulatory uncertainty: The evolving regulatory landscape for cryptocurrencies presents a risk. Changes in regulations could unpredictably affect the value and legality of STX tokens.
Despite these risks, recent advancements in the Stacks ecosystem have highlighted its potential positively. This reflects progress regarding the SEC approach to this specific cryptocurrency and can work as an incentive.
Conclusion
Stacks (STX) represents an interesting and promising development in blockchain technology that extends Bitcoin’s utility through smart contracts and dApps. It uses PoX consensus mechanism; this approach allows users to participate in network security and consensus by stacking, locking STX tokens, and receiving rewards.
The security of the Stacks network benefits significantly from its integration with the robust Bitcoin blockchain, ensuring that all transactions remain secure and reliable. Moreover, recent regulatory clarity has further boosted investor confidence, reflecting positively on STX’s market value.
However, as with any cryptocurrency, users should consider the associated risks, such as market volatility, technological challenges, and regulatory changes.
