Author: Deep Tide TechFlow
When Bitcoin breaks $90,000, various ecosystems in the crypto market begin their own celebrations.
The AI narrative continues to be hot, and memes continue to create wealth myths... But in this revelry, projects in the Bitcoin ecosystem are more like 'outsiders': they celebrate, but I have nothing.
Clearly, the positive effects of Bitcoin's rise have not significantly overflowed into projects within its own ecosystem.
Even compared to the 'least promising' Ethereum, the latter's proud DeFi sector occupies nearly 17% of Ethereum's total market cap; while Bitcoin maintains about 50% of the entire market's market cap, its total locked amount in the DeFi ecosystem (TVL) is less than 1% of the entire market (data source: CMC research report).
However, the crypto market consistently follows the rules of attention and narrative rotation.
The significant gap also contains phase opportunities. After the inscription and staking gameplay, the BTC ecosystem fell into silence; there is a possibility of being ignited at any time in the face of a huge gap.
Some projects that have been deeply involved in the Bitcoin ecosystem for years may also welcome their opportunities; often, they just lack a catalyst.
While various Meme coins showcase 'explosive growth', as one of Bitcoin's earliest Layer 2 solutions, Stacks has chosen a quiet path—focusing on technological transformation and finally completing the long-discussed Nakamoto upgrade.
Don't forget, last year STX also had a similar meme-like quality, with its price once skyrocketing 10 times.
What will this upgrade bring? Will it be a new opportunity to kickstart?
In the current speculative environment, how much imagination space is left for projects focused on technological innovation like Stacks?
Revisiting an old shop, let us get to know Stacks, this old friend, once again.
The Nakamoto upgrade is not just a technical reconstruction
The core of the Nakamoto upgrade lies in the comprehensive innovation 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 needs to wait for the Bitcoin network to generate a new block to complete. Although this mechanism inherits the security of Bitcoin, it also brings efficiency problems: even simple transactions have to wait for 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 the transaction.
Grayscale's analysis illustrates the potential performance gap before and after the upgrade more intuitively:
(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 an internal consensus mechanism while waiting for Bitcoin block confirmations. 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 brought substantial improvements. Originally, Stacks wrote its block hash into Bitcoin transactions, but this one-way security inheritance had potential risks. In the new architecture, miners need to participate in both Bitcoin mining and Stacks verification, creating a bidirectional security verification mechanism. This not only raises the cost of attacks but also ensures the honesty 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 relied on complex relay mechanisms, 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, significantly 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 possible implications of the Nakamoto upgrade:
At the same time, according to Grayscale's research analysis, the Nakamoto upgrade will provide unique features that include:
(i) Bitcoin collateralized stablecoin,
(ii) Bitcoin-based lending (and Bitcoin-native rewards),
(iii) Decentralized Autonomous Organization based on Bitcoin.
Similar to how foundational financial primitives propelled Ethereum's DeFi ecosystem in 2017, given Bitcoin's currently high-profile status, its ecosystem could also flourish now.
sBTC, an innovative application of Bitcoin on Stacks
This upgrade looks promising, but what substantial changes will it bring to the ecosystem and products?
From Stacks' 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 simple: to make Bitcoin, the 'digital gold', more flexible and become a truly programmable productive asset.
Thus, the sBTC mentioned in the table above can be understood as an innovative Bitcoin wrapping protocol that allows Bitcoin to operate in the form of smart contracts on the Stacks network.
An infrastructure project still needs to get closer to asset issuance to gain more attention and create more gameplay.
This vision does not sound novel. There have been many similar attempts in the market, such as the popular wBTC on Ethereum, which even reached a locked amount of $5-15 billion under centralized custody. But the ambition of sBTC is clearly more than that—it aims to be a truly decentralized solution that aligns with the spirit of Bitcoin.
The core mechanism of sBTC is actually very intuitive: when a user locks BTC on the Bitcoin mainnet, the Stacks network mints 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 just need to burn sBTC, and the corresponding amount of BTC will be automatically released.
It sounds simple, but the real technical challenge lies in ensuring the decentralization and security of this process, which is also the most distinctive aspect of sBTC.
It has no preset managers but operates the entire system through an open dynamic signer group. All key operations are conducted on the Bitcoin mainnet, inheriting Bitcoin's security features.
Signers earn BTC rewards through Stacks consensus, and this economic incentive ensures that the system can operate steadily and sustainably. 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 already in place.
From the market's perspective, the TVL share of Bitcoin DeFi is less than 1%, which forms a huge contrast with its market value. This gap indicates tremendous development space. More encouragingly, several major Bitcoin organizations have explicitly stated their support for the sBTC plan, demonstrating industry recognition of this innovation.
Regarding sBTC, it should 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 sBTC upgrade is expected to launch 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 brief can help you get a quick overview.
In the current context of the Bitcoin ecosystem 'only rising in price but not in ecology', the emergence of sBTC might become a catalyst for changing this situation. Just as Ethereum drove the development of the DeFi ecosystem through foundational financial primitives in 2017, the Bitcoin ecosystem may just be one such opportunity away.
Ecosystem and Data Overview
Whether before or after the upgrade, Stacks itself remains infrastructure, and its development and progress cannot be separated from the construction of ecological projects.
After the Nakamoto upgrade, liquidity in the BTC ecosystem could be released through sBTC, Bitcoin smart contract functionality, and scalability improvements, and various projects in the ecosystem may benefit from this.
There are over 60 DAPPs in the Stacks ecosystem, most related to DeFi and NFTs. Among them, DeFi protocols can benefit relatively more from the upgrade because, 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. For DeFi protocols built on Stacks, users can receive BTC yield rewards.
Currently, some good DeFi protocols are as follows:
Alex Labs: Building the most comprehensive Bitcoin DeFi ecosystem through Stacks. Alex Labs is expanding products such as Lisa (a liquidity staking version of Stacks), launchpad, and cross-chain bridges into the Runes ecosystem;
Arkadiko: Adopts the CDP (Collateralized Debt Position, similar to MakerDAO) model, allowing users to mint stablecoins to generate Bitcoin yields;
StackingDAO: A liquidity staking protocol on Stacks that allows staking Stacks to generate additional returns;
Zest: An on-chain lending protocol;
Bitflow Finance: DEX in the ecosystem;
According to data from Signal 121, most of the staked STX has flowed to StackingDAO, followed by LISA and Stackswap, etc.
Currently, the active addresses in the Stacks ecosystem are basically in the DeFi protocols shown in the figure above, and the funding volume of different ecological projects is positively correlated with the activity level of the addresses. Protocols with the most staking funds often have the most active addresses.
However, from the perspective of total TVL and the absolute value of the number of addresses, there is indeed a considerable gap between DeFi on Stacks and ETH, which also corroborates the opening argument of the article—that we often need a detonator and a catalyst to transform gaps into upward spaces.
But this gap is clearly difficult to fill with memes. It is noteworthy that there are some meme projects on Stacks, but their cultural attributes, influence, market cap, and activity levels still have a significant gap compared to memes on Solana.
Therefore, as the infrastructure of Stacks matures, whether there will be more asset creation gameplay like inscriptions in the previous wave of BTC ecosystem will directly affect the activity level of Stacks ecosystem.
However, the bridge has been built, and what kind of vehicle 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 is the relationship between technological innovation and market recognition?
Does having technology mean the market will definitely buy it? The answer is, of course, no; often whether the market buys it depends on the project's operational thinking and planning.
Technological upgrades are just the foundation, while sBTC is poised for action, encouraging more participation from both sides of supply and demand in the construction of sBTC, which is a key move for Stacks going forward.
Therefore, the recently launched 'Best & Brightest' program is essentially a major innovation project solicitation activity aimed at the Bitcoin ecosystem. In simple terms, it provides comprehensive support for developers and teams looking to build innovative applications on Bitcoin—somewhat like a 'Bitcoin ecosystem innovation accelerator'.
This plan will start to unfold in late November 2024, covering important areas in the Bitcoin ecosystem such as miners, wallets, exchanges, etc. It caters to the growth space for individual developers while providing ample development funding for mature teams.
To ensure these innovations are safe and reliable, Stacks has also specially invited top security teams from the industry to join. For instance, Immunefi (an on-chain security platform protecting over $190 billion in assets with over 45,000 security researchers) will hold a special 'Attackathon' event to allow white hat hackers to test and strengthen the security of these innovative projects in advance.
Interestingly, the timing of this plan's launch is just right. Just as the price of Bitcoin hits a new high and the market generally falls into speculative frenzy, Stacks chose a seemingly slow but possibly more visionary path: providing more possibilities for the entire Bitcoin ecosystem through solid technological innovation and ecological construction.
From the perspective of institutional support, sBTC has already received support from over 20 well-known institutions, including BitGo, Blockdaemon, Figment, Copper, and Asymmetric. This wide-ranging institutional endorsement not only recognizes the technical solution but also reflects trust in the future development of the entire ecosystem.
We are likely to see a wave of innovation based on Bitcoin. This not only relates to the expansion of the Bitcoin ecosystem but may also redefine our understanding of 'Bitcoin applications'.
After all, as Satoshi 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 significant transaction volume or there will be no transaction volume.' It seems that through such ecological innovation plans, Bitcoin is moving towards the former.
However, technological innovation ultimately needs market validation. In the current Bitcoin ecosystem 'only rising in price but not in ecology', will Stacks' choice be recognized by the market?
The answer to this question may only be revealed when sBTC officially launches and more innovative applications based on Stacks emerge.
