When BTC broke through $90,000, the entire crypto market ecosystem began to celebrate.

The AI narrative continues to be hot, and the MEME continues to play out the myth of wealth creation... But in this celebration, the projects in the BTC ecosystem are more like "outsiders": they are lively, but I have nothing.

Clearly, the positive effects of the BTC rally have not spilled over too much into the projects in its own ecosystem.

Even compared to the "least impressive" Ethereum, the DeFi sector it is proud of occupies nearly 17% of Ethereum's total market capitalization; while BTC maintains about 50% of the entire market capitalization, its DeFi ecosystem's total locked value (TVL) is less than 1% of the entire market (data source: CMC report).

However, the crypto market has always followed the rules of attention and narrative rotation.

The huge gap also contains stage-specific opportunities. After the Bit inscription and staking gameplay, the BTC ecosystem has fallen into silence; in the face of the huge gap, there is also the possibility of being ignited at any time.

Some projects that have been deeply cultivating the BTC ecosystem for many years may also usher in their own opportunities, and often it just needs a catalyst.

While various MEME coins are taking turns to "explode", Stacks, one of the earliest Layer2 solutions for BTC, has chosen a quiet path - focusing on technical transformation, and finally completed the long-awaited Nakamoto upgrade.

Don't forget that STX also had a MEME-like quality last year, with its price being pulled up 10 times at one point.

What will this upgrade bring? Will it be a new starting point?

In the current speculative market environment, how much imagination space do projects like Stacks that focus on technical innovation have?

Old shop, new exploration, let's get to know our old friend Stacks again.

Nakamoto Upgrade, Not Just 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 need to first understand the limitations of the existing PoX mechanism.

In the current PoX mechanism, the confirmation of Stacks blocks requires waiting for the BTC mainnet to generate a new block. Although this mechanism inherits the security of BTC, it also brings efficiency problems: even simple transactions need to wait about 10 minutes for the BTC mainnet to generate a block. More importantly, since the confirmation of Stacks blocks depends on the accumulation of BTC blocks, users often need to wait for multiple BTC blocks (usually 6 blocks, about 1 hour) to ensure the finality of the transaction.

Grayscale's analysis more intuitively shows the potential performance gap before and after the upgrade:

The new Nakamoto PoX solves this performance problem by introducing a "fast block confirmation" mechanism. The upgraded system allows pre-confirming transactions through the internal consensus mechanism while waiting for BTC block confirmations. This allows most transactions to be confirmed within a few minutes, while still maintaining security tied to the BTC mainnet.

In terms of security architecture, the upgrade brings substantial improvements. The original Stacks, although writing its block hash into BTC transactions, this one-way security inheritance has potential risks. In the new architecture, miners need to participate in both BTC mining and Stacks validation, creating a two-way security verification mechanism. This not only increases the cost of attacks, but also ensures the honest behavior of validators through economic incentives.

The improvement in interoperability is reflected in the reconstruction of the underlying architecture. Previously, the interaction between Stacks and the BTC mainnet required a complex relay mechanism, 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 BTC mainnet, greatly simplifying the complexity of cross-chain operations. This improvement lays the foundation for subsequent innovative applications, especially the implementation of sBTC.

We can also quickly understand the details and potential significance of the Nakamoto upgrade through a table:

At the same time, according to Grayscale's research report, after the Nakamoto upgrade, the Stacks protocol will provide unique functions including:

(i) BTC-collateralized stablecoins,

(ii) BTC-based lending (as well as BTC-native rewards),

(iii) BTC-based decentralized autonomous organizations.

Similar to how the basic financial primitives drove the development of the Ethereum DeFi ecosystem in 2017, given BTC's current high-profile position, its ecosystem may now also experience a prosperous development.

sBTC, Innovative Application of BTC on Stacks

This upgrade looks good, but what substantive changes will it bring to the ecosystem and products?

From Stacks' own first-party perspective, a new product that comes with the upgrade is sBTC.

As a decentralized BTC two-way anchoring protocol, the design intent of sBTC is simple: to make BTC, the "digital gold", more flexible and become a truly programmable productive asset.

So the sBTC mentioned in the table above can be understood as an innovative BTC encapsulation protocol that allows BTC to run in the form of smart contracts on the Stacks network.

An infrastructure project still needs to be closer to the issuance of assets to gain more attention and create more gameplay.

This vision doesn't sound new. There have been many similar attempts in the market, such as the popular wBTC on Ethereum, whose locked value has even reached $5-15 billion under a centralized custodian model. But the ambition of sBTC is obviously not limited to this - it wants to be a truly decentralized solution that aligns with the spirit of BTC.

The core mechanism of sBTC is actually very intuitive: when users lock BTC on the BTC mainnet, the Stacks network will mint 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 they need to redeem, they only need to burn the sBTC, and the corresponding amount of BTC will be automatically released.

It sounds simple, but the real technical challenge lies in how to ensure the decentralization and security of this process, which is also the most distinctive feature of sBTC.

It has no preset administrators, but adopts an open-ended dynamic signer group to operate the entire system. All key operations are performed on the BTC mainnet, inheriting the security characteristics of BTC.

The signers obtain BTC rewards through the Stacks consensus, and this economic incentive ensures the system can run stably and continuously. More importantly, sBTC directly implements the price oracle function on the BTC mainnet, without relying on any external data sources.

Timing is important. In the BTC ecosystem, the emergence of sBTC is timely. With the completion of the Nakamoto upgrade, the technical foundation is already in place.

From the market perspective, the TVL of BTC DeFi accounts for less than 1% of its market capitalization, forming a huge disparity. This gap means huge development potential. Even more encouraging is that multiple major BTC organizations have already expressed their support for the sBTC plan, indicating industry recognition of this innovation.

Regarding sBTC, it is important to note that it is not a direct component of the Nakamoto upgrade, but rather one of the important applications supported by this upgrade. The Nakamoto upgrade, through improved interoperability and security architecture, provides the necessary technical foundation for sBTC.

According to the latest news from the Stacks-related blog Stacks Snacks, the sBTC upgrade is expected to be launched 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 one-pager can help you quickly understand the basics.

Against the backdrop of the Bitcoin ecosystem where "only the coin price rises, not the ecosystem," the emergence of sBTC may become a catalyst for changing this status quo. Just as Ethereum drove the development of the DeFi ecosystem in 2017 through basic financial primitives, the Bitcoin ecosystem may only be missing such an opportunity.

Ecosystem and Data Overview

Regardless of the upgrade, Stacks itself remains the infrastructure, and its development and progress are inseparable from the construction of ecosystem projects.

After the Nakamoto upgrade, by releasing the liquidity of the BTC ecosystem through sBTC, Bitcoin smart contract functionality, and scalability improvements, various projects in the ecosystem may also benefit.

The Stacks ecosystem has more than 60 DAPPs, most of which are related to DeFi and Non-Fungible Tokens. Among them, the DeFi protocols have relatively larger upgrade dividends, as 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, lending, and asset swapping. For DeFi protocols built on Stacks, users can also earn BTC rewards.

Some good DeFi protocols currently include:

· ALEX Lab: Building the most comprehensive Bitcoin DeFi ecosystem through Stacks. ALEX Lab has expanded products like Lisa (Stacks version of liquid staking), launchpad, and cross-chain bridges to the Runes ecosystem;

· Arkadiko: Using a CDP (collateral-backed debt position, similar to MakerDAO) model, allowing users to mint stablecoins and generate Bitcoin yields;

· StackingDAO: A liquid staking protocol on Stacks that allows staking Stacks to generate additional rewards;

· Zest: On-chain lending protocol;

· Bitflow Finance: A DEX in the ecosystem.

According to data from Signal 121, most of the staked STX currently flows to StackingDAO, followed by LISA and Stackswap.

Correspondingly, the active addresses in the Stacks ecosystem are mainly in the DeFi protocols shown in the above figure, and the capital volume and activity level of different ecosystem projects are positively correlated, with the protocols with the most staked funds often having the most active addresses.

However, in terms of total TVL and the absolute value of address aggregation, there is indeed a considerable gap between the DeFi on Stacks and Ethereum, which also empirically verifies the point made at the beginning of the article - we often need a trigger point and catalyst to turn the gap into upside potential.

And this gap is obviously difficult to fill with memes. It is worth noting that there are also some meme projects on Stacks, but their cultural attributes, influence, market capitalization, and activity are still significantly lower than the memes on Solana.

Therefore, as the Stacks infrastructure matures, whether there will be more asset creation gameplay like Runes in the BTC ecosystem, will directly affect the activity of the Stacks ecosystem.

However, the bridge has been built, and what kind of vehicle will eventually run on it remains to be observed.

Future Outlook: When Technological Innovation Meets Ecosystem Incentives

In the Bitcoin ecosystem, we often discuss a question: what is the relationship between technological innovation and market acceptance?

Is it that as long as there is technology, the market will definitely buy it? The answer is of course No, as the market's acceptance often depends on the project's operational thinking and planning.

Technological upgrades are just the substance, while the sBTC waiting to be unleashed is the external force. Encouraging more people to participate in the construction of sBTC on both the supply and demand sides is the key next step for Stacks.

Therefore, the "Best & Brightest" program recently launched by Stacks is essentially a major innovation project solicitation activity for the Bitcoin ecosystem. In simple terms, it is to provide comprehensive support for developers and teams who want to build innovative applications on Bitcoin - a bit like a "Bitcoin ecosystem innovation accelerator".

This program will be gradually rolled out from late November 2024, covering important areas of the Bitcoin ecosystem such as miners, wallets, and trading platforms. It not only caters to the growth space of individual developers, but also provides sufficient development funds for mature teams.

To ensure the security and reliability of these innovations, Stacks has also specially invited top-tier security teams in the industry to join. For example, Immunefi (a on-chain security platform that protects over $190 billion in assets, with over 45,000 security researchers) will host a dedicated "Attackathon" event, allowing white hat hackers to test and strengthen the security of these innovative projects in advance.

Interestingly, the timing of the launch of this program is just right. Just as Bitcoin prices hit new highs and the market is generally caught up in speculative frenzy, Stacks has chosen a seemingly slow-burning but potentially more far-sighted path: through solid technological innovation and ecosystem building, to provide more possibilities for the entire Bitcoin ecosystem.

From the perspective of institutional support, sBTC has already received the support of more than 20 well-known institutions including BitGo, Blockdaemon, Figment, Copper, and Asymmetric. This broad institutional endorsement is not only a recognition of the technical solution, but also a vote of confidence in the future development of the entire ecosystem.

We may see a wave of Bitcoin-based innovations. This not only relates to the expansion of the Bitcoin ecosystem, but may also redefine our understanding of "Bitcoin applications".

After all, as Satoshi Nakamoto said on the Bitcoin forum: "In the future, when the block reward gets too small, the transaction fee will become the main compensation for nodes. I believe that in 20 years there will either be very large transaction volume or no volume." And now it seems that through such an ecosystem innovation program, Bitcoin may be heading towards the former.

However, technological innovation ultimately needs to be tested by the market. In the current Bitcoin ecosystem where "only the coin price rises, not the ecosystem," will Stacks' choice be recognized by the market?

The answer to this question may have to wait until sBTC is officially launched, and until more innovative applications based on Stacks appear.

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