What is Stacks (STX), how does it work and what makes it unique?

What is Stacks (STX)?

Stacks, formerly known as Blockstack, is a cryptocurrency project aiming to enable smart contracts and decentralized applications (dApps) on the Bitcoin blockchain. It operates as a layer-1 solution, utilizing Bitcoin as its foundational layer. The platform is powered by the Stacks (STX) token, which is used for executing smart contracts, processing transactions, and registering new digital assets.

The motivation behind Stacks stems from concerns about the centralized nature of the internet, where major players like Google and Facebook wield significant power over users. This concern is reflected in Google's former unofficial motto, "don't be evil," which was abandoned in 2018. Stacks aims to create a more decentralized online environment where companies "can't be evil," a motto prominently displayed on a billboard near Google's headquarters in California.

One of Stacks' key features is its compatibility with Bitcoin, ensuring that any smart contracts added to Bitcoin do not alter its fundamental characteristics, including its renowned security and stability. Stacks dApps are designed to be open and modular, allowing developers to build on each other's work and create innovative features. Moreover, Stacks leverages Bitcoin's robust blockchain, ensuring that all activities within its ecosystem are supported by one of the most secure blockchains available.

How does Stacks work?

Stacks operates through the interaction of two main participants: miners and stackers. This interaction is governed by a unique consensus mechanism called Proof of Transfer (PoX).

In the Stacks blockchain, miners do not perform traditional mining activities. Instead, they exchange already-mined BTC from the Bitcoin blockchain and commit it to earn STX coins. This type of mining operates under its own set of rules, detailed in the Stacks Mining section below.

Each block mined on the Stacks blockchain contains user identity and transactional metadata, which is used to interact with applications in the Stacks ecosystem. Since Stacks is connected to Bitcoin, any changes to Stacks IDs or wallet balances can be verified using the Bitcoin blockchain. This verification process also extends to Stacks smart contracts, which are written in a specialized language developed and tested for Stacks by Algorand.

The Stacks blockchain stores data not included in the blockchain on a custom storage system called Gaia. Gaia utilizes cloud storage providers such as Azure and Dropbox, but also allows users to use their own cold storage solutions if they have sufficient computing power.

STX, the native cryptocurrency of the Stacks ecosystem, is used to register digital assets on the Stacks blockchain, including user IDs and smart contracts, providing the foundational support for the entire ecosystem.

Who founded Stacks?

Stacks was co-founded by Muneeb Ali and Ryan Shea, both alumni of Princeton University, in 2013. Ali began working on Stacks immediately after graduating in mechanical engineering and computer science and remains involved with the platform as the CEO of Hiro PBC. Ryan Shea, the platform's other co-founder, served as co-CEO from 2013 but departed in 2018 to focus on his own stealth startup, which he believes will address significant challenges facing humanity in the 21st century.

The idea behind Stacks originated from the observation that the internet has become increasingly centralized, controlled by major corporations rather than being an open, user-owned system. Muneeb discussed his vision for the next generation of the internet in a 2016 TEDx talk and outlined the architecture for a new trust-to-trust design for the internet in his doctoral thesis at Princeton.

What makes Stacks unique?

Simply put, Stacks is an exceptionally innovative project, starting from its development process. Unlike many cryptocurrency projects, Stacks underwent an extensive eight-year development period before its launch. During this time, the Stacks team subjected their concept to rigorous peer reviews by academics from Princeton and Stanford to identify and address any potential weaknesses.

Stacks reimagines the functionalities of Bitcoin, aiming to expand its capabilities without requiring a hard fork or altering the original blockchain. This is achieved through its unique consensus mechanism, Proof of Transfer (PoX), which directly connects to the Bitcoin blockchain. To support this, Stacks introduces a new smart contract language called Clarity, designed for accessibility without compromising on security.

Due to its lightweight architecture, Stacks uses a separate data storage solution, Gaia, which leverages commercial cloud storage providers. Gaia stands out by allowing users who are wary of cloud storage to self-store their data.

Additionally, Stacks incorporates an integrated naming service, the Blockstack Naming Service, enabling users to assign human-readable names to assets secured by a combination of public and private keys.

In a remarkable achievement, Stacks secured funding from the US government, receiving millions of dollars for its development. More notably, Stacks became the first blockchain token to receive approval from the SEC for its initial coin offering, marking a significant milestone in its journey.

What contributes to the value of Stacks?

While miners commit BTC to generate new Stacks (STX) tokens, STX holders can stake their tokens to earn Bitcoin rewards. The future profitability of the mining system depends on various factors, with the relative price of STX versus BTC being a key consideration.

Although STX has seen significant price growth in 2021, its long-term value hinges on the adoption of the Stacks platform and the continued expansion of Clarity-powered smart contracts. If this growth stagnates, the price of STX could decline to a point where miners are unwilling to exchange their BTC for Stacks tokens. This is crucial because smart contract developers require STX tokens to deploy their contracts on the blockchain, and users need STX to pay gas fees when executing these contracts.

How many Stacks (STX) coins are currently in circulation?

The total supply of STX is not fixed, but it is estimated that around 1.8 billion STX tokens will be in circulation by 2050.

As of now, there are 1,460,829,536 STX tokens in circulation.

Other technical data

The specific distribution of STX's initial supply is somewhat uncertain, but it's estimated that approximately 15% of the genesis supply (1.32 billion STX) was allocated to the founders and the original Stacks team. These tokens are subject to a vesting schedule ranging from three to seven years, with the next scheduled release anticipated in November 2021.

How does the Stacks network ensure security?

Stacks enhances its security by leveraging Bitcoin's Proof of Work consensus, which involves thousands of miners and nodes to protect the network from attacks. This makes it exceedingly difficult to undermine the network in terms of both computational power and financial incentive.

To further strengthen security, Stacks introduces its own consensus model, Proof of Transfer, where miners commit BTC to mint STX. This effectively ties the security of the Stacks platform to BTC, as all transactions can be verified through Bitcoin.

In the latest version of Stacks, the blockchain's transactions can scale independently of Bitcoin, which it relies on. The Bitcoin blockchain is solely used for final verification and security, meaning that thousands of transactions on the Stacks blockchain result in just a single hash on the Bitcoin blockchain.

How to use Stacks?

The main utility of the STX token is to facilitate the connection between Stacks and Bitcoin through the Proof of Transfer consensus mechanism. Apart from powering this consensus, STX is also used for creating smart contracts, decentralized applications (dApps), and establishing permanent, transferable virtual assets. STX tokens are used to deploy new contracts to the blockchain and to pay the transaction fees required for executing these contracts. STX tokens used in this manner are burned during the process.

Additionally, the STX token is used for voting on Stacks protocol upgrades and participating in the selection of application reviewers.

Furthermore, users can stake their STX tokens, a process often confused with stacking. To stake, users must hold a minimum amount of STX, which they can then lock up on the network to earn rewards. These rewards, paid out in BTC, are distributed at the end of each approximately two-week reward cycle. The rewards are funded by the BTC that miners commit to mine new blocks of STX.

How can one select a Stacks wallet?

Stacks offers its dedicated wallet for storing STX, but these tokens are compatible with various third-party wallets. Individuals interested in investing in or mining STX are advised to conduct their own research when selecting a wallet.

Hardware wallets, such as Ledger or Trezor, provide the most secure option for storing cryptocurrencies, offering offline storage and backup. However, they may require more technical knowledge and are more expensive, making them suitable for storing larger amounts of STX for experienced users.

Software wallets are another option, being free and easy to use. Available as smartphone or desktop apps, they can be custodial or non-custodial. Custodial wallets manage and back up private keys on behalf of the user, while non-custodial wallets store private keys using secure elements on the user's device. Although convenient, they are considered less secure than hardware wallets and are better suited for storing smaller amounts of STX or for novice users.

Online wallets, or web wallets, are also free and easy to use, accessible from multiple devices through a web browser. However, they are considered hot wallets and less secure than hardware or software alternatives. Users must choose a reputable service with a strong security and custody track record, making them suitable for holding smaller amounts of cryptocurrencies or for frequent trading.

Kriptomat offers a secure storage solution for STX, allowing users to store and trade their tokens seamlessly. Storing STX with Kriptomat provides enterprise-grade security and user-friendly functionality, enabling quick buying, selling, or trading of STX for other cryptocurrencies.

Stacks mining

Because Stacks relies on BTC for the minting of STX, it requires miners. However, these miners do not directly mine STX. Instead, they commit previously mined BTC to generate new STX tokens. Miners must commit BTC to have the opportunity to mine STX, and this opportunity is partly random and partly based on the amount of BTC a miner has committed.

The profitability of this operation depends on two key factors. Firstly, whether the miner is granted the right to mine a block of STX, which is likely to favor miners who commit larger amounts of BTC. Secondly, the relative price of STX compared to BTC. If the price of Bitcoin rises while STX remains stagnant, mining could become unprofitable until the relative price recovers. Another possibility is that a miner who commits BTC to the mining process could experience a drop in the value of STX during the mining period (approximately sixteen hours), reducing their profits.

The issuance of STX tokens follows a halving schedule similar to that of BTC. This means that a miner's reward per block will decrease from the current 1,000 STX to 500 STX, then 250 STX, and finally, 125 STX. Once it reaches 125 STX, this will remain the reward for mining indefinitely.

Revolutionary ambition

Whether you've only glanced at Stacks or delved into its details, one thing is clear: the developers have demonstrated immense ambition. Their initial goal is to revolutionize the use case for Bitcoin, the world's largest and most powerful blockchain.

Their approach to achieving this goal has been bold and ambitious, evidenced by Stacks being the first SEC-backed ICO in US history. The outcome of their ambition remains uncertain—whether they will achieve great success or face challenges akin to Icarus.

As the cryptocurrency market experiences another bullish trend, there is skepticism about whether people will continue to exchange BTC for the opportunity to mine STX. The future of Stacks is a topic that will be closely monitored by many in the industry.