What is Stacks and does it really serve as DeFi for Bitcoin?

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Stacks is marketed as enabling “DeFi, NFTs, apps, and smart contracts for Bitcoin.” It’s a blockchain that tries to share in some of Bitcoin’s security by writing blockheaders into the Bitcoin blockchain. The Stacks chain uses the STX token as its native token.

However, recently the chain has been struggling as users attempt to register names using the Blockchain Naming Service — which made us wonder, how well does this work?

Is Stacks as secure as they say?

Fundamentally, Stacks is connected to Bitcoin because the ‘miners’ who participate in the process of securing the Stacks blockchain write their block headers to the Bitcoin blockchain using OP_RETURN when they ‘commit’ their Bitcoin to mine. So, Stacks uses Bitcoin as an additional data availability layer, making it possible for someone who can access the Bitcoin blockchain to determine which Stacks blocks have been broadcast and built on.

What this practically enables is the ability to better recognize bad actors. It’s still possible for a change in the Stacks client to happen and for previous state to be declared invalid.

The marketing of Stacks repeatedly emphasizes the idea that it’s secured by Bitcoin, but that truly only means “as a way to store history.

Is it “for Bitcoin?”

In order to use Bitcoin in most Stacks applications you need to first acquire xBTC — a wrapped form of bitcoin that was listed on OkCoin less than a year ago and now has zero 24h volume.

Currently if you have dollars or bitcoin and want xBTC, the easiest way to do that is to purchase STX on an exchange, transfer that STX to your wallet, then use a protocol like Alex to then swap your STX for xBTC. You can also acquire your STX by doing a submarine swap using a service like LN SWAP from Bitcoin.

In the future it hopes to be able to use atomic swaps to make it easier to onboard bitcoin into xBTC using something like the ‘Magic‘ protocol, to make it easier to swap between bitcoin and xBTC.

These user experience hurdles have probably contributed to the anemic usage of xBTC with less than 250 total bitcoins currently in use. This compares to over 244,000 bitcoins currently used for wBTC on Ethereum, and 16,000 bitcoins currently wrapped in Sollet for Solana. Even other chains that try to explicitly enable DeFi for Bitcoin, like Liquid and RSK, have 3,500 and 3,100 respectively.

Do the NFTs work?

One of the most popular use cases for NFTs on Stacks has been for the Blockchain Naming Service. It’s broadly analagous to the Ethereum Naming Service, but currently has some troubling limitations.

These include:

  • It only allows one name per address.
  • They are difficult to trade, requiring special escrow contracts.
  • Stacks users complain that the working group brought together to advance the BNS ecosystem are “missing in action.”

There are of course other NFTs on Stacks, including the Gamma marketplace, which hopes someday soon to integrate native bitcoin payment. The largest collection of all time found there is the ‘Megapont Ape Club,’ which is a reminder of how all great artists create.

It has traded a total of 4.3m STX, or at the current price of STX about $1.4 million. The top NFT collection on Ethereum is CryptoPunks which has done about one million ether worth of volume, or about $1.3 billion at press time.

Read more: Millionaire under investigation for burning Frida Kahlo art in NFT stunt

Earlier attempts at tradeable visual assets on Bitcoin like Rare Pepes have had individual assets sell for $3.6 million before, singlehandedly eclipsing the entire trading volume of ‘Megapont Ape Club.’

The NFT ecosystem on Stacks has limited adoption, and it’s not possible to directly trade bitcoin for most of the existing NFTs.

Does DeFi work?

Sometimes, some of it works, if you are willing to accept certain tradeoffs. When the chain gets congested — which has been happening more frequently — the largest and most important protocols have had to use their administrative privileges to shut down the protocols.

Even at the best of times there is still a strong question as to whether or not this enables ‘DeFi for Bitcoin’ with the aforementioned difficulties in actually using Bitcoin.

DefiLlama shows approximately $12.3 million in total value locked (TVL) on Stacks. This compares to roughly $31 billion in TVL on Ethereum.

Alex, the largest DeFi protocol on Stacks has a TVL of $10 million. This compares to roughly $2.2 billion for Compound on Ethereum. DeFi on Stacks has seen very little usage.

How did Stacks fundraise?

The STX token sale was one of the few cryptocurrency token raises which chose to register with the SEC under Regulation A+ framework. They were able to raise $50 million.

This did not give the STX token voting rights in Blockstack PBC (now Hiro System PBC). Earlier equity rounds were converted to STX tokens at a rate of $0.019 per STX, or a little less than 7% of the $0.30 price in the A+ token sale.

STX token is “mined” by running the node software and sending Bitcoin to a set of predetermined addresses, at which point a random number generator allows one of the miners to add their block to the chain, and receive new STX tokens and the transaction fees for that block.

This can be thought of as somewhat analogous to ‘miners’ being allowed to participate in an ongoing sale of STX token for bitcoin they send to STX “stackers.” Stacking is the process by which STX holders can receive bitcoin sent from the miners as a reward for locking up their STX tokens.

Currently, you need about 100k STX tokens to independently “stack,” or about $32,000. You can stack with smaller amounts if you’re willing to pool.

Is it decentralized?

There are currently five miners who have participated in the last 100 blocks. Unlike Bitcoin mining, these don’t generally represent pools of smaller individual miners.

This problem is related in part to the fact that Stacks miners report that mining is not a profitable endeavor. That is, unless you’re willing to participate in an attack against the consensus protocol and “stack” a large amount of STX to receive as much of the Bitcoin you are sending in the mining process back. This is called a “discount-mining” attack and is a behavior that rational miners need to participate in Stacks.

The solutions for this proposed in the whitepaper were to either have a set of “trusted miners” who you can be sure would never secretly stack on the side, or to eventually stop giving coinbase (newly minted STX) rewards to miners and hope they’re still incentivized by STX transaction fees to participate. Neither of those solutions seem adequate.

Founder Muneeb Ali has even pointed out that without major changes to the protocol, they’re effectively capped to less than 100 miners, as “with 100 unique miners… you’d be taking up approx 10% of the total Bitcoin transaction bandwidth per block. I personally wouldn’t want the Stacks layer to take up more than 10% of the Bitcoin bandwidth for mining.”

Decentralization is of course a spectrum, but five individual miners certainly seems closer to one end.

What happened under load recently?

Recently, the Stacks protocol was suffering under mempool congestion. This led to some protocols like Alex shutting off some of its functions, as it became impossible to get through the transactions it needed.

The source of this congestion seems to have been related to a new release on Blockchain Naming Service which caused an increase in the number of transactions. It was enough to effectively incapacitate the chain.

Read more: Blockchain predator 0xbadc0de becomes prey, loses 1,100 ETH

Strikingly, the number of mempool transactions sufficient to incapacitate the network appeared to be in the mere thousands, with a peak at approximately 6,500 transactions over a 15 minute period.

There have been previous periods where relatively small amounts of load were sufficient to overwhelm the Stacks network. In August of 2021, it experienced similar issues, though the problem was in part related to the fact that they did not have a functioning fee market, because the mining software did not consider fees.

The most popular wallet, Hiro — developed by Muneeb Ali’s company — also did not support Replace By Fee which allows users to later increase their transaction fees, which meant if you set your fee too low it could get stranded until the network cleared up.

At least it’s good for CityCoins!

One of the most popular use cases for Stacks so far has been the issuance of CityCoins. These include Miami Coin, endorsed by mayor Francis Suarez, and New York Coin, backed by mayor Eric Adams.

Are there other options for DeFi with Bitcoin?

Omni, formerly Mastercoin, was the first protocol to enable issuing tokens on Bitcoin. They eventually developed a rudimentary decentralized exchange. Its usage has always been dominated by Tether, and as Tether has moved to other layers it’s been used less. There are many limitations on what can be accomplished in Omni.

RSK is an Ethereum Virtual Machine-compatible merge-mined chain that uses Bitcoin as its native currency. Effectively users are able to lock Bitcoin into a multisignature wallet and receive the corresponding rBTC token and use it on the RSK chain.

Liquid is a Bitcoin sidechain created by Blockstream that allows users to deposit their Bitcoin into a multisig and then use the L-BTC token to transact on the Liquid Network. Liquid is focused more on issuing tokens than enabling fully composable DeFi.

The most common way to use Bitcoin in DeFi is to wrap it and use it on other smart contract chains. Using Bitcoin in this way often allows access to the largest DeFi protocols and liquidity, and while using assets on a different chain poses certain incontrovertible problems, that applies to xBTC, rBTC, L-BTC, and many other solutions as well.

It’s possible that Bitcoin could enable zero knowledge rollups to potentially enable many of the things that these sidechains are currently used for, though it’s still an active research area.

What does it all mean?

Stacks is advertised as enabling a whole bunch of additional features, and focuses on tying all these claimed benefits to the brand of Bitcoin. However, the reality is that many of the ties are much more tenuous than they seem, with very little Bitcoin actually used in the applications, and the security only minimally drawing on the security of Bitcoin.

It’s a strange chain that represents a symbolic vision of Bitcoin DeFi rather than an actually useful and usable version. In part because Bitcoin itself has been reticent to make changes that would enable more of that, preferring to take a very gradual pace to improvements.

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