Stacks — A fable about Stacks and Nakamoto trying to become a butterfly.

Disclaimer: The content of this report reflects the author's opinion and is for informational purposes only, and is not intended to recommend buying or selling tokens or using the protocol. Nothing contained in this report constitutes investment advice and should not be construed as investment advice.

1. Bitcoin network showing new possibilities

In early 2023, the emergence of “Ordinals” on the Bitcoin network sparked discussion about new approaches to the network’s blockspace. In May of the same year, the demand for BRC-20 increased explosively, causing the Bitcoin network to be unable to process blocks for a while, leading to the situation where Binance, the world's largest central exchange, had to temporarily suspend withdrawals for Bitcoin. I also did it.

Ordinals, whose name originates from the word ordinal, meaning 'number representing order', is a protocol created by Casey Rothermore in January 2023 by applying Bitcoin's script, and is the most popular of Bitcoin. We have implemented a function that allows arbitrarily to attach data to a small unit, satoshi. Through Ordinals, text, images, voice, video, and code can be stored on the Bitcoin blockchain, resulting in the creation of a large number of PFP NFT collections commonly found on Ethereum in the Bitcoin ecosystem ( see details Going ).

Now, about a year after the emergence of Ordinals, three of the NFT collections issued on the Bitcoin network are ranked in the top 10 of all NFTs by market capitalization (NodeMonkes, Runestone, Bitcoin Puppets), showing their potential as a smart contract platform in name and reality. It's showing.

1.1. Bitcoin L2 and Stacks

Accordingly, projects advocating L2 based on the Bitcoin network are appearing one after another. According to defillama, at the time of writing on April 15th, there are a total of 11 projects classified as “Bitcoin Sidechains,” recording a TVL of nearly $900M. Although there is debate as to whether these projects actually function as an L2 with the Bitcoin network as the L1, the rapid rise in TVL and the emergence of a large number of projects prove that the market's interest in the Bitcoin narrative is increasing.

Among them, the recent growth shown by Stacks can be said to be special. This is because not only is it an OG project launched in 2017, but the project has been continuously operated with the goal of steadily applying smart contracts to the Bitcoin network from 2021. Below, we will look at Stacks’ actions and the “Nakamoto Release,” a large-scale upgrade ahead of the Stacks chain.

2. The beginning of Stacks, Blockstack

In 2017, Dr. Muneeb Ali completed his degree, published a white paper for Stacks (then Blockstack), and successfully raised $52 million through a token sale on CoinList. However, earlier teams, including Muneeb Ali, built protocols and applications directly on Bitcoin L1. The name of the project is Onename, and it enables the creation of decentralized identities and profile pages on the Bitcoin network. That experience helped shape Stacks in 2017, and the team focused on creating a more robust platform.

Blockstack points out that the existing Internet adopts a centralized data storage and management method, and uses blockchain technology to implement a decentralized network where users have data sovereignty, allowing developers to easily develop dApps like Ethereum. We wanted to create a blockchain layer that has

Meanwhile, the sale of STX (STX), a token of the Blockstack ecosystem, was approved and carried out in accordance with the SEC's Regulation A+ regulations in 2019, and Blockstack succeeded in raising $23 million. Because it was the first case of a token sale with SEC approval, it attracted market attention for its efforts to issue tokens within the regulatory network.

From 2018 to 2020, the Stacks team was dedicated to building a solid project infrastructure. Stacks is a blockchain that operates through cross-chain consensus that integrates seamlessly with the Bitcoin network and is designed to function as a programming layer for Bitcoin. The team also developed Clarity, a Stacks custom programming language. During this period, Stacks raised funds from prominent investors including Union Square Ventures, Harvard Endowment, Winklevoss Capital, and Naval Ravikant.

3. Stacks 2.0

“I see Bitcoin as the best, most decentralized currency layer. The fact that 1% of all Bitcoin in circulation is currently issued as Wrapped Bitcoin (wBTC) on Ethereum means there is demand for using Bitcoin in smart contracts. Instead of bringing Bitcoin wrapped in some smart contract platform, why not port smart contract functionality to the Bitcoin network?” — Bitcoin DeFi? Excerpt from It's a Thing, Says Stacks Founder Muneeb Ali, Decrypt

In January 2021, Blockstack launched the Stacks 2.0 mainnet and became the Stacks Network ( related link ). As can be seen in Muneeb Ali's interview above, Stacks 2.0 started with the goal of porting smart contract functionality to the Bitcoin network without modifying Bitcoin itself. The chain was designed to improve the scalability of the network by inheriting the decentralization and security of the Bitcoin network while adding smart contract functions.

3.1. Proof of Transfer

Stacks' consensus mechanism, Proof of Transfer (PoX), is the key to inheriting the security of the Bitcoin network and can be seen as an extension of Proof of Burn. Proof of Burn refers to a consensus mechanism that conducts mining competition by burning the cryptocurrency of the network in a Proof of Work (PoW) environment.

Unlike in the proof-of-burn method, where miners burn bitcoins, in the proof-of-transfer method, miners transfer their held bitcoins to STX holders who participate in the stacking process. Miners can participate in the mining process by operating a Stacks node, and proceed with the block creation and mining process using the Bitcoin network as an anchor chain. The following proof-of-delivery mechanisms are:

• Registration: Miners register as candidates for miner selection by transmitting consensus data to the network.
• Commitment: Registered miners participate in mining competitions by sending Bitcoin to a group of STX token holders.
• Election: Select a miner to create a new block on the Stacks blockchain using a Verifiable Random Function (VRF)
• Assembly: Selected miners create blocks and receive STX tokens as compensation.

Miners elected through the election process record hash values containing records of all newly generated transactions on the Stacks chain in Bitcoin blocks, while following the proof of transmission method to ensure the security of miners on the Bitcoin network and the Stacks chain. An incentive system is completed among contributing stackers. Here, “stacking” is similar to “staking” in the Proof of Stake (PoS) network, but differs from staking in that you lock up STX and receive anchor chain tokens, i.e. BTC, as compensation. . The detailed roles of miners and stackers are shown in the image below.

[Miner]

1. Miners send BTC to stackers to receive transaction fees and block rewards accumulated in Stacks blocks.
2. Miners have a probability of winning the mining competition depending on the relative amount of BTC they transmit, and VRF is applied in this process.
3. Elected miners acquire the right to create new blocks and stream microblocks on the Stacks chain.
4. Elected miners receive STX and transaction fees given as block rewards.

[Stacker]

1. The stacker locks up the STX it holds for a certain cycle.
2. You can choose whether to stack independently or pool with the STX volume of other stackers in proportion to the STX lockup amount.
3. Stackers provide BTC addresses to receive BTC rewards, and the probability of obtaining rewards is determined in proportion to the amount of stacked STX.
4. After the previously set lockup cycle, the stacked STX is unlocked.

3.2. Bitcoin L2?

Stacks 2.0 is significant in that it functions as a smart contract platform for the Bitcoin network through the launch of the mainnet and the introduction of a proof-of-transmission mechanism. However, there are some difficult points in expressing it as L2 on the Bitcoin network.

• Stacks 2.0 has its own token and a separate security budget distinct from the Bitcoin network.
  • Security Budget: Refers to resources allocated to maintain network integrity and refers to funds such as mining rewards, operating costs, and network fees.
• Like L2 in Ethereum and other ecosystems, asset deposits and withdrawals do not occur due to L1 security and validators.

For the above reasons, it is difficult to classify Stacks 2.0 into the same category as the existing L2. Additionally, since transactions on the Stacks chain are ultimately settled on the Bitcoin network, it is not appropriate to classify them as sidechains. Due to this unique structure of the Stacks chain, Muneeb Ali, co-founder of Stacks, described the Stacks chain as “layer 1.5” in an interview with Decrypt in 2021 .

Because the Bitcoin network did not start out as a smart contract platform, movements to introduce smart contracts or improve scalability do not occur in the same way as in the cases of Ethereum and EVM chains. According to “BITCOIN LAYERS — Tapestry of a Trustless Financial Era” published by Spartan Group in December 2023, we can understand the distinction of Bitcoin L2 more clearly.

As shown in the image above, the Bitcoin L2 trilemma was introduced, and the components are as follows.

1. Open Network: Adopting an open network rather than a federated model
2. No New Token: No new tokens introduced
3. Full VM/Global State: Applying the “global state” method rather than a limited form of off-chain contract

Stacks 2.0 can be viewed as a Bitcoin L2 solution that satisfies conditions 1 and 3, rather than introducing a new token (STX) (which does not meet condition 2). Lightning Network, which can be considered as a comparison group, instead of satisfying conditions 1 and 2, fails to meet condition 3 by adopting the “Local Consensus” method in which the transaction process is recorded only on a P2P network that is distinct from the main chain.

This structure was how Stacks achieved connectivity with the Bitcoin network before the Nakamoto release, and Stacks is trying to get closer to the ideal Bitcoin L2 through the Nakamoto release.

4. Toward Stax 3.0, Nakamoto Release

4.1. Problems with the existing Stacks chain

The unique structure of the Stacks chain, which we looked at earlier, was the reason why Stacks could function as a smart contract platform for the Bitcoin network, but it was also the cause of problems in the system. The problems that existed previously are as follows:

• security model
  • The Stacks chain has a separate budget, unlike the Bitcoin network's security budget, which is defined by the BTC paid by Stacks miners.
  • This makes the security of the chain highly dependent on the budget of Stacks miners, which means increased security risks.
• Performance and scalability
  • The structure for connectivity between the Stacks chain and the Bitcoin network, such as the transmission proof mechanism, contributed to increasing decentralization and security, but served as a limiting factor in chain performance and scalability.
  • In particular, the process of creating a new block through the miner election process links the Stacks chain with the slow Bitcoin block creation cycle, resulting in very high transaction confirmation latency.
  • It acts as a vulnerability in the user experience, but also causes difficulties in DApp onboarding.
• MEV problem
  • Bitcoin miners who hold a significant percentage of Bitcoin hashrate censor other Stacks miners' commitment transactions (BTC transfer transactions to participate in the STX mining competition) in the Bitcoin blocks in which they are selected as miners to receive Stacks rewards and transactions. Fees can be obtained with certainty

4.2. Key goals and design changes

4.2.1. main goal

The Nakamoto release is a major upgrade to the Stacks Chain scheduled for this year. It focuses on the following changes to solve the problems of the Stacks Chain mentioned above and improve the performance and security of the chain.

• Fast blocks
  • The time it takes for a user-submitted transaction to be mined and confirmed within a block is reduced from tens of minutes to a few seconds.
  • This is achieved by separating the miner election process from the block generation mechanism, and after the Nakamoto release, miners will be able to generate as many blocks as possible before the next miner election process.
• Achieving transaction security through Bitcoin finality
  • Transactions on the Stacks chain are secured by the hash power of the Bitcoin network.
  • This means that transactions are settled on the Bitcoin network, thereby ensuring transaction immutability from the most secure network.
• Improved MEV resistance
  • Improved the BTC bidding mechanism for STX rewards to improve the MEV problem that occurs during the miner selection process
  • Change the miner election algorithm so that Bitcoin miners do not have the advantage of being a Stacks miner.

4.2.2. Changes in block generation mechanism and stacker role

Blocks created in the Stacks chain before the Nakamoto release were fixed 1:1 with Bitcoin blocks, so they had problems with slow block creation times and resulting slow transaction confirmations.

After the Nakamoto release , “Tenure-based block production,” that is, “tenure-based block generation mechanism” was introduced to solve these problems and enable fast block generation. Blocks in the Stacks chain do not correspond 1:1 to Bitcoin blocks, but multiple Stacks blocks are created during the term of an elected miner, that is, during the Bitcoin block creation cycle. With the introduction of this mechanism, the block creation and confirmation time is reduced to about 5 seconds, dramatically improving the scalability of the Stacks chain.

At this time, validation of the generated Stacks block is performed by stackers. Before the Nakamoto release, stackers were responsible for contributing to the economic security of the Stacks network by simply locking up (stacking) STX tokens, but after the Nakamoto release, each Stacks block produced during the miner's term was verified and stored. , performs the role of a signer, responsible for signing and disseminating. Accordingly, the interrelationship between miners and stackers can be summarized as shown in the image below.

1. Miners send BTC to stackers to be selected as miners for the Stacks network and perform a miner election process.
2. When a new miner is elected, a “tenure change” transaction occurs that grants a new term to the miner.
3. Miners must collect signatures from stackers in the process of creating and verifying blocks in seconds.
4. Block validation requires that more than 70% of stackers sign the block to approve it.

As in the above process, the miner needs the stacker's signature to generate the next block, and the stacker must perform the signature operation to receive rewards according to the proof-of-transmission mechanism and unlock the stacked STX tokens.

4.2.3. Change in chain structure and achieve Bitcoin finality

Signers (stackers) prevent miners from arbitrarily forking the Stacks chain by signing only new blocks created based on the most recently signed block during the tenure change (or miner election) process. In other words, signers are responsible for verifying the validity of previously created blocks and monitoring miners to ensure that new blocks are created based on the most recent blocks.

Additionally, miners must include an indexed block hash when submitting a commit transaction (tenure change transaction), which includes the hash of the first Stacks block recorded in the previous miner's term and the block itself. Hash included. Through this, the state of the Stacks blockchain is recorded in a Bitcoin block, and miners in the next term do the same, continuously recording the history of the Stacks blockchain in the Bitcoin network.

As a result, the relationship between Stacks blocks and Bitcoin blocks is formed as shown in the image above. Transactions on the Stacks chain submitted in the Nth term are recorded in the Bitcoin block only in the next term, that is, the N+2th term, and the term must be changed three times to revert a Stacks transaction to revert a Bitcoin block. It becomes as difficult as it gets. For users using the Stacks chain, transactions are approved within seconds, but it takes about 30 minutes to be settled in Bitcoin, and the chain structure is organized in the same way as the L2 we know.

This system also brings positive changes in terms of the security budget of the Stacks chain. A large security budget of up to 70% of the stacked STX is formed through a mechanism where block validation occurs through signatures of more than 70% of the signers. Additionally, once a transaction achieves Bitcoin finality, it has the same effect as reaching a security budget of 51% of Bitcoin mining power.

If we go back and summarize the mechanism of the Stacks chain after the Nakamoto release, it is as follows.

• When submitting a tenure change transaction, miners must include an indexed block hash containing the hash of the first Stacks block recorded in the previous tenure.
• Signers force miners to create blocks based on the last signed Stacks block during the previous term.
• Stacks Chain transactions submitted in the Nth term are recorded in a Bitcoin block in the N+2th term and have Bitcoin finality.

Since the release of Nakamoto, the Stacks blockchain has changed its chain structure to this structure, enabling transactions to occur at a very high speed compared to the existing method, while achieving Bitcoin finality and ensuring data immutability. From the user's perspective, it will be reborn as a true Bitcoin L2 that can quickly approve transactions and systematically inherit Bitcoin's security.

4.2.4. Bitcoin MEV problem alleviated

The MEV problem in the Stacks chain prior to the Nakamoto release occurred in the following way: Bitcoin miners, such as F2Pool, who hold a significant percentage of Bitcoin hashrate, censor commit transactions submitted by other Stacks miners within the Bitcoin blocks they create and adjust the BTC bidding amount they submit to Stacks. We were able to ensure that we would get the block rewards and transaction fees for the block. These actions served as a factor in reducing the BTC rewards to stackers and weakening the reliability of the mining process.

The Nakamoto release established several new criteria to be considered when selecting miners to increase fairness in the block mining process.

• Miner Participation in Recent Blocks
  • In order to be eligible for miner selection when the term changes, a record of participating in the miner selection process in the last 10 blocks is required.
  • Introducing these standards fosters a stable community of miners and discourages attempts to cherry-pick chain rewards.
• Median of Past Bids Method
  • The probability of a miner being selected is calculated based on the median of all BTC bids recorded in the last 10 blocks.
  • Prevent miners from receiving block rewards by submitting abnormal bids
• Considering the absolute value of the total bid amount (Absolute Bid Total)
  • The miner selection process is carried out on stable economic standards by considering the absolute value of the total bid amount rather than considering the bid amount variable according to the immediate mining environment.

The Nakamoto release seeks to increase transparency and reliability of the mining process of the Stacks blockchain by introducing these MEV relaxation standards.

4.3. Nakamoto Release Release Plan

Since the sBTC and Nakamoto release whitepaper was published in late 2022 , the Stacks Foundation and related developers have been working on the Nakamoto release for a long time. As you can see in the image above, the Nakamoto Release update is in full swing in February 2024, after the Nakamoto Release's features were completed and integrated into the testnet ( Nakamoto Milestone 0.3 and codenamed Argon ).

Nakamoto releases consist of a two-stage process, each of which involves a hard fork. The process is divided into Instantiation and Activation, respectively, and this is a plan that aims to minimize confusion arising from changes in the chain environment by having a final adjustment period such as bug fixes before full-scale feature activation after the Nakamoto release update. no see.

4.3.1. Existing release plan

• Step 1: Instantiate
  • Most of the code included in the pox-4 (an upgraded version of the proof-of-delivery mechanism) contract and Nakamoto release applies, but features are not activated.
  • Allow at least two stacking cycles for signers and partners to register for the pox-4 contract. During this period, we check whether the signers registered in pox-4 properly verify the block and determine whether we can proceed to the activation stage.
• Step 2: Activation
  • Nakamoto release updates such as signer-based system, fast blocks, Bitcoin finality, etc. are applied and Nakamoto rules are activated.
  • The Nakamoto rule refers to the overall logic that distinguishes between before and after the Nakamoto release.

4.3.2. Schedule after release plan revision

Instantiation, the current stage 1 upgrade, began on April 22nd, and stage 2 upgrade was scheduled to begin after mid-May, assuming that no special bugs were discovered and instantiation was completed. However, after the first stage, supplementary issues related to the Signer Resiliency/Recovery system were discovered in relation to the application of the Nakamoto release, and the Stacks Foundation announced the modification of the existing plan through a related notice on May 1. The main points are as follows:

• Existing Nakamoto release plan includes only a rudimentary signer recovery system and begins activation phase
• The upgrade to the advanced signer recovery system was planned to be deployed at the end of 2024 after the activation of the Nakamoto release, but the need for the advanced signer recovery system was confirmed after onboarding signers following instantiation.
• A new 8-week development time will be required prior to the Nakamoto release activation phase. Accordingly, signer recovery system code completion is scheduled to be completed on July 15th and Nakamoto release activation is scheduled for August 28th.
• The work includes the following:
  • Enhanced miner resilience to signature timeouts and incorrect responses from signers
  • Harden processes for signer reactivity and key loss scenarios
  • Improvements to miner tenure creation and extension methods
  • Prevent network entropy (uncertainty) and improve flash block handling

As the existing plan has been revised, code development is scheduled to be completed on July 15th after an 8-week code development period, and the Nakamoto release activation phase, originally scheduled for after mid-May, will be approximately 3 months later, on August 28th. It is scheduled to start on the 1st. The good news is that the sBTC upgrade, which was previously scheduled for the third quarter, is scheduled to proceed without delay and is scheduled for 4 weeks from the start of the activation phase.

5. The final puzzle for the L2 leap, sBTC

The Nakamoto release, which is expected to be fully activated in May, focuses on dramatically improving the performance of the Stacks chain and achieving Bitcoin finality for Stacks blocks. However, in order to become a true L2 of the Bitcoin network, the Nakamoto release is only a half-way update.

After the Nakamoto release, Stacks will establish an environment similar to the Sovereign rollup. However, it will be able to function as a true Bitcoin smart contract platform and L2 only if BTC, the basic asset of the Bitcoin network, can be imported and utilized on the chain. Stacks founder Muneeb Ali also said in the tweet that moving BTC in and out of layers is the difficult part, and that applying a peg mechanism for BTC through a decentralized and public group of signers without modifying Bitcoin L1 is also a challenge. In other words, it is explained that sBTC is the closest to a trustless bridge.

sBTC connects BTC assets between the Bitcoin network and the Stacks chain based on two main properties.

• 1:1 Redeemability: sBTC and BTC can always be exchanged 1:1 unless the Stacks chain is stopped.
• Open Membership: Anyone can participate in the sBTC protocol, and no centralized entity has custody of BTC.

Like Ethereum's wBTC (wrapped BTC), there were BTC-related assets such as xBTC and aBTC that existed on the Stacks chain, but they had to go through a centralized management entity or follow a multi-sig method during the bridging process. In contrast, sBTC utilizes stackers on the proof-of-transmission mechanism as a group of signers, enabling BTC bridging in a nearly trustless manner.

sBTC update and implementation is scheduled for the third quarter of 2024. The Nakamoto release and sBTC update will be a very important turning point in achieving Stacks' grand goal of becoming a complete smart contract platform for the Bitcoin network. We recommend that you continue to monitor whether Stacks Chain can function as a true Bitcoin L2 and become a smart contract platform that can utilize dormant BTC.

<Reference materials>

• Stacks docs
• Stacks: A Bitcoin Layer for Smart Contracts
• sBTC: Design of a Trustless Two-way Peg for Bitcoin
• Jeff Benson and Daniel Roberts, Bitcoin DeFi? It's a Thing, Says Stacks Founder Muneeb Ali , Decrypt
• Katelyn Peters, Blockstack (Stacks): What it is, How it Works, FAQ , Investopedia
• muneeb.btc tweet
• light tweet
• Stacks, A Showcase For Stacks Nakamoto Release Transactions
• Stacks, What's Next for Stacks After Nakamoto Upgrade
• The Spartan Group, Bitcoin Layers: Tapestry of a Trustless Financial Era
• Mitchell Cuevas, Nakamoto Activation: 8 Weeks of Additional Development Time Expected , Stacks Foundation