Pantera Partner: Bitcoin Layer2 Stacks Use Cases and Ecosystem

Author: Paul Veradittakit, Partner of Pantera Capital; Translation: Golden Finance 0xjs

Key Points

* Since the launch of Bitcoin in 2009, the network has established its viability as a base layer 1 (L1) network. While other networks experienced downtime, outages, etc., Bitcoin managed to hold on. Although Bitcoin has shown resilience and accumulated over $500 billion in idle capital, it lacks the ability to leverage core functionality because it does not have the same inherent programmability as Ethereum.

* Stacks is a leading solution that unlocks Bitcoin’s programmability as Bitcoin L2. It is the second layer of Bitcoin, with complete smart contracts, and transactions are permanently settled on the BTC blockchain.

* Stacks brings smart contracts and programmability to the Bitcoin network as Bitcoin L2, unlocking over $500 billion in idle untapped Bitcoin capital for developers and applications.

* Stacks The upcoming Natamoto network upgrade will increase network speed by reducing block times to 5 seconds and introduce sBTC, a mechanism for Bitcoin deposits and withdrawals from L1 that will unlock BTC liquidity.

Addressing Bitcoin’s scalability

Amid the surge in new activity and transactions that require Bitcoin's block space, its basic layer protocol faces inherent obstacles in scalability. Bitcoin is built on a decentralized consensus mechanism that ensures security, and its design inherently imposes limits on transaction throughput. These limitations become especially apparent during periods of high network congestion, when surges in activity lead to delayed confirmation times and higher transaction fees. Additionally, Bitcoin Layer 1's limited scripting capabilities limit the range of applications that can be run, exacerbating issues related to scalability. While a limited design space is both limiting and often desirable, it has so far made it difficult or untenable to build more complex applications on the network.

It is in this context that Tier 2 solutions emerged as a concept designed to complement and enhance Tier 1 functionality. As the name suggests, layer 2 solutions operate on top of existing blockchains, easing congestion and enabling the development of complex applications without compromising key principles of security and decentralization. The importance of Layer 2 solutions lies in their ability to create new network capabilities that enable innovation without violating the fundamental security and economic promises of the underlying blockchain.

Layer 2

* Build blockchain architecture

* Add additional functionality on top of L1 network

* Solutions (shared consensus mechanism, changing consensus mechanism, etc.) can be provided to improve scalability for large-scale software upgrades, but validators must be convinced to implement the changes through a hard fork.

*Involves using off-chain services (rollups, sidechains, etc.) to improve scalability.

* Create a secure record on the blockchain.

* Requires users to rely on L2 developers and networks for efficiency and processing of transactions. Security can often be derived from L1.

Stacks（STX）

Stacks (STX) stands out among a host of layer 2 solutions for the Bitcoin network as an innovative platform that is redefining the boundaries of scalability and functionality. Stacks operates as a layer 2 solution and integrates seamlessly with the Bitcoin blockchain, unlocking new possibilities. At its core, Stacks introduces a groundbreaking approach that bridges the gap between Bitcoin’s base layer and ancillary layers optimized for complex applications. Unlike traditional layer 2 solutions that focus solely on off-chain transaction management, Stacks enhances Bitcoin's layer 1 functionality by empowering developers to design dynamic smart contracts on layer 2. This facilitates a symbiotic connection between the two layers, ensuring that complex computations and interactions occur on Layer 2, while transaction security and finality remain firmly anchored to the underlying Bitcoin blockchain. This innovative architecture does not require any changes to Bitcoin L1, retains Bitcoin's strong security, and prioritizes scalability, allowing a large number of applications to run seamlessly without burdening the main network. Stacks’ unique approach sets it apart, offering a more comprehensive solution that leverages the benefits of both layers to create an efficient ecosystem for decentralized applications.

Building decentralized applications on Stacks

The development of decentralized applications (DApps) on the Stacks network opens the door to a range of possibilities, fostering innovation in areas such as finance, digital art, supply chain management, and decentralized finance (DeFi). By seamlessly integrating with Bitcoin and leveraging its user base and security features, Stacks creates an environment where DApps of all types can thrive. Developing DApps on Stacks can enhance scalability and ensure a smooth user experience even during network peaks. Stacks' innovative architecture leverages Bitcoin's base layer security to create a secure DApp environment. This layered approach enhances trust, allowing developers to design applications that can confidently handle sensitive data and valuable assets. Interoperability with the Bitcoin network is another key advantage, enabling seamless interaction between DApps and Bitcoin’s native assets and ecosystem. As a result, Stacks enables developers to bring their ideas to life while providing users with a powerful and user-friendly decentralized experience.

Nakamoto upgrade

The upcoming Nakamoto upgrade marks a key milestone in the continued development of the Stacks network, bringing transformative enhancements. The Satoshi upgrade introduced a series of technological advancements that together enhanced the network’s speed and security prospects. Combined with the launch of sBTC, a 1:1 Bitcoin-backed asset, Stacks will soon be able to write to Bitcoin in a fully decentralized manner, allowing Bitcoin to be easily moved in and out of L2. This unlocks hundreds of billions of dollars in potential capital for web3. sBTC is a trust-minimized way of transferring BTC between L1 and L2; in addition to cryptography, it works through economic incentives. Threshold wallets are not managed by users having to delegate their BTC to a centralized or predetermined set of entities, as was the case with earlier sidechain approaches. Instead, threshold wallets are managed by a permissionless, dynamically changing set of entities that are financially incentivized to maintain the peg, and who can join or exit peg maintenance at will (following the spirit of Bitcoin itself).

Using this mechanism, assets can be issued on the Bitcoin layer (here sBTC on the Stacks layer) and always maintain a 1:1 peg to BTC. Fully expressive smart contracts, triggered by Bitcoin transactions, as currently in Stacks L2, can run on sBTC and can also broadcast signed transactions on the Bitcoin blockchain without the need for a trusted entity. This solves the "trustless Bitcoin writes" problem and allows smart contracts to effectively operate on BTC as their asset without having to convert BTC to another unpegged currency. Unlike typical sidechains, Stacks L2 transactions (and smart contracts) inherit other important properties: (i) they are settled on the secure, durable Bitcoin blockchain; (ii) peg-related operations are denominated in Bitcoin Transactions are implemented in a form that cannot be censored by the Stacks layer or its miners; (iii) Stacks transactions and peg operations achieve Bitcoin finality - i.e., they are backed by 100% of the Bitcoin base layer security/computing power, and (iv) Stacks transactions and peg operations work seamlessly with Bitcoin forks, so no intervention is required when Bitcoin forks.

Additionally, the Satoshi upgrade aims to drastically reduce execution time from minutes to seconds. This achievement stems from groundbreaking research and development that enables Stacks to provide users with an experience similar to Ethereum’s layer 2 solutions while maintaining strong ties to the security of the Bitcoin network. The Satoshi upgrade underscores the Stacks community’s strong commitment to pushing the boundaries of the Bitcoin blockchain, positioning the platform as the center of a new wave of decentralized applications.

Example

1. Decentralized Finance (DeFi):

Stacks L2 will surely become a hot spot for DeFi applications serving Bitcoin holders. Through Stacks, users can access a decentralized lending and trading platform. DeFi projects on Stacks aim to provide financial services while utilizing Bitcoin as collateral. This approach provides Bitcoin holders with the opportunity to earn interest and use DeFi features without leaving the Bitcoin ecosystem. Considering the potential BTC capitalization of $500 billion, this could be a very large opportunity for developers and new use cases.

2. Digital ownership and identity:

Stacks facilitates the creation of digital assets that represent real-world ownership, such as real estate or intellectual property. Users can establish verifiable digital identities and claim ownership of these assets on the blockchain. This has implications for the tokenization of physical assets and the development of secure, tamper-proof records.

3. Tokenization and NFT:

The Stacks ecosystem supports the creation of non-fungible tokens (NFTs) and tokenized assets. Artists, musicians, and content creators can tokenize their work and sell it on the Stacks-based marketplace. This enables creators to retain ownership and royalties of their digital creations.

4. Voting and governance:

Stacks supports decentralized governance and voting mechanisms. Users can participate in decision-making processes such as protocol upgrades and community initiatives by staking STX tokens. This enhances the democratization of the blockchain network and ensures that stakeholders have a say in the development of the platform.

5. Cross-chain integration:

Stacks is exploring cross-chain integration, allowing assets and data to move seamlessly between different blockchains. This has the potential to connect Bitcoin to other blockchain networks, expanding the utility of Stacks and Bitcoin.

6. Use Bitcoin to mine STX:

Miners can participate in Bitcoin mining while supporting the Stacks ecosystem by locking up Bitcoin (BTC) as collateral. This innovative Proof-of-Transfer (PoX) consensus mechanism aligns the incentives of the Bitcoin and Stacks communities.

Stacks Ecosystem

The Stacks developer ecosystem is a testament to collaborative innovation, where developers join forces to shape the future of finance and technology. Let’s take a look at some of the popular leading projects and tools.

1、Hiro PBC（原Blockstack PBC）：

Hiro PBC built an early version of Stacks and is now the development tools company for Bitcoin L1 and L2. They were instrumental in developing early versions of Stacks and its associated technologies, and continue to contribute to more recent developments. Hiro PBC provides tools and resources for developers and projects based on Bitcoin L1 and Stacks L2, including products such as Ordinals API, Chainhook indexer and subnet. Their efforts are aimed at driving developer adoption of Bitcoin L1 and L2.

2、Trust Machines：

Trust Machines is building the largest ecosystem of Bitcoin applications to maximize the value of the Bitcoin network. Trust Machines is building Bitcoin DeFi projects, as well as exploring project applications where Bitcoin-backed assets and identities can be unlocked, such as Console, a Web3 chat application controlled by user identities. Trust Machines contributes to open source code for Bitcoin L2 technologies such as Stacks and Bitcoin L1 technologies such as DLC.

3. Stacks Foundation:

The Stacks Foundation supports builders activating the Bitcoin economy through broader adoption. The Stacks Foundation funds critical open source technology development and education efforts, community development and event resources, developer education resources, and contributes to the open source Stacks development and SIP (Stacks Improvement Proposal) processes.

4. Wallet:

Leather Wallet (formerly Hiro Wallet) and Xverse Wallet both allow users to manage their STX tokens, Bitcoin and Bitcoin-based assets (including Stamps and Ordinals) as well as decentralized applications (DApps) on the Stacks blockchain. ) important applications for interaction. They provide a user-friendly interface for securely storing, sending, and receiving BTC and STX tokens, allowing individuals to easily participate in the ecosystem.

5、ALEX：

ALEX is a Bitcoin DeFi protocol and decentralized exchange (DEX) that released the first bridge between the Ethereum and Stacks layers in the second quarter of 2023, allowing users to transfer assets between blockchains.

6、Gamma：

Bitcoin NFT marketplace and creator launchpad has launched its own Ordinals marketplace and partner program, featuring 60 debut artists from the Bitcoin and traditional art worlds.

**7. BNS (Bitcoin Domain Name System): **

The oldest Bitcoin domain name system was launched on Bitcoin L1 in 2015. The .BTC namespace alone has more than 300,000 name registrations, and Leather and Xverse support sending and receiving BTC with unique, human-readable names.

8、Clarity Smart Contracts：

Clarity is a smart contract language developed for Stacks that ensures security and predictability. Developers can use Clarity to build decentralized applications and smart contracts, promoting trust and reliability in the ecosystem. Clarity’s design eliminates a large number of smart contract bugs common on other networks.

**9. Stacks pool, such as fast pool (fka Friedger Pool): **

Fast Pool allows users to share and stack STX with others, making stacking rewards more accessible to users below the protocol’s minimum stack requirement. The Stacking protocol allows people to choose to lock STX and qualify for BTC rewards sent by miners who mine STX. Fast Pool is a self-service mining pool where smart contracts are the pool operators. Fast Pool sends payments to users via STX instead of BTC to reduce transaction fees.

10. The Bitcoin Frontier Fund:

Bitcoin Frontier Fund (formerly Stacks Ventures) has launched its first Bitcoin Ordinals accelerator program. The program aims to promote innovation in the Ordinals sector, providing start-ups with seed funding, access to financing and mentoring. In exchange for participation, the Bitcoin Frontier Fund provides a $100,000 investment and access to a supportive community, as well as 2-3% common stock equity. Startups without significant previous funding will receive 3% equity, while startups with recent funding of $600,000 or more will receive 2%. Areas of interest include infrastructure, proven Web 3.0 use cases, developer tools, and accessibility.

11、Bitcoin Layer 2 Labs：

Bitcoin L2 Labs is a Pakistan-based core development-focused entity that plays a key role in the advancement of Bitcoin layer 2 solutions. With a strong commitment to the development of Bitcoin infrastructure, the organization has placed itself at the forefront of blockchain innovation in Pakistan. Bitcoin L2 Labs actively participates in the research, development, and implementation of layer 2 scaling solutions, making significant contributions to the scalability and functionality of the Bitcoin network. In the rapidly evolving blockchain environment, their work highlights Pakistan’s growing influence in the global blockchain community and its dedication to the continued development of blockchain technology.

12、DeSpread：

DeSpread has been committed to cultivating a healthy blockchain ecosystem, especially addressing the language and cultural barriers unique to the Korean market. The company has grown significantly in the past four years and now has a team of 21 blockchain experts, all without outside investment. DeSpread leverages its extensive market knowledge to specialize in providing growth and market strategy consulting services to blockchain projects. Additionally, they actively contribute to the industry by publishing educational materials and research publications, promoting mutual growth within the blockchain community. Their in-house development team, DeSpread Labs, plays a vital role by operating validators, driving on-chain activity, and creating the web3 community platform, demonstrating their commitment to blockchain innovation.

13、HireVibes：

HireVibes is a platform focused on transforming the traditional job market by integrating blockchain technology and decentralization principles. HireVibes aims to create a fairer and more efficient job search experience for job seekers and employers through its innovative approach. By leveraging the power of blockchain, they promote transparent and fair recruitment processes, giving individuals greater control over their career paths. The platform not only connects talented professionals to exciting opportunities, but also promotes values such as sustainability and social impact by allocating a portion of job placement fees to philanthropic causes. HireVibes is committed to revolutionizing the job market and represents a pioneering force at the intersection of blockchain technology and human resources.

14. Sustainable Bitcoin Protocol:

The Sustainable Bitcoin Protocol is a groundbreaking initiative that aims to solve one of the most pressing issues in the cryptocurrency world – carbon emissions. Recognizing the environmental impact of Bitcoin mining and trading, the protocol aims to offset and reduce the carbon emissions associated with operating the Bitcoin network. The program works to make Bitcoin more environmentally friendly and socially responsible by implementing sustainable practices and technologies, such as renewable energy and carbon offset programs. It is a critical step towards mitigating the ecological footprint of cryptocurrencies and aligning the growth of digital currencies with global sustainable development goals. The Sustainable Bitcoin Protocol demonstrates the cryptocurrency community’s growing awareness of the importance of ecological responsibility,

Harness innovation and creativity

Bitcoin’s transformative potential has been reignited with the introduction of “Ordinals,” an innovative concept rooted in the Bitcoin ecosystem. Ordinal marks a paradigm shift in how data is tied to a single Satoshi, the smallest unit of Bitcoin. This innovation assigns a unique digital identity to each Satoshi, enabling novel applications that take advantage of its unique properties. One practical implementation involves creating non-fungible tokens (NFTs) on the Bitcoin blockchain, linking data to a single satoshi to establish secure and immutable ownership. Beyond art and collectibles, this innovation has the potential to revolutionize provenance tracking, supply chain management and decentralized identity verification. The introduction of Ordinal introduces unparalleled granularity to the Bitcoin network, which will open up a new realm of innovation and creativity and have the potential to reshape digital assets and decentralized applications, but only if, as mentioned earlier, these activities can successfully Expand via L2s.

Future Outlook and Conclusion

In summary, Stacks’s journey within the Bitcoin ecosystem has been characterized by its creative approach to addressing scalability challenges and facilitating the development of new applications. This 2-layer solution demonstrates its ability to increase Bitcoin’s scalability while adhering to the core principles of security and decentralization. The fusion of Stacks’ unique properties, the innovative utilization of Ordinal, and the upcoming Nakamoto upgrade make it a pioneer in the cryptocurrency space.

As the broader cryptocurrency community recognizes the importance of Layer 2 solutions in shaping Bitcoin’s future, Stacks is poised to play a key role in the evolving narrative. Collaboration, technological innovation, and the exploration of novel use cases will shape Stacks and the broader Bitcoin developer ecosystem. Releasing $500 billion of Bitcoin liquidity into DeFi, providing a faster and cheaper track for BTC movement, continued DApp development, and the integration of cutting-edge technologies, give us a glimpse of the huge potential in the development process of Nakamoto’s version of Stacks.