Can Stacks (STX) bring Bitcoin (BTC) to DeFi?

Stacks (STX) is a blockchain built to connect Bitcoin (BTC) to decentralized finance (DeFi).

The Stacks blockchain is an extra layer they add to the Bitcoin blockchain. The extra layer serves as a shortcut between Bitcoin and DeFi mechanisms and protocols.

To enable transactions, Stacks uses a consensus mechanism they call Proof of Transfer. They claim Stacks apps can leverage Bitcoin through the layer.

The Stacks blockchain connects Bitcoin (BTC) to a network of decentralized apps (DApps). These Dapps run on the Stacks Blockchain instead of a centralized server. This makes Stacks a decentralized blockchain similar to Bitcoin.

What is Stacks (STX)?

Interestingly, Stacks is an acronym. It stands for:

• S Secured by the entire hash power of Bitcoin (Bitcoin finality).
• T Trust-minimized Bitcoin peg mechanism; write to Bitcoin.
• A Atomic BTC swaps and assets owned by BTC addresses.
• C Clarity language for safe, decidable smart contracts.
• K Knowledge of full Bitcoin state; read from Bitcoin.
• S Scalable, fast transactions that settle on Bitcoin.

How Stacks (STX) powers Bitcoin DeFi

Ultimately, Stacks (STX) is a Bitcoin layer for smart contracts. A smart contract is a digital mechanism that performs a task.

For example, they build smart contracts into Smartcoins and DApps. For example, the Tether (USDT) smart contract makes payments in US dollars when you spend Tether.

In 2023, Stacks plans to introduce a similar mechanism a “Bitcoin peg” to make payment in BTC through Stacks apps. Currently, Stacks settles transactions in Bitcoins using the Clarity language for safe contracts that can respond to Bitcoin. They claim over 5,000 Clarity contracts were running on Stacks in December 2022.

Stacks also uses Atomic Swaps. An Atomic Swap is an exchange of cryptocurrencies from separate blockchains. For example, swapping Bitcoin (BTC) for Binance (BNB). The term comes from atomic states. Smart contracts make most atomic swaps.

Hence, Stacks helps DApps make atomic swaps with Bitcoin. Most decentralized exchanges (DEXs) use atomic swaps for trading.  They can automate Atomic Swaps with Hash Timelock Contracts (HTLC). An HTLC expires after a period of time. For example, an HTLC can expire in two weeks if somebody does not receive payment.

How Stacks Enables Bitcoin (BTC) DeFi Transactions

Stacks enables Bitcoin (BTC) DeFi transactions by finalizing transactions for 100 Bitcoin blocks at at time. They also finalize the transactions each day to maintain liquidity. Stacks forks with Bitcoin so it follows all Bitcoin forks.

A whitepaper claims Stacks creates blocks at the speed of Bitcoin (every ten minutes). However, Stacks proposed Nakamoto Release (which could come in 2023) could create new blocks every five seconds. Theoretically, this could help Stacks settle Bitcoin transactions every five minutes.

To make smart contracts faster Stacks builds a decentralized Bitcoin-pegged asset or synthetic asset they call sBTC. A good way to think of sBTC is as a Bitcoin stablecoin. To explain, sBTC’s smart contract makes payment in Bitcoin from the Stacks network.

They claim sBTC enables trustless atomic swaps. To elaborate, in a trustless swap you trust the asset (sBTC), so you don’t have to trust other parties in the transaction. For instance, a US dollar is trustless because people will accept one from anybody.

They claim Stacks has full knowledge of the Bitcoin state. This allows Stacks to make fast Bitcoin transactions.

They use several mechanisms to scale Stacks and connect it to other blockchains. For example, scalability layers such as subnets can support other programming languages such as Ethereum’s Solidity and the Ethereum Virtual Machine (EVM).

The EVM is the digital computer that runs the Ethereum blockchain. DApps need EVM access to operate on Ethereum. They claim Ethereum smart contracts can settle transactions with sBTC.

The Stacks Applications

They claim many applications including DeFi Protocols, nonfungible tokens (NFTs), social media, tokens, wallets, and Decentralized Autonomous Organizations (DAOs) use the Stacks blockchain.  

For example, Alex powers DAaps on Bitcoin. Arkadiko builds Stacks stablecoins and powers a Decentralized Exchange. Arkadiko built the USDA stablecoin. BlockSurvey creates end-to-end encrypted forms and surveys. Console is a group chat platform for creative communities.

Banana is a staking protocol fro the Bitcoin Monkey ecosystem. The Zest Protocol creates Bitcoin loans for institutional borrowers. They claim Zest’s smart contracts enable Bitcoin liquidity providers to earn Bitcoin yield through lending pools. Zest offers on-chain Bitcoin loans against balance sheets.

Novum Insights creates data-driven analytics and dashboards that help users find liquidity pools and DeFi pairs. Stackswap is a decentralized exchange (DEX) that supports token swaps, liquidity pools, liquidity farming, and staking on Stacks and Bitcoin. Bitfari is a mobile advertising network built to reach people all over the world. Gamma is an open marketplace for Bitcoin NFTs. 

What Value could Stacks (STX) Accrue?

Stacks (STX) could achieve enormous because of its connection with Bitcoin (BTC).

Bitcoin (BTC) is the world’s most popular cryptocurrency with a $445.520 billion Market Capitalization on 27 January 2023. CoinMarketCap gave Bitcoin a $485.428 billion Fully Diluted Market Cap, a $29.063 billion 24-Hour Market Volume, a $29.060 billion Centralized Exchange (CEX) Volume, and a $3.632 billion Decentralized Exchange (DEX) Volume on 27 January 2023. They base numbers on a Circulating Supply of 19.274 million BTC, a Maximum Supply of 21 million BTC and a Total Supply of 19.273 million BTC. Bitcoin had a $23,078.56 Coin Price on 27 January 2023.

In contrast, Stacks (STX) was CoinMarketCap’s 97^th ranked cryptocurrency with a 28.05₵ Coin Price on 27 January 2023. CoinMarketCap gave Stacks a Market Capitalization of $380.359 million, a $509.289 million Fully Diluted Market Cap, an $11.488 million Centralized Exchange (CEX) Volume, and a 24-Hour Market Volume of $11.418 million on 27 January 2023. They based those numbers on a Circulating Supply of 1.358 billion STX, a Maximum Supply of 1.818 billion STX, and a Total Supply of 1.352 billion STX.

I think Stacks (STX) could offer some genuine value because of all the DApps and DeFi protocols using it. If Stacks’ Nakamoto Release works this DeFi token could add a lot of value. Thus, Stacks is a DeFi protocol that speculators need to watch.