The latest coin to shine in the ongoing bear market is Stacks (STX) which gained more than 100% in the past two days to now trade at $0.867, according to data from CoinGecko.
These gains have helped the coin regain its billion-dollar market capitalization. And with a market cap of $1.2 billion, STX is now the 51st largest cryptocurrency, up 157% in the past week and 200% in the past month.
It has been enjoying an uptrend since the beginning of the year, with a positive price performance of a whopping 310% YTD. However, STX is still down over 74% from its all-time high (ATH) of $3.39 hit over a year ago.
STX is the native token of the Stacks protocol, which is built on top of the leading cryptocurrency Bitcoin, which is up 45% YTD to trade above $24,000. The token is used to reward Stacks miners and participants of the proposed Stacks Bitcoin (sBTC) system, which seeks to make Bitcoin completely programmable. Notably, the sale and distribution of STX was the first of its kind approved in 2019 by the SEC to take place under Regulation A+.
Understanding Stacks: A Bitcoin Layer 2
Launched in 2017, Stacks allows developers to build and deploy smart contracts secured by Bitcoin to enable decentralized applications (dApps) and non-fungible tokens (NFTs) on the leading blockchain.
Stacks is a Bitcoin layer two that utilizes a novel consensus mechanism called Proof-of-Transfer (PoX), which runs in parallel with Bitcoin’s Proof-of-Work (PoW) consensus, using it as a settlement layer.
As part of the mainnet launch in January 2021, the project launched the innovative mechanism Stacking.
Under this mechanism, miners commit BTC on qualifying stack addresses participating in the consensus instead of miners burning BTC as a proxy for computing resources. And in exchange for committing their BTC, miners get a chance to mine a Stacks block. Metadata from freshly mined stack blocks are attached to each Bitcoin block, allowing users to validate a canonical stack chain through Bitcoin blocks.
Miners that generate new blocks are rewarded with a block reward of newly minted STX tokens as well as a fee of STX, while qualifying Stackers earn BTC-denominated earnings.
Stack is still a very young chain and has only a small number of applications when compared with other ecosystems. Statistically speaking, across the broader DeFi ecosystem, Stacks represents less than 1% of the total value locked with nearly $25 million in TVL, as per DeFi Llama.
Applications on Stack are built using Clarity, its smart contract language, which is optimized for security and predictability.
Ordinal NFTs Fueling the Rally
The biggest driving force for the recent uptick in STX’s price has been a steady increase in NFT activity on the Stacks blockchain. The buzz surrounding Ordinals, the recently launched Bitcoin-based NFT project, has been particularly good for the network’s overall activity, with investors seeking greater exposure to the NFT-on-Bitcoin narrative.
Unlike the NFTs on Ethereum, Ordinals is akin to drawing art directly onto satoshis, Bitcoin’s lowest denomination. Because Ordinals are directly mined onto a blockchain, they are “considered to be digital artifacts because of their persistence and immutability in the distributed ledger,” unlike traditional NFTs, which smart-contract developers could alter, wrote Markus Thielen, head of research at Matrixport.
According to Dune Analytics, more than 165,000 ordinals have been created so far. This led to congestion in the Bitcoin blockchain driving the network activity and fees.
While some in the Bitcoin community saw it as an abuse of the network, Muneeb Ali, co-founder of Stack, sees this as a good thing for Bitcoin as the leading blockchain has been missing the “young, enthusiastic developer community that is actually building things, shipping stuff.” Additionally, all the activity from Bitcoin layers and Ordinals will “give a clear path for long-term Bitcoin security” rather than mining.
“Ordinals on Bitcoin [layer 1] are complementary to Bitcoin NFTs on [layer 2s] like Stacks. Ordinals have a natural limit on the L1 scale, and L2s provide a clear scalability path,” tweeted Ali.
He also pointed out how this craze has led Bitcoin-focused Web 3 wallet Xverse to roll out support for Ordinals. Hiro Wallet also added support for Inscriptions to their testnet, which Ali described as the Metamask of Bitcoin.
Data from DappRadar also showed that the volume traded on Gamma.io, the Stack-based Bitcoin NFT market, increased over 1000% in the last 30 days. Earlier this month, Gamma.io also unveiled the No Code Creator Platform for NFTs on Bitcoins via Ordinals, opening doors for users to create inscriptions without running an entire Bitcoin node or writing code, essentially making ordinals available for anyone.
“Ordinals NFT on Bitcoin blockchain has been very successful, leading to a general Bitcoin NFT fever,” said CK Cheung, investment analyst at DeFiance Capital. “Stacks is a beneficiary of this as it is an L2 supporting smart contracts built on top of the Bitcoin Network. People could mint new Bitcoin NFTs on top of Stacks with a lower cost and higher speed.”
Bitcoin’s Vast DeFi Ecosystem
According to Matrixport, Ordinals could potentially propel STX into the billion-dollar range as the full potential of the Stacks Network is starting to get recognized, which could lead to further gains in the STX token.
In its research report, Matrixport also noted that the idea of bitcoin NFTs is not new, having been developed by protocols like Counterparty and Stacks. It further added that the combination of the NFTs and the Bitcoin network does bring greater security, transparency, and traceability, which has opened up multiple use cases and renewed interest in these tokens.
“Stack’s ability to leverage the Bitcoin blockchain’s security for settlement of transactions positions the network well for developing Bitcoin decentralized finance (DeFi),” the report said.
Bitcoin NFTs, however, could very well be just the tip of the iceberg when it comes to Bitcoin DeFi, as Stacks has the advantage of free smart contract development over Ethereum and other blockchains.
“Whatever you can build on Ethereum, Solana, you can build on Stacks L2s,” said Ali, according to whom the goal of Ordinals is to “unlock $500 billion in BTC capital” by enabling sBTC for a Bitcoin-based DeFi. “sBTC can do for Bitcoin DeFi what Ordinals did for Bitcoin NFTs,” he added.
According to Stacks’ website, the sBTC token will allow Bitcoin to become the foundation for a more secure Web3. This will be achieved “by enabling trustless writing to Bitcoin and the movement of Bitcoin in and out of Bitcoin layers.”
Furthermore, a trustless bridge for Bitcoin is being built to port it into Stacks’ DeFi ecosystem.
Amplified Network Activity
With so much happening in Stack, there is plenty of activity happening on the platform. For instance, the network processed 3.36 million transactions in February, up over 200% compared to 1.13 million transactions recorded in the previous month.
During this same time frame, the Stacks network’s mempool (a queue for outstanding transactions where new transactions on the blockchain are stored before being verified and added to the blockchain) has seen a distinct spike in transactions, which indicates an increased demand for the network, according to data from Stacks on Chain.
Following Ordinals’ growing popularity, NFT activity on Stack also picked up, with more than 650k Bitcoin NFTs minted on layer 2.
The amount of daily active wallets on the network has also been on the rise, with Messari noting a 67.4% surge from a year ago. However, the average number of active wallets is just below 1000 daily.
This shows that Stack is still a fledgling system compared to the Ethereum Layer-2 networks. For a better comparison, let’s look at Arbitrum’s numbers, which clocks in at fewer than 30,000 active wallets per day.
In addition to the hype surrounding the Bitcoin NFT project Ordinal, increased development activity in Stack is also the reason why the STX’s price has been pumping. According to Stacks, about 35,000 smart contracts are currently running on Bitcoin’s Layer-2 network. And on top of that, over 150 different projects are now developing applications on Stacks, according to the team.
All said and done, Stack is still in its growing phase, and this growth has been going on since last year when smart contracts deployed showed a strong momentum with a compound annual growth rate (CAGR) of 19.2%.
If we look at Q4 of 2022, Stacks network utilization metrics, defined as the daily average of active users and addresses, increased by 76% and 42%, respectively.
The spike in BNS signups (BTC addresses) in this quarter was a major catalyst driving Stacks network usage. This led to more than 97,000 new BNS names being registered during the quarter, which represents about 70% of total 2022 BNS registrations, as per the Messari report.
What’s Coming?
Amidst all this, the project is busy with developments too. On 16 December, the Stack 2.1 upgrade was approved, queuing up multiple upgrades. These changes are scheduled to take effect in the first quarter of 2023.
The new whitepaper from Stacks released in Q4 that introduces sBTC, “trust-minimized” two-way Bitcoin Peg, will allow Bitcoin capital inflows to contracts in Stacks layers, starting at Bitcoin L1, and allow smart contracts to programmatically write back to Bitcoin L1.
According to Messari’s recent report, the new BTC-to-sBTC linkage will provide users a decentralized route for deploying their BTC to take advantage of stacked smart contract capabilities.
Meanwhile, the upcoming planned release, called the Nakamoto version, will no longer have separate security budgets for Bitcoin, but rather Bitcoin’s hash power will determine the finality of the Stacks layer. This means that for an attacker to reorganize the Stacks block, they have to reorganize the Bitcoin blockchain itself.
Stack continues to make improvements to the network, with plans to implement a variety of proposals centered around scaling to subnets, the programmability of Bitcoin, and new tools for users and developers, which can help its token STX rise in value.
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