Disclaimer: This is not financial advice. Anything stated in this article is for informational purposes only and should not be relied upon as a basis for investment decisions. Triton may maintain positions in any of the assets or projects discussed on this website.
In our last few posts, we’ve gone deep into how blockchain networks are a step-change improvement on payment networks, turning them into internet-native value transfer platforms. In this paradigm, native assets of these networks are productive and inherently valuable as they are vital to the functioning and service provision enabled by these chains. In this post, we’ll double click on a project that embodies this platform functionality, transforming latent Bitcoin into a highly productive asset: Stacks.
Stacks (STX) – current front runner for general-purpose Bitcoin L2s
We alluded to the fact that Bitcoin is slowly becoming a more productive asset as development across the ecosystem picks up. Stacks has been ahead of that curve and is currently the leading BTC L2 in the market. The project grew out of founders Muneeb Ali and Ryan Shea’s work while at Princeton University, where the underlying technology was first developed and was the topic of Ali’s PhD thesis.
Stacks primarily addresses two core issues that result from the design choices of Bitcoin: it is deliberately slow, and it is deliberately limited in functionality. On average, Bitcoin produces new blocks every ~10 minutes. While this is (arguably) okay for a singularly-focused secure payment platform, it is far from adequate for a platform that hosts applications requiring sub-second transaction speeds. Meanwhile, though Bitcoin’s scripting language enables conditions to be set under which transactions can be spent, it is extremely limited in what rules it can enforce. This means it cannot enable the types of complex calculations required to natively support application development.
In short, Stacks is a BTC-secured layer 2 network that brings the general-purpose compute capabilities of smart contract platforms to Bitcoin. That is, Stacks decouples the execution from the base layer to expand upon the limited speed and functionality of the Bitcoin network, while still leveraging the security provided by the 640 exahashes per second of the Bitcoin network. With its recent Nakamoto Upgrade (live as of Bitcoin block 840,360), transactions were reduced to 5s from ~10m and are now fully settled on Bitcoin. Economically it taps into Bitcoin through its decentralized peg sBTC and validates network transaction data by publishing hashes of data to Bitcoin every Bitcoin block (it does not post the block data itself, just the hashes for validation to minimize data loads on mainnet).
Stacks’ own native programming language, Clarity, is optimized for security and predictability to reduce the chance of exploits but does so at the cost of being Turing Complete. To remedy this, Stacks expands its capabilities by positioning itself as a platform for additional subnets to be created on top of the main Stacks layer, allowing for different tradeoffs to be made between decentralization and performance on a subnet-to-subnet basis. These subnets benefit from much higher throughput and lower latency, but with less decentralization, and can support a range of different languages and execution environments, such as Ethereum’s Solidity and EVM. Regardless of implementation choice, all transactions are still ultimately settled on the Bitcoin blockchain via Stacks’ main layer. These subnets are akin to Arbitrum’s Orbit chains or Avalanche’s subnets.
What does this mean? Stacks extends its own functionality to enable any number of other networks to deploy on top of it, immediately getting access to the sBTC (e.g. pegged BTC) capital on the Stacks main layer. For BTC holders, this means that by moving their BTC to Stacks, they can now access a wide range of use cases in which they can deploy their BTC, such as lending or borrowing, trading and gaming.
The key opportunity for Stacks is that its architecture enables trustless and permissionless migration of the $1.2T of dormant Bitcoin capital to a far more dynamic execution environment, turning Bitcoin into a productive asset and unlocking its use across myriad applications. There are currently dozens of projects building to do this through various architectures, be it through sidechains, rollups, state channels or client-side verification. The vast majority of these have yet to release a live mainnet, and those that have are fighting to differentiate themselves from the other newly launched projects.
Much like with Ethereum and its ecosystem of L2s, the likelihood of multiple BTC L2s to gain traction and have success is high. However, also like Ethereum, the market has shown that it does not have unlimited appetite for yet-another-EVM-compatible-zk-rollup. Rather, the strongest teams that deploy first with a differentiated offering have won the Ethereum community’s mindshare (e.g. Optimism, Arbitrum, Base).
We believe that the same dynamics will likely play out for Bitcoin L2s, but with an additional criterion: adherence to the Bitcoin ethos of conservatism and security. Rootstock has existed as an EVM compatible BTC L2 network that uses merge mining to secure its network for many years. Similarly, bridged Bitcoin (e.g. wBTC) has been available on Ethereum since 2019 but has never broken above $15B in total value. That is, the market has shown that smart contract functionality for Bitcoin, but at the cost of introducing many new trust assumptions and security risks, is not enough to convince Bitcoin holders to put their coins to productive use. Simply put, 5% yield is not worth the risk of suffering an exploit in a smart contract.
Many of the newly launching projects are introducing these additional trust assumptions and security risks inherent in their architectures (e.g. fraud proofs aren’t even live on the leading Ethereum L2s, and ZK implementations introduce heavy hardware requirements for their nodes, necessarily limiting participation). However, with Stacks’ sBTC release and Nakamoto upgrade now complete, it differentiates itself from rival projects through live Bitcoin finality, trustless and permissionless pegging, a limited and secure programming language, and lightweight nodes. Each of these positions Stacks closest to the native BTC vision and coupled with its high scaling potential through subnet support, puts Stacks in a prime spot to solidify its lead as the top BTC L2 solution.
This is why we invested in Stacks in October 2023 and continue to believe it will be a top project in the BTC L2 ecosystem.
MEV (Maximum Extractable Value) is the value captured by third parties on blockchain networks