The longest-running and most secure decentralized network in the world powered by blockchain technology is Bitcoin, which has established itself as such. It can only be used to transact in and hold monetary value in bitcoins because it is the first cryptocurrency in history. At least, that was Bitcoin’s story for more than a decade. So what exactly is Blockstack (STX)?
Without altering any of Bitcoin’s source code, a new technology called Blockstack aims to modernize the traditional cryptocurrency by making it even more robust and practical.
More specifically, Blockstack (also known as Stacks) keeps the transactions on the Bitcoin network after running smart contracts off-chain and concurrently with Bitcoin. As a result, those who own bitcoin can engage more with DeFi, like the NFT market, without exchanging their bitcoin for other cryptocurrencies.
Although the idea of smart contracts working with Bitcoin looks thrilling, the reality is a little more complicated. In this post, you will discover how Blockstack (or Stacks) functions.
What is Blockstack (STX)?
The Layer-2 approach for putting smart contracts on Bitcoin is called Stacks. The security of the Bitcoin protocol is shared despite the fact that it is a completely different blockchain network from Bitcoin.
What is Stacks?
Briefly put, Blockstack, sometimes referred to as Stacks, is a platform for smart contracts that works with Bitcoin. Block leader positions are auctioned for by nodes using bitcoin, and STX stakers are rewarded for their bitcoin staking.
The block leader in Stacks creates fresh STX currency and is rewarded with transaction fees. Transactions on Stacks are therefore supported by the security of Bitcoin.
Dapp developers essentially construct dapps on top of the Stacks blockchain. Transactions involving smart contracts are processed on this blockchain and verified by Stacks network nodes. Stacks use a distinctive mechanism known as the Proof of Transfer to achieve network consensus.
By competing against one another in Proof of Transfer, network nodes on the Stacks platform can receive block rewards from the Stacks blockchain and become the next block leaders.
The transactions on the new Stacks block are stored on both the Stacks and the Bitcoin blockchains once the Stacks network reaches consensus, doubling the layer-2 network’s security.
The winning bidder’s bitcoins are subsequently sent to two random STX staking pool-owned bitcoin wallets (more on this below). Transaction fees and newly created STX coins, the Stacks blockchain’s native money, are given to nodes who support transactions. Therefore, the price of bitcoin’s proof-of-work system and its worth are the sources of value for STX coin.
The interactions between bitcoin and STX coin inside the Proof of Transfer system are just briefly discussed here. Staking STX is a significant component of how Stacks functions in addition to Bitcoin’s Proof of Work mechanism. This will be covered in more detail in subsequent parts.
What is the Stacks 2.0 blockchain?
The blockchain that drives the Stacks network is known as Stacks 2.0 officially. This is done to distinguish the current Stacks network from an earlier, more centralized test network run by Hiro Systems PBC, the main developer of the current Stacks network.
By giving network users quick transaction times (instead of having to wait 10 minutes for a Bitcoin transaction) and nearly instant finality, Stacks 2.0 aims to scale up the Bitcoin network.
Additionally, Stacks 2.0 uses the Clarity programming language, which is intended for transparency and auditability, to anchor on Bitcoin to support the history of smart contract transactions.
On Stacks 2.0, more than 20 dapps have already been released, including:
- Boom, a Bitcoin-secured NFT marketplace.
- A registrar for.btc web names is BTC.US.
- A platform called Ryder is used to manage “digital DNA” for self-sovereign digital ID.
PlanBetter is a website where STX coins can be staked for bitcoin payouts.
a decentralized stablecoin lending platform called Arkadiko.
What is the STX cryptocurrency?
Stacks uses its own native money, called STX, to operate smart contracts, pay transaction fees, and secure the network through staking, just like any other blockchain. You might be wondering why the network still needs an additional STX cryptocurrency if Stacks uses bitcoin to power its consensus algorithm.
There are still several uses for STX.
Stacks 2.0 requires at least one medium of exchange, which we refer to as STX, even though it runs on a different blockchain than Bitcoin.
In Stacks 2.0, bitcoin cannot be kept. Instead, the consensus system makes use of bitcoin as an entry-level cost for network nodes. Nodes are more motivated to work honestly since they risk losing their bitcoin.
Staking requires the use of STX. The bitcoin reward system becomes centralized in the absence of stakers.
Stacks smart contracts cannot be powered by bitcoin since it is unable to process smart contracts.
Fun fact: If you read the whitepaper or docs, you won’t be surprised to learn that the Stacks community refers to staking as “stacking.”
Why did Stacks choose to work with the Bitcoin network?
The team behind Stacks thought that Bitcoin is underutilized and that if it doesn’t offer more functionality for various user types, the strong network effect will be lost.
Additionally, they think Bitcoin is the benchmark for all cryptocurrencies. The fact that the performance of Bitcoin has an impact on the value of the vast majority of cryptocurrencies serves as evidence.
The Stacks whitepaper claims that it would be difficult to compete with a protocol once it achieved supremacy. The TCP/IP protocol developed as the de facto Internet protocol among many in the early days of the Internet, and later applications simply stick to it.
“Instead of separate networks, our hypothesis is that decentralized apps and use cases will eventually be developed on Bitcoin, the most robust and well-known blockchain network. Many rival protocols existed in the early years of the internet. The winning standard was TCP/IP, on which everything else was based. That standard for cryptocurrencies is bitcoin.
How is Stacks 2.0 functional?
Consider Stacks 2.0 as a standard blockchain for a moment. Every blockchain must use a consensus protocol to select a distinct block leader for every block. Proof of Work, like in the case of Bitcoin, or Proof of Stake, where the protocol decides based on the assets staked by a node, can be used for this random election.
Technically speaking, Proof of Burn (PoB) is changed to work on Stacks 2.0.In PoB, nodes are required to demonstrate their dedication to the network by using resources modeled by a crypto asset. This is distinct from Proof of Stake, which allows stakers to sell their staked assets after a certain amount of time.
Bitcoin serves as the crypto asset in the context of Stacks 2.0. The distinction is that STX stakers receive bitcoin instead of it really being burned, or taken out of circulation.
Consequently, there are 2 different sorts of “stakers” in this network: those who stake STX coins to get bitcoin transfers from nodes and nodes that “bid” (stake-to-burn) using bitcoin to be able to create new STX coins.
The protocol rewards individuals who are willing to decentralize the distribution of Bitcoin at one end and selects those who are willing to lose their bitcoin at the other.
Too few STX stakers cause bitcoin transfer incentives to loop back to the bidders, centralizing and making the system vulnerable.
After the consensus process, stakers act as a stand-in for bitcoin’s usability, but bitcoin itself remains the store of value that is utilized to reward ethical behavior across the network.
Naturally, this is still oversimplifying how Stacks 2.0 functions. The documentation for the Proof of Transfer protocol is available here.
How are block rewards split up in the blockchain of Stacks 2.0?
Similar to how bitcoin is created and distributed, STX awards are also. The Bitcoin network is designed to synchronize with Stacks 2.0. This means that every 10 minutes, a new Stacks block is created along with a new Bitcoin block, containing information related to the new Bitcoin block.
The Stacks network nodes additionally generate many microblocks throughout the 10-minute period, enabling almost immediate finality on the Stacks blockchain without the need to wait for Bitcoin to generate the following block.
New STX coins are created every time a block is created on the Stacks 2.0 blockchain; likewise, new bitcoins are created every time a block is created on the Bitcoin blockchain. Following Bitcoin’s cycle, the block reward on Stacks 2.0 is halved every four years.
1000 additional STX units will be produced in the first four years following availability in 2020. 500 STX will be produced during the next four years. This cycle continues for almost 12 years, after which the issuance rate will be fixed at 125 STX per block until the network has issued all 1.818 billion STX coins.
The block reward (as depicted above) and transaction fees are included in the minting rewards. There is a 24-hour lockout period when the block leader successfully builds the new block before the rewards can be liquified. As STX coins cannot be staked soon after the block leader earns them to earn bitcoin back, this prevents the “rich get richer” feedback cycle.
