What Is Stacks Crypto? Building Web3 Applications Secured by Bitcoin, Powered by STX

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What Is Stacks Crypto? Building Web3 Applications Secured by Bitcoin, Powered by STX

Stacks is a leading blockchain network that provides smart contracts, DApps, and a plethora of other web3 services, secured by the Bitcoin blockchain. In this guide, we deep-dive into different facets of Stacks and its vision of making a Bitcoin-centric web3 possible. 

What Is Stacks?

Stacks is an open-source layer one blockchain network that leverages the security and network effect of Bitcoin to power the creation of decentralized applications and smart contracts.

With Bitcoin as the robust base layer where all Stack transactions are settled, Stacks users can use their tokens to access innovative crypto solutions like DeFi, trading/minting NFTs, GameFi, DAOs, etc. 

While Stacks may look similar to a Bitcoin merged-mining blockchain or a layer-2 scaling solution, it functions quite differently from them.

Stacks employs a unique operational framework via a Proof of Transfer (PoX) consensus mechanism that allows Stacks to run in parallel with Bitcoin. In essence, Stacks uses Bitcoin as a reliable broadcast medium and storage for all blocks that miners generate within its network. This means that Stacks has its own miners and token – STX – independent of the Bitcoin blockchain. Bitcoin miners can’t validate blocks on Stacks while mining bitcoin, and Stack miners can’t validate transactions simultaneously on Bitcoin while mining Stacks.

What Is STX?

Stacks (STX) is the native token of the Stacks blockchain that fuels all activities that occur within its ecosystem. Similar to ether (ETH) on the Ethereum blockchain, STX is used to pay transaction fees, for smart contract execution, and to power web3 services across Stacks.

STX also plays a critical role in the functionality of Stacks as it serves as an incentive for its security and consensus mechanism. Miners validate transactions in the Stacks blockchain because of the reward they stand to get in STX.

Miners receive 1,000 STX per block after the first four years of Stacks launch. 500 STX in the following four years. 250 STX in the next one, and so on.

Just like Bitcoin, Stacks mining algorithm halves block rewards every four years to reduce its emission rate enabling the token to have a kind of deflationary mechanism.

STX holders can also lock their coins in a process known as stacking to earn bitcoin rewards. 

STX currently has over 1.32 billion tokens in circulation with a market capitalization of above $500 million, according to Coinmarketcap. You can purchase STX from most of the prominent cryptocurrency exchanges in the market.

How Does the Stacks Blockchain Work?

The Stacks blockchain’s key property is its Proof-of-Transfer (PoX) consensus mechanism that connects Stacks to Bitcoin. Through PoX, all Stacks transactions are settled on the Bitcoin blockchain.

The process requires Stacks miners to send bitcoin to a predefined list of Bitcoin addresses set by STX holders before they can produce blocks in the Stacks blockchain. Since anyone can be a miner in Stacks by sending block-commit transactions to the list of specific Bitcoin addresses, the blockchain will probably have several forks. And the process enables the mining activities across all Stacks forks to be public, meaning all Stacks nodes that observe the Bitcoin chain will know of all Stacks forks that exist.

Like Bitcoin, miners are incentivized to follow the longest chain rule to receive a reward for their efforts. The network determines who gets the mining rewards through a cryptographic sortition process. However, the amount of bitcoin miners spend to mine blocks plays a critical role if they will receive the block reward. This is a bit similar to proof of work in Bitcoin. However, instead of expending more energy to produce blocks which is environmentally inefficient, Stacks miners use bitcoin that they purchase from the market – in a way, this is recycling the energy spent in the Bitcoin blockchain to expand its capabilities. The only barrier to entry is the process of acquiring and spending bitcoin.

Since miners incur costs for participating in consensus and securing the Stacks blockchain, the network rewards them accordingly with transaction fees and newly minted tokens in the form of STX – Stacks’ native token.

Although the Stacks blockchain functions similar to a proof of stake chain, it’s not the same. Unlike PoS chains, the Stacks blockchain can fork without the involvement of a third party to determine the longest chain and uses a protocol to rank forks based on quality. This enables honest miners to recover the chain in events of a heavy network split or where a malicious entity gains control of the network. 

Proof of Transfer Explained

Proof of Transfer (PoX) is an extension of the Proof-of-Burn consensus mechanism. In proof-of-burn, miners participate in the consensus process of validating blocks by burning some particular cryptocurrency in return for the capacity to validate blocks and possibly earn mining rewards. Burning here implies transferring coins to cryptocurrency addresses with unknown private keys, meaning they will be lost forever.

Proof-of-transfer (PoX) slightly shifts the proof-of-burn mechanism by actively employing two blockchain networks. Instead of burning tokens, PoX requires miners to transfer a proof-of-work cryptocurrency to addresses of other nodes that play a role in the network’s security. By doing so, miners secure the PoX network and earn a reward in the blockchain’s native cryptocurrency. This shows that proof-of-transfer blockchains depend on their said proof-of-work chains to function. In the case of Stacks, the Bitcoin blockchain is the anchor chain.

Through PoX, Stacks works in tandem with the Bitcoin blockchain. As a result, blocks in the Stacks blockchain are anchored to Bitcoin blocks, meaning Stacks produces blocks at the same time as Bitcoin, which is every 10 minutes on average. The simultaneous block validation enables Bitcoin to serve as a rate-limiter for Stacks blocks, hence preventing denial-of-service attacks on the Stacks blockchain. However, this process poses questions about the scalability of Stacks.

To address such issues, Stacks allows for the creation of microblocks in between anchor blocks, enabling Stacks to settle transactions rapidly with a high degree of confidence.  

Transactions in microblocks are processed once the network confirms their associated anchor blocks. Therefore, Stacks can achieve scalability independently of Bitcoin without the creation of additional layer protocols while establishing finality on Bitcoin’s main chain.

What Is Stacking?

Stacking is the process of locking up STX tokens for a defined period as a means of participating in Stacks security to receive bitcoin rewards. The concept of stacking answers the question of “whose address receives the bitcoin that miners transfer?”

STX holders – also referred to as stackers – register for the bitcoin rewards cycle by broadcasting a signed message that locks up their tokens for a specific period.

Stackers also have to provide their Bitcoin address to receive their rewards. The rewards are available immediately after a miner transfers bitcoin to the address and they are proportional to the amount of stacked STX. Stackers can also decide to pool their tokens together with other stackers to enable them to earn higher bitcoin rewards.

After the lock-up cycle ends, stackers receive back their STX tokens. While this looks a lot like staking in proof-of-stake, we have already established that PoX is a different consensus process. For example, the tokens of stackers are not slashed for any reason and they are not responsible for producing blocks in the Stacks blockchain.

Alex

Alex, short for automated liquidity exchange, is a complete DeFi platform built through Stacks smart contracts for bitcoin holders. Alex’s mission is to “Bring your Bitcoin to life: launch new projects, earn interest, swap tokens, rewrite finance, reinvent culture.” Alex has a total value locked of $10 million at the time of writing, according to DAppRadar.

Stacking

Stacking is a native DApp on the Stacks network that facilitates the locking of STX tokens to support its security and consensus to enable Stackers to earn bitcoin rewards. Stacking currently has an annual percentage yield of 8 – 10%, paid in bitcoin.

Gramma

Gamma is a leading NFT marketplace based on the Bitcoin blockchain where creators and collectors can find, list, and sell NFTs. Gamma also has a minting platform for creators to launch NFT collections and a social platform that aims to leverage NFTs to host social identities in web3.

DeFi, NFTs & Web3 on Bitcoin: The Stacks Vision Explained

The ultimate vision of Stacks is to allow people access the full plethora of web3 applications, powered by the stability and security of Bitcoin.

Bitcoin is the largest and most trusted cryptocurrency with a market capitalization that reached a trillion dollars at some point. Additionally, most institutions recognize and have invested in bitcoin. However, Bitcoin as a standalone blockchain isn’t currently as useful as layer 1 blockchains in supporting web3 applications.  

The Stacks vision bridges this gap through the proof-of-transfer (PoX) consensus mechanism, which allows developers to build Bitcoin-enabled Web3 services using Stacks Clarity smart contracts.

Several venture capitalists, entrepreneurs, developers, and crypto users are flocking to Stacks to build and access the innovative Bitcoin web3 solutions on its network.

FAQs

What is Stacks?

Stacks is an open-source layer-1 blockchain that leverages the novel security, network effect, and capital of Bitcoin to power the creation of smart contracts, decentralized applications (DApps), and other web3 solutions.

What is STX?

STX is the native token of the Stacks blockchain that is used to pay transaction fees for token transfers, smart contract creation, and DApp deployments. The token is also used to reward miners.

What is Stacking?

Stacking in the Stacks ecosystem refers to locking up STX tokens for a specific period to receive rewards paid in bitcoin in exchange for helping out in the blockchain’s security mechanism.

What Kind of DApps Can You Find on Stacks?

In the growing Stacks DApp ecosystem, you can find predominantly NFT marketplaces and DeFi protocols.