Stacks is an open-source blockchain network that brings decentralized apps (dApps) and smart contracts to Bitcoin (BTC -2.83%). Even though they're separate blockchains, Stacks and Bitcoin are effectively able to work together.

The STX token is the network's native cryptocurrency, and it's notable for being the first token offering qualified by the U.S. Securities and Exchange Commission (SEC). It's used on Stacks for transaction fees and deploying smart contracts. In addition, it can be "stacked" and earn Bitcoin rewards.

In this guide to Stacks, we'll cover what it does differently than other blockchain projects and if you should consider investing in it.

What makes Stacks unique?

Like other programmable blockchains, Stacks has smart contract functionality, meaning it can be used for dApps and non-fungible tokens (NFTs). The unique thing about Stacks is that it links to Bitcoin and turns the Bitcoin blockchain into a programmable base layer. Most programmable blockchains, such as Ethereum (ETH -4.83%), start from scratch.

This means Stacks leverages Bitcoin's high level of security since Stacks' transactions are settled on Bitcoin. Stacks' dApps can also interact with Bitcoin even though it's a separate blockchain.

Stacks has several interesting features that make it stand out. Here are a few that are worth mentioning:

• It uses a consensus mechanism called “proof of transfer” that recycles Bitcoin's proof-of-work system. Proof of transfer makes Stacks highly scalable and decentralized without causing additional environmental impact.

• It uses microblocks to speed up transaction processing. Stacks is limited to the same block times as Bitcoin, but, by dividing blocks into microblocks, it can reduce processing times from minutes to seconds.

• It has its own smart contract language called Clarity. An advantage of Clarity over other smart contract languages is that users can set up their own conditions for transactions and aren't limited to preprogrammed conditions.

Where Stacks came from

Stacks has a lengthy development history dating back to 2013. Co-founders Muneeb Ali and Ryan Shea started working on the idea in the Princeton University computer science department. They originally named it Blockstack and released the platform design for it in 2015.

The Blockstack team spent years on research and development and securing funding. They launched the first testnet for the blockchain, called the Stacks network, in the second quarter of 2018. The testnet was followed by the release of the mainnet in October 2018.

They also worked with the SEC for almost a year to meet its qualifications for a token sale. They were able to hold an SEC-qualified sale of STX tokens in July 2019.

By October 2019, there were more than 300 applications built on Stacks. A year later, the project went through a full rebrand from Blockstack to the Stacks ecosystem, and Blockstack PBC became Hiro Systems PBC. Blockstack said the January 2021 launch of Stacks 2.0 meant the network would be decentralized and should no longer be considered a security.

How Stacks works

Stacks connects to Bitcoin and validates transactions through its proof-of-transfer consensus mechanism. Proof of transfer is a variation on another system called proof of burn, so it helps to understand how that works first.

Proof of burn requires that miners burn their own cryptocurrency to earn the right to validate transactions. By burning more, they can mine more blocks of transactions. To compensate them for their efforts, miners receive block rewards paid in the cryptocurrency they're mining.

Proof of transfer follows the same idea except miners must transfer their cryptocurrency to other participants in the network instead of burning them.

In the Stacks proof-of-transfer system, miners transfer their Bitcoin. The protocol randomly selects a winning miner who validates a block of Stacks transactions and receives a block reward, which is paid in STX tokens.

The Bitcoin is transferred to Stacks token holders who have chosen to participate in its consensus process by locking up their STX tokens. Once again, the protocol chooses a winner at random and sends the Bitcoin to their crypto wallet address.

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Partnerships

The Stacks ecosystem, whose governance is coordinated and whose growth is supported by the non-profit Stacks Foundation, is home to many independent entities working toward the growth of its network. Here are a few of the partners working with Stacks:

• Chainlink (LINK -7.77%) oracles have been integrated into the Stacks platform to provide financial market data.

• Algorand (ALGO -6.52%) is working with Stacks to support the design and development of the Clarity smart contract language.

• Blockchain infrastructure platform Blockdaemon has partnered with Stacks to provide a seamless path to running a Stacks 2.0 node.

Stacks also often gives out grants to a variety of projects, including decentralized finance (DeFi) platforms, developer tools, and much more. One of the more notable examples happened in December 2021 when Stacks helped fund CityCoins through its Stacks Accelerator program. CityCoins are cryptocurrencies built on Stacks that provide an ongoing crypto revenue stream to their respective cities.

Can I make passive income with Stacks?

You can make passive income with Stacks by locking up your STX tokens on the network. Stacks calls this "stacking," although it's essentially the same thing as crypto staking.

By stacking, you're contributing to the proof-of-transfer system and helping to keep the network secure. In return, you'll receive a share of the Bitcoin rewards transferred by Stacks miners.

There are a few different ways to stack STX tokens. The simplest is through a crypto exchange that supports stacking, such as Okcoin or Binance. If you're in the United States, note that Binance isn't available to U.S. residents, and Binance U.S. doesn’t offer the STX token.

You can also stack with your own crypto wallet. Most investors will need to join a stacking pool, such as OKcoin’s, because the minimum to stack on your own is generally about 100,000 STX.

Unique risks

If Stacks fails, the most likely reason will be a lack of interest either from developers or users. The network currently only has a few dozen dApps, so it's still very much in the early stages. That's the case with most programmable blockchains other than Ethereum, which has built a larger user base due to its first-mover advantage.

The other potential risk with Stacks is that it's closely tied to Bitcoin. Given the technical dependence of Stacks on the Bitcoin blockchain, its future success is dependent on Bitcoin's continued stable operation.

Of course, Stacks wouldn't be the only cryptocurrency with problems in that situation. Bitcoin leads the entire crypto market, so a Bitcoin crash would likely affect almost everything. However, Stacks would be hit harder than other blockchain networks because it relies so much on Bitcoin.