Author: Deep Tide TechFlow
When Bitcoin broke $90,000, various ecosystems in the crypto market began their own celebrations.
AI narratives continue to be hot, and memes continue to create wealth myths... But amidst this frenzy, projects in the Bitcoin ecosystem feel more like "outsiders": they are lively, but I have nothing.
Clearly, the positive effect of Bitcoin's rise has not overly spilled over to its own ecosystem projects.
Even compared to the "most unproductive" Ethereum, the latter's proud DeFi field occupies nearly 17% of Ethereum's total market value; while Bitcoin maintains about 50% of the total market value of the entire market, its total lock-up amount (TVL) in the DeFi ecosystem is less than 1% of the entire market (data source: CMC research report).
However, the crypto market has always followed the pattern of attention and narrative rotation.
The large gap also contains phase opportunities; after inscriptions and staking gameplay, the BTC ecosystem has fallen into silence; in the face of a huge gap, there is also the possibility of being ignited at any time.
Some projects that have been deeply engaged in the Bitcoin ecosystem for many years may also welcome their opportunities; often, it just takes a catalyst.
While various meme coins are experiencing "explosive price increases," Stacks, as one of the earliest Layer 2 solutions for Bitcoin, has chosen a quiet path — focusing on technological transformation and finally completing the long-awaited Nakamoto upgrade.
Don't forget, last year STX also had a similar meme-like quality, with its price once surging tenfold.
What will this upgrade bring? Will it be a new opportunity for launch?
In the current market environment with high speculative sentiment, how much imagination is left for projects like Stacks that focus on technological innovation?
Old store, new exploration, let us get to know our old friend Stacks once again.
Nakamoto upgrade is not only a technical restructuring.
The core of the Nakamoto upgrade lies in the comprehensive reform of the PoX consensus mechanism of Stacks 2.0. To understand the significance of this upgrade, we first need to understand the limitations of the existing PoX mechanism.
In the current PoX mechanism, the confirmation of Stacks blocks has to wait for the Bitcoin network to generate a new block. Although this mechanism inherits Bitcoin's security, it also brings efficiency issues: even simple transactions have to wait about 10 minutes for the Bitcoin network's block time. More importantly, since the confirmation of Stacks blocks relies on the accumulation of Bitcoin blocks, users often need to wait for multiple Bitcoin blocks (usually 6 blocks, about 1 hour) to ensure the finality of transactions.
Grayscale's analysis also more intuitively demonstrates the potential performance gap before and after the upgrade:
(Data source: Grayscale research report)
The new Nakamoto PoX solves this performance issue by introducing a "fast block confirmation" mechanism. The upgraded system allows transactions to be pre-confirmed through the internal consensus mechanism while waiting for Bitcoin block confirmation. This enables most transactions to be confirmed within minutes while still maintaining security binding with the Bitcoin network.
In terms of security architecture, the upgrade has brought substantial improvements. The original Stacks wrote its block hash into Bitcoin transactions, but this one-way security inheritance has potential risks. Under the new architecture, miners need to participate in both Bitcoin mining and Stacks verification simultaneously, creating a bidirectional security verification mechanism. This not only raises the cost of attacks but also ensures the honest behavior of validators through economic incentives.
Improvements in interoperability are reflected in the reconstruction of the underlying architecture. Previously, interactions between Stacks and the Bitcoin network required a complex relay mechanism, which not only increased latency but also introduced additional trust assumptions. The new architecture adopts a direct state verification mechanism, allowing Stacks nodes to directly read and verify the state of the Bitcoin network, greatly simplifying the complexity of cross-chain operations. This improvement lays the foundation for subsequent innovative applications, especially the implementation of sBTC.
We can also use a table to quickly understand the details and potential significance of the Nakamoto upgrade:
At the same time, according to Grayscale's research report analysis, after the Nakamoto upgrade, the Stacks protocol will offer unique features including:
(i) Bitcoin-collateralized stablecoins,
(ii) Bitcoin-based lending (and Bitcoin-native rewards),
(iii) Decentralized Autonomous Organizations based on Bitcoin.
Similar to how basic financial primitives drove the development of the Ethereum DeFi ecosystem in 2017, given Bitcoin's currently high-profile status, its ecosystem may also flourish.
sBTC, the innovative application of Bitcoin on Stacks
This upgrade looks good, but what substantial changes will it bring to the ecosystem and products?
From Stacks' own first-party perspective, a new product that comes with the upgrade is sBTC.
As a decentralized Bitcoin two-way anchoring protocol, the design intention of sBTC is very simple: to make Bitcoin, the "digital gold," more flexible and become a truly programmable productive asset.
Thus, the sBTC mentioned in the table can be understood as an innovative Bitcoin wrapping protocol that allows Bitcoin to operate as a smart contract on the Stacks network.
A foundational project still needs to be closer to asset issuance to gain more attention and create more gameplay.
This vision does not sound fresh. There have been many similar attempts in the market, such as wBTC, which is popular on Ethereum; even under centralized custody models, its locked amount has reached $5-15 billion. But the ambitions of sBTC are clearly more than that — it aims to create a truly decentralized solution in line with the spirit of Bitcoin.
The core mechanism of sBTC is actually very intuitive: when users lock BTC on the Bitcoin mainnet, the Stacks network will mint an equivalent amount of sBTC, strictly maintaining a 1:1 anchoring relationship. Users can use these sBTC to participate in smart contract interactions, and when redemption is needed, they only need to destroy the sBTC, and the corresponding amount of BTC will be automatically released.
It sounds simple, but the real technical challenge lies in how to ensure the decentralization and security of this process, which is also what makes sBTC stand out.
It does not have preset managers but operates the entire system using an open dynamic signer group. All key operations are conducted on the Bitcoin mainnet, inheriting Bitcoin's security features.
Signers receive BTC rewards through Stacks consensus, and this economic incentive ensures that the system can continue to operate stably. More importantly, sBTC directly implements price oracle functionality on the Bitcoin mainnet without relying on any external data sources.
Timing is crucial. The emergence of sBTC in the Bitcoin ecosystem is timely. With the completion of the Nakamoto upgrade, the technical foundation is now in place.
From the market perspective, the TVL of Bitcoin DeFi accounts for less than 1%, forming a huge contrast with its market value, which means a tremendous development space. What’s more encouraging is that several major Bitcoin organizations have clearly expressed support for the sBTC plan, showing the industry's recognition of this innovation.
Regarding sBTC, it needs to be particularly noted that it is not a direct component of the Nakamoto upgrade but one of the important applications supported by this upgrade. The Nakamoto upgrade provides the necessary technical foundation for sBTC through improved interoperability and security architecture.
According to the latest news from Stacks-related blogs, the upgrade of sBTC is expected to start in early December 2024. Currently, the community is voting on the SIP-029 proposal, which will optimize the Stacks token issuance mechanism and pave the way for the launch of sBTC.
If you want to know more about sBTC, the official one-finger Zen can basically help you quickly understand the gist.
In the current context where the Bitcoin ecosystem "only raises coin prices but not the ecosystem," the emergence of sBTC may become a catalyst for changing this situation. Just as Ethereum promoted the development of the DeFi ecosystem in 2017 through basic financial primitives, the Bitcoin ecosystem may also just need such an opportunity.
Ecosystem and Data Overview
Regardless of whether before or after the upgrade, Stacks itself remains foundational, and its development progress cannot be separated from the construction of ecosystem projects.
After the Nakamoto upgrade, by releasing liquidity in the BTC ecosystem through sBTC, Bitcoin smart contract functionality, and scalability improvements, various projects in the ecosystem may benefit.
There are over 60 DApps in the Stacks ecosystem, most of which are related to DeFi and NFTs. Among them, DeFi protocols reap relatively large upgrade dividends, as through the Nakamoto upgrade, users only need to lock their BTC to mint sBTC on Stacks and use sBTC in DeFi, such as stablecoin lending, borrowing, asset swapping, etc. Users can earn BTC rewards for protocols built on Stacks.
Currently, some good DeFi protocols are as follows:
Alex Labs: Building the most comprehensive Bitcoin DeFi ecosystem through Stacks. Alex Labs will extend products such as Lisa (Stacks version of liquidity staking), launchpad, and cross-chain bridge into the Runes ecosystem.
Arkadiko: Adopting a CDP (Collateralized Debt Position, similar to MakerDAO) model, allowing users to mint stablecoins and thus generate Bitcoin rewards.
StackingDAO: A liquidity staking protocol on Stacks, allowing staking of Stacks to generate additional rewards.
Zest: An on-chain lending protocol.
Bitflow Finance: A DEX in the ecosystem.
According to data from Signal 121, most of the currently staked STX has flowed to StackingDAO, followed by LISA and Stackswap.
Currently, the active addresses in the Stacks ecosystem are basically all in the DeFi protocols shown in the above image, and the fund sizes of different ecological projects are positively correlated with the activity levels of the addresses; the protocols with the most staked funds often have the most active addresses.
But from the overall TVL and the absolute value of the address count, there is indeed a considerable gap between DeFi on Stacks and ETH; from another perspective, this also corroborates the article's opening viewpoint — we often need a detonator and catalyst to turn the gap into upward space.
And this gap is clearly difficult to fill with memes. It is worth noting that there are also some meme projects on Stacks, but their cultural attributes, influence, market value, and activity levels still have a significant gap compared to memes on Solana.
Therefore, as the Stacks infrastructure matures, whether there will be more asset-creating gameplay like inscriptions in the previous wave of BTC ecosystem will directly affect the activity level of the Stacks ecosystem.
However, the bridge has been built; what kind of vehicles will ultimately run on it still needs time to observe.
Future Outlook: When technological innovation meets ecological incentives
In the Bitcoin ecosystem, we often discuss a question: what kind of relationship exists between technological innovation and market recognition?
Is it true that having technology will guarantee market acceptance? The answer is certainly No; often, whether the market accepts it depends on the project's operational thinking and planning.
Technological upgrades are just the underlying aspects; what’s outside is the sBTC ready to take off, encouraging more people to participate in the construction of sBTC on both the supply and demand sides, which is the next key move for Stacks.
Therefore, the recently launched "Best & Brightest" program by Stacks is essentially a major innovation project solicitation aimed at the Bitcoin ecosystem. In simple terms, it provides comprehensive support for developers and teams who want to build innovative applications on Bitcoin — somewhat like a "Bitcoin ecosystem innovation accelerator."
This plan will start to unfold in late November 2024, covering various important areas in the Bitcoin ecosystem such as miners, wallets, and exchanges. It caters to the growth space of individual developers while providing ample development funds for mature teams.
To ensure these innovations are safe and reliable, Stacks has also specially invited top security teams in the industry to join. For example, Immunefi (a blockchain security platform protecting over $190 billion in assets, with over 45,000 security researchers) will hold a special "Attackathon" event to let white-hat hackers test and strengthen the security of these innovative projects in advance.
Interestingly, the timing of this plan's launch is just right. Just as Bitcoin prices hit new highs and the market fell into speculative frenzy, Stacks chose a seemingly slow-burning but possibly more visionary path: through solid technological innovation and ecological construction, to provide more possibilities for the entire Bitcoin ecosystem.
From the perspective of institutional support, sBTC has already gained support from more than 20 well-known institutions, including BitGo, Blockdaemon, Figment, Copper, and Asymmetric. This broad institutional endorsement is not only recognition of the technical solution but also a trust vote for the future development of the entire ecosystem.
We are likely to see a wave of innovation based on Bitcoin. This relates not only to the expansion of the Bitcoin ecosystem but may also redefine our understanding of "Bitcoin applications."
After all, as Nakamoto said on the Bitcoin forum: "In the coming decades, when block rewards become too small, transaction fees will become the main compensation for nodes. I believe that in 20 years, there will either be a lot of transactions or none at all." Now it seems that through such an ecological innovation plan, Bitcoin is seemingly heading towards the former direction.
However, technological innovation ultimately requires market validation. In the current context where the Bitcoin ecosystem "only raises coin prices but not the ecosystem," can Stacks' choice gain market recognition?
The answer to this question may only be revealed after sBTC officially launches and more innovative applications based on Stacks emerge.
