STX Update and Beta Plays on Ecosystem with HodlSTX

Level 2 - Value investor

Welcome Avatar! We have HodlSTX here with an update on the Stacks ecosystem. This is an older investment and we’re crowdsourcing the community for updates.

Handing it over to HodlSTX.

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Introduction

HodlSTX here giving you all an update on the Stacks ecosystem. I’ve been around the broader crypto ecosystem and have been following Bull since the WSPs days, bought Bitcoin in the Covid crash (not enough), and have been in the space since 2020. I mainly focus on building and investing within the Stacks ecosystem. 

Stacks Value Prop (if you already know about this scroll down)

For those that are less familiar with Stacks, it used to be an afterthought for many across the crypto ecosystem back in the last cycle, it was in many ways like trying to sell a computer to the Amish. Stacks aim has always been to make Bitcoin programmable while still focusing on security first. 

The narrative around building on Bitcoin back then was focused mainly on Lightning and many Bitcoin developers left for other ecosystems. At the time Bitcoin maxis simply would call everything else in crypto a scam, and go back to their bunker.

Being in Stacks early I always felt I was skating to where the puck was going. If you believed the Maxis, Bitcoin was going to consume all economic value and would be used as de facto money. While I also understood programmable money via smart contracts was also going to consume our current economic world (it’s only a matter of time). It then only makes sense for these two trends to happen in unison with some kind of scaling solution. 

The other realization I had which was from those that critique Bitcoin, was that at some point Bitcoins security budget would decrease in value as the halvenings would occur, and transaction fees would need to greatly increase to keep Bitcoin secure, and keep miners profitable. For this to happen while onboarding massive amounts of the world, and their usage, it is inevitable for a scaling solution to happen.

Stacks Overview

Stacks has attracted users in the past whether it be with waves of new users with CityCoins and NFTS back in 2021, DeFi and BNS (ENS equivalent) in 2022, and memecoins earlier this year, but has had a difficult time at keeping all these new users once they come in mainly due to the poor experience from the slowness of the chain as it has been tied to Bitcoin blocks. 

This poor user experience should all be resolved with the Nakamoto upgrade, which is coming mid October. This will make Stacks go from Bitcoin block speed to roughly 5 second blocks with full Bitcoin security. Something those in the Stacks ecosystem have been working on, and patiently waiting on for 1.5 years. 

Directly following the Nakamoto upgrade sBTC will launch allowing users to bridge Bitcoin, fully realizing Stacks claim as a Bitcoin L2. My estimation is ~4 weeks after Nakamoto goes live sBTC will launch.

sBTC explained

The easiest explanation for how sBTC works is Stackers currently receive a yield for locking their Stacks; the yield is paid out in Bitcoin. If your alarm bells went off and go where does the yield come from, the yield is produced from Stacks miners bidding on Stacks emissions, essentially participating in an ongoing continuous auction for newly minted STX. 

With these new upgrades these Stackers are now validators in the bridge between Bitcoin the L1 to Stacks the L2. There is a security budget which caps the amount of BTC that can be bridged onto Stacks, priced in Stacks (which fluctuates based on the total value of the stacks locked earning the yield). This makes sure the validators always have more to lose in Stacks valued in USD than what they would gain in Bitcoin valued in USD by a large margin if they were to act in bad faith. To my knowledge Stacks is the only crypto that currently produces a native Bitcoin yield.  

Once sBTC is live, you can bridge native Bitcoin onto the Stacks chain using a bridge, you just initiate a Bitcoin transaction and provide your Stacks wallet address. The Bitcoin is sent to the Stacks protocol multisig run by the signers/validators (who have stacked their STX). On deposits the sBTC is available within one block confirm on the Bitcoin chain. All bridges come with risk assumptions, and this is how these are explained: "Greater than 70% of these signers are required to approve deposit and withdrawals from the system. This means that as long as at least 30% of validators are honest, the BTC deposited in sBTC is secure. To steal the BTC deposits, malicious actors would need to convince a number of validators that represent > 70% of the stacked STX capital to collude in order to steal the BTC funds. This is highly unlikely in practice given Stacks validators are geographically dispersed entities with significant business risk for behaving maliciously." For those looking for a deep dive, the risk assumptions are best described here (source)

Withdraws are slower and can take up to 24 hours, but I anticipate a number of protocols will have the ability to swap from sBTC to BTC using other existing technology (Submarine swaps) at a quicker pace if needed.

Many protocols in Stacks are working on integrating sBTC into DeFi in all the typical use cases we are used to seeing like over collateralized loans, Aave type lending/borrowing protocols, perpdexes, and typical dex functionality (these protocols are discussed further down).

My take on Stacks

Stacks has taken the approach of slow as smooth and smooth as fast in regards to its development, this means last cycle although it didn’t generate the same buzz like other protocols did, it also dodged a lot of bullets that caused the last cycle to blow up.  

Stacks will soon have its main point of criticism solved (chain is too slow and congested) and will soon have a growth driver with sBTC. I look forward to seeing the growth this will drive in the next 6 months, depending on usage of the chain I believe this could lead to a repricing, as potential finally meets execution. 

Many in the past weren’t interested in the Bitcoin L2 narrative and really Stacks and Rootstock were the only shows in town. However, with the launch of Ordinals and Runes many more have become interested in building Bitcoin L2s. Easily there are 20+ Bitcoin L2s in various stages of development now. Stacks has a lead compared to all of these other projects but needs to execute. 

Currently there is a minimal amount of Bitcoin deployed in smart contracts across all ecosystems even including wrapped Bitcoin (~$12 Billion total) compared to its 1.3 trillion market cap. You compare that to the total value on Ethereum ~$120 Billion including stables, and it's easy to realize that most Bitcoin is dormant, with some percentage (5,10 or 15%) waiting to be deployed. 

This is more or less the rationale for why so many are wanting to build on Bitcoin again. The culture has changed with the development of Ordinals and Runes bringing in builders and investors, and more have realized the opportunity that exists in making Bitcoin more productive. Many describe the Bitcoin L2 space as a $100 Billion + opportunity. 

With the launch of these new Bitcoin L2s (competition to Stacks), they will attract users with points, airdrops and will have investor cliffs that we are all used to seeing, but since Stacks already has all its tokens unlocked, quite the head start in development, and most of its supply already exists I see it holding a large market share of the Bitcoin L2s. 

The Bitcoin L2 space has the opportunity for a few winners, like we see on Ethereum with Arbitrum, Base, and Optimism. Where if the trend holds true the top 3 L2s accrue 80% of the value for this opportunity. Also as the sector matures another handful of L2s for particular use cases could thrive.  

Growth driver for all L2s

The launch of these new L2s will clog the L1 (hard to pay $100 fees for a coffee) with users bridging assets into and off these protocols. This will cause many to see the importance of Bitcoin L2 scaling solutions, leading to a positive feedback loop of users that want fast block times, smaller fees, and BRC-20, Runes, and Ordinals trading taking place on the L2 (hopefully Stacks). We have already seen this happen once with the launch of Babylons staking protocol which took in a capped 1000 Bitcoin in one day causing large fee spikes to occur on the L1, one could imagine what many mature L2s may produce. 

Recent news/updates

One of the main goals of the Stacks ecosystem will be onboarding as many ecosystems, rails, and Dapps to sBTC. Stacks has already started some partnerships in order to engrain sBTC in other ecosystems (Aptos announcement) and Stacks developers are working to bring sBTC to Solana.

Other news from Stacks in regards to regulatory clarity from back in late June from the Co-founder of Stacks Muneeb Ali-
“The SEC after 3 years, are terminating their investigation into the Stacks blockchain (the protocol) and Hiro System (a company) with no action.

Stacks did the first-ever SEC-qualified offering in 2019. The Stacks ecosystem decentralized before the mainnet launch in Jan 2021. In June 2021, the SEC launched an investigation of Stacks & Hiro.”

Institutional adoption news: Grayscale launched its Stacks Trust back in May and Anchorage Digital institutional self custody wallet now supports Stacks (September 24th).

The Bitcoin L2 landscape continues to develop rapidly. data now officially reports that there are more daily transactions on Bitcoin L2s than on the Bitcoin L1 (from Signal21).

Stacks in 2024 has seen its TVL double, its non-zero STX wallets double, and an increase in activity across all applications, as seen from Signal 21.

Protocols live on Stacks that I find interesting

Velar- Is a protocol that has launched this year, they have a Dex, a launchpad in the works, and just launched a Perpdex. They will be on many Bitcoin L2s. They are a great team that works with the community and has been a hot Dapp that a lot of meme coin trading volume occurs on.

StackingDAO- Provides a liquid staking solution for stacks with 110 million TVL, 9 percent APY, does not have a governance token yet, just has a points program.

Bitflow- Has launched a Dex aggregator, and also has its own Dex with liquidity mainly focused on stSTX (stackingDAOs liquid staking token for STX), and stablecoin swaps. It also has a Runes trading experience coming soon. No token yet either, just a points program currently.

Zest-  Provides an Aave like lending experience, and is working to provide sBTC yield opportunities.

Hermetica- Provides a stablecoin that trades on the Bitcoin L1 as a Rune and also on Stacks, the protocol acts similar to that of Ethena labs with their delta neutral stable coin.

Arkadiko-  Has its version of a MakerDAO overcollateralized stablecoin protocol, this was the first DeFi protocol launched on Stacks and has been live since 2021.

Alex- Had a hack back in the spring, but has a well established team and has committed to distribute revenue back to LP holders that lost funds, TVL and its token have recovered relatively well, and the project has its own Dex, bridges, L1 Bitcoin trading experience as well, and their own liquid staking solution for Stacks. 

For those curious about the meme coin scene on Stacks the most established meme coins in the community today are:
Welsh- a community takeover token widely distributed, reached 150+ million market cap back in the Spring. It goes by the first dog on Bitcoin and really is the first community token on Stacks. 

LEO token (the co-founder of Stacks pet cat is named LEO) the team also built its own explorer and analytics page (stxtools), it is widely held and respected. 

Roo- is a community token that raised its LP from the community, it has a strong group that is innovative. 

Nothing- The coin was the first coin on the Stacks chain (besides STX), and has a strong cult following. 

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There are other tokens out there, but these are what I myself consider beta plays on the ecosystem and are all tokens that I hold (NFA). 

I’m hodlSTX and have been following the Stacks ecosystem since January 2021, and I am the Co-founder and a core-contributor of Zero Authority DAO which is a gig and bounty marketplace allowing peer to peer work along with reputation badges (non-transferrable NFTs) signifying immutable work/actions on chain. Our goal is to help grow the pseudonymous economy. Please give us a follow and be on the lookout for our launch of Platform V2.

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Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are *opinions* written by an anonymous group of Ex-Wall Street Tech Bankers and software engineers who moved into affiliate marketing and e-commerce.

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