What is Stacks and does it really work as DeFi for Bitcoin?

Stacks is marketed as enabling “DeFi, NFTs, Apps and Smart Contracts for Bitcoin.” It is a blockchain that attempts to share some of Bitcoin’s security by writing block heads into the Bitcoin blockchain. The Stacks chain uses the STX token as its native token.

However, the chain has recently struggled as users attempt to register names using the Blockchain Naming Service – leading us to wonder how well this works?

Is Stacks as safe as they say?

Basically, Stacks is connected to Bitcoin because the “miners” who participate in the process of securing the Stacks blockchain write their blockheads to the Bitcoin blockchain using OP_RETURN when they “commit” their Bitcoin to mine. So Stacks uses Bitcoin as a additional data availability layerwhich allows anyone who can access the Bitcoin blockchain to find out which Stacks blocks have been broadcast and built upon.

What this practically enables is the ability to better recognize bad actors. It is still possible that a change in the Stacks client may occur and that previous state may be declared invalid.

The marketing of Stacks repeatedly emphasizes the idea that it is secured by Bitcoin, but that really just means “as a way of saving history.“

Is it “for Bitcoin?”

To use Bitcoin in most Stacks applications, you must first acquire xBTC – a wrapped form of bitcoin that was listed on OkCoin less than a year ago and now has zero 24-hour volume.

Currently, if you have dollars or bitcoin and want xBTC, the easiest way to do it is to buy STX on an exchange, transfer that STX to your wallet, and then use a protocol like Alex to then exchange STX for xBTC . You can also get STX by doing a submarine swap using a service like LN SWAP from Bitcoin.

In the future it hopes to be able to use atomic switches to make it easier to deposit bitcoin into xBTC using something like the “Magic” protocol, to make it easier to switch between bitcoin and xBTC.

These user experience obstacles have likely contributed to the anemic use of xBTC with less than 250 total bitcoins currently in use. This compares to over 244,000 bitcoins currently used for wBTC on Ethereum, and 16,000 bitcoins currently wrapped in Sollet for Solana. Even other chains trying to explicitly enable DeFi for Bitcoin, such as Liquid and RSK, have 3500 and 3100 respectively.

Do the NFTs work?

One of the most popular use cases for NFTs on Stacks has been for the Blockchain naming service. It is largely analogous to the Ethereum naming service, but currently has some troubling limitations.

These include:

• It only allows one name per address.
• They are difficult to trade, and require special escrow contracts.
• Stacks users complain that the working group brought together to advance the BNS ecosystem is “lacking in action”.

There are of course other NFTs on Stacks, including the Gamma marketplace, which hopes to one day soon integrate native bitcoin payment. The greatest collection of all time is the “Megapont Ape Club”, which is a reminder of how all great artists create.

It has traded a total of 4.3 million STX, or at the current price of STX about $1.4 million. The best NFT collection on Ethereum is CryptoPunks remade volume worth one million etheror about $1.3 billion at press time.

Read more: Millionaire under investigation for burning Frida Kahlo art in NFT stunt

Previous attempts at tradable visual assets on Bitcoin such as Rare Pepes have seen individual assets sell for $3.6 million before, single-handedly eclipsing the entire trading volume of the ‘Megapont Ape Club.’

The NFT ecosystem on Stacks has limited use, and it is not possible to trade bitcoin directly for most existing NFTs.

Does DeFi work?

Sometimes some of it works if you’re willing to accept certain trade-offs. When the chain gets overloaded – which has happened more often – the biggest and most important protocols have had to use their administrative rights to turn off the protocols.

Even at the best of times, there is still a strong question as to whether this enables ‘DeFi for Bitcoin’ with the aforementioned difficulties of actually using Bitcoin.

DefiLlama shows approx $12.3 million in total value locked (TVL) on stacks. This compares to roughly $31 billion in TVL on Ethereum.

Alex, the largest DeFi protocol on Stacks, has a TVL of $10 million. This compares to roughly $2.2 billion for Compound on Ethereum. DeFi on Stacks has seen very little use.

How did Stacks raise money?

The STX token sale was one of the few cryptocurrency token raises that chose to register with the SEC under the Regulation A+ framework. They were able to raise $50 million.

This did not give the STX token voting rights in Blockstack PBC (now Hiro System PBC). Previous equity rounds were converted into STX tokens at a rate of $0.019 per STX, or slightly less than 7% of the $0.30 price in the A+ token sale.

The STX token is “mined” by running the node software and sending Bitcoin to a set of predetermined addresses, at which point a random number generator allows one of the miners to add their block to the chain, and receive new STX tokens and the transaction fees for that block.

This can be thought of as something analogous to “miners” being allowed to participate in an ongoing sale of the STX token for the bitcoin they send to STX “stackers.” Staking is the process by which STX holders can receive bitcoin sent from the miners as a reward for unlocking their STX tokens.

Currently, you need about 100,000 STX tokens to “stack” independently, or about $32,000. You can stack with smaller amounts if you’re willing to pool.

Is it decentralized?

There are currently five miners who have participated in the last 100 blocks. Unlike Bitcoin mining, these typically do not represent groups of smaller individual miners.

This issue is partly related to the fact that Stacks miners report that mining is not a profitable endeavor. That is, unless you are willing to participate in one attack against the consensus protocol and “stack” a large amount of STX to receive as much of the Bitcoin you send in the mining process back. This is called a “discount-mining” attack and is a behavior that rational miners need to participate in Stacks.

The solutions to this proposed in the white paper were to either have a set of “trusted miners” who you could be sure would never secretly stack the site, or eventually stop giving coinbase (newly minted STX) rewards to miners and hope they are still incentivized by STX transaction fees to participate. None of these solutions seem sufficient.

Founder Muneeb Ali has even pointed out that without major changes to the protocol, they are effective limited to less than 100 minerswhich “with 100 unique miners … you will take up about 10% of the total Bitcoin transaction bandwidth per block. I personally would not want the Stacks team to take up more than 10% of the Bitcoin bandwidth for mining.”

Decentralization is of course a spectrum, but five individual miners certainly seem closer to one end.

What happened under load recently?

Recently, the Stacks protocol suffered from mempool congestion. This caused some protocols such as Alex to shut down some of its functions, as it became impossible to get through the transactions it needed.

The source of this congestion appears to have been related to a new release on the Blockchain Naming Service that caused an increase in the number of transactions. It was enough to effectively disable the chain.

Read More: Blockchain Predator 0xbadc0de Becomes Prey, Loses 1100 ETH

Strikingly, the number of mempool transactions sufficient to crash the network appeared to be in the thousands, with a peak of approximately 6,500 transactions over a 15-minute period.

There have been previous periods where relatively small amounts of load were sufficient to overwhelm the Stacks network. In August 2021, it experienced similar problems, although the problem was partly related to the fact that they did not have a functioning fee market, because the mining software did not consider fees.

The most popular wallet, Hiro – developed by Muneeb Ali’s company – also did not support Replace By Fee which allows users to later increase their transaction fees, which meant that if you set the fee too low, it could be stranded until the network cleaned up.

At least it’s good for CityCoins!

One of the most popular use cases for Stacks so far has been the issuance of CityCoins. These include Miami Coin, backed by Mayor Francis Suarez, and New York Coin, backed by Mayor Eric Adams.