Unraveling the potential of Stack’s sBTC

The challenge of creating a decentralized two-way Bitcoin peg has long been regarded as an elusive and highly sought-after goal within the Bitcoin community.

Recently, something changed. Bitcoin Stacks and sBTC have emerged among the latest innovations within the Bitcoin ecosystem. The goal is to transform Bitcoin from "digital gold" into a settlement layer for the digital economy. sBTC has the potential to significantly enhance the functionality and accessibility of Bitcoin in DeFi, unlocking over $500 billion in capital. Within this article, we delve into Stacks technology, examining its status, constraints, and propose our outlook on its future.

What exactly is Stacks?

Stacks is a layer-2 solution built on Bitcoin that will feature at its core a trustless two-way Bitcoin peg system called sBTC.

sBTC offers smart contracts linked to the foundational Bitcoin layer, in this way solving the Bitcoin write problem (i.e. creating a way to write to the Bitcoin main chain). This achievement marks a significant milestone as sBTC will become the first trustless and non-custodial Bitcoin bridge. We will delve into the operational mechanics of sBTC in the subsequent paragraph.

Stacks also has its own native digital coin, $STX, that acts as an incentive mechanism for maintaining the ledger and financing the security budget. Additionally, $STX is used for rewarding miners participating in the Stacks network through a process known as stacking. Stacking rewards STX token holders who actively engage in the consensus process known as Proof-of-Transfer (PoX). Referred to as stackers, these participants receive BTC rewards whenever new blocks are mined as a reward for their contributions.

Direct participation in stacking requires Stacks holders to possess a minimum amount of $STX (estimated at 100,000 $STX but can change depending on market fluctuations). However, those who do not meet this minimum can still participate by utilizing third-party delegation services, enabling them to pool their holdings with others for collective participation.

How does it work?

A comprehensive understanding of the inner workings of sBTC can be gained from the whitepaper, published in December 2022. The whitepaper represents a collaborative effort featuring different contributors such as Stack Core Devs, Princeton computer scientists, Hiro Wallet, Trust Machines, Stacks founder Muneeb Ali, and the Stacks Foundation. In the first quarter of 2023, research and development efforts were initiated, creating an alpha design currently accessible to a restricted group of participants. Throughout the second and third quarters of 2023, further technical development of sBTC. Finally, by the fourth quarter of 2023, specific developers and founders will receive invitations to deploy their applications powered by sBTC.

Source: Andre Serrano

Today, Stacks operates as a layer-2 blockchain interconnected with the Bitcoin blockchain (rather than being built directly on top of it). The vital link bridging the Stacks and Bitcoin blockchains is represented by the consensus mechanism PoX.

PoX is closely intertwined with proof-of-work (PoW). In PoW, miners compete to solve complex computational problems, with the first successful miner earning the right to create new blocks and receiving cryptocurrency as a reward. While PoW ensures high security, it is resource-intensive due to its substantial energy and computing power requirements. To address this concern, alternative solutions like PoX were developed.

In PoX, miners bid by sending their PoW cryptocurrency to a series of addresses held by users who have staked their PoX tokens, ensuring the PoW cryptocurrency is recycled rather than permanently removed from circulation. The PoW chain serves as an anchor chain, settling all PoX transactions. In Stacks, stackers lock $STX into a peg wallet to earn Bitcoin rewards. On the other hand, Bitcoin holders on the base layer transfer their Bitcoin into this peg wallet to mint sBTC on the Stacks layer 2, maintaining a 1:1 ratio.

This interconnected design allows developers to harness the security of the Bitcoin PoW chain and the flexibility of the Stacks PoX chain. It incentivizes miners and users to contribute to both blockchains' ongoing stability and integrity. Stacking incentives also compensate Stackers for maintaining the peg, eliminating the need for users to pay "wrapping fees" associated with other pegged assets such as wBTC.

Instead, the peg-out mechanism requires a threshold signature system to off-ramp sBTC and convert it back to Bitcoin. Liveness, (i.e. uninterrupted operations) is sustained as long as at least 70% of the Stackers holding stacked $STX tokens sign the peg-outs. Failure to reach this signature threshold will result in the indefinite freezing of the $STX collateral. The current proposal mandates a collateralization ratio of 200% STX, known as the liveness ratio.

Source: Hiro Wallet

A new era of Bitcoin applications?

The launch of sBTC (part of the broader Nakamoto release) could spark exponential growth in Bitcoin applications, accelerating the Bitcoin economy without sacrificing its security. The potential use cases of sBTC include:

1. Trustless, Bitcoin-collateralized stablecoin loans.

2. On-chain, undercollateralized BTC lending.

3. Cheaper and faster leveraging of BTC for NFTs and other dApps.

Challenges and considerations around sBTC

While Stacks and sBTC present promising potential, it is essential to acknowledge the concerns and potential limitations associated with these innovations, as well as layer-2 solutions in general:

1. The proposed requirement of high collateralization for sBTC (200%) imposes limitations on capital efficiency.

2. The use of the Clarity programming language is specifically tailored to Stacks. Without widespread usage, developers may face a learning curve when building applications on Stacks for the first time. However, it is worth noting that the roadmap includes plans to provide SDKs in more commonly used programming languages, which could alleviate this concern over time.

3. The potential lack of interoperability with other chains or layers-2 could lead to liquidity fragmentation.

4. Due to the approximately 10-minute block times, Stacks has faced challenges relying on Bitcoin's base layer. However, the upcoming Nakamoto upgrade aims to solve this performance problem through the implementation of 'Fast Blocks' that will be processed every 5 seconds, utilizing BFT-style quorum signing. The BFT nature of Fast Blocks ensures they will never fork, but Settlement Blocks remain susceptible to reorganizations.

   
   

The liquid staking opportunity

To improve the adoption of sBTC and its peg, it is paramount that enough people are staking the Stacks token. However, with such a high threshold for staking, one could argue that the opportunity costs for locking up tokens are substantial. Therefore, we started building a liquid staking solution that allows people to receive a liquid staking token when one stakes, allowing for utilizing the staked amount by making it liquid. However, we couldn’t follow the existing players in the ETH ecosystem with designing our solution.

In the current sta(c)king landscape, the way in which someone can participate fosters several disadvantages and therefore hinders the progress of decentralization and widespread adoption. Staking options can be classified into three main categories: self-stacking on your own, stacking on a centralized exchange, or stacking with a third party. Each approach carries its own set of risks, limitations, and tradeoffs. For instance, self-stacking requires a significant investment and a deep understanding of the underlying blockchain network, as well as slashing risks. On the other hand, stacking on a centralized exchange or third party introduces centralized counterparty risks. This is the case in the Stacks landscape and in the Ethereum ecosystem where Lido and players like Rocketpool introduce a degree of centralization.

To overcome these challenges and pave the way for decentralization and adoption, Efiko is working on a non-custodial liquid staking product called Liqed, where validators are run in a decentralized manner.

Liqed is a novel solution that differentiates itself from existing liquid staking offerings in other ecosystems. Liqed achieves decentralization by implementing Distributed Validator Technology (DVT), ensuring that control over a validator is not concentrated in the hands of one party. Additionally, it aligns with the underlying ethos of Stacks and sBTC, reinforcing the concept of a fully decentralized solution for staking.

For further insights into Liqed, subscribe to our mailing list. Additionally, if you have any inquiries or wish to connect with our team, contact us via our website.

Conclusion

Stacks and sBTC signify crucial milestones in the evolution of Bitcoin. They offer the potential for enhanced scalability, security, and functionality for Bitcoin while preserving its core principles. However, like all technological innovations, they come with their own set of challenges and potential drawbacks. The future impact of these advancements will depend on their final design, implementation, and adoption, which requires ongoing collaboration and innovation within the community.

Instead, Liqed's decentralized liquid staking solution not only tackles the existing challenges of the Stacks blockchain but also provides a seamless and secure way for stackers to participate, fostering decentralization, increasing profitability, and driving the widespread adoption of the Stacks ecosystem overall.

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