Stacks (STX) Network Analysis: Build Your Web 3.0 Startup on Bitcoin
I’m super excited to launch Stacks Accelerator on CoinDesk.
We’re investing $50k on uncapped notes (the most generous investment terms possible) and providing an incredible three month mentorship program for outstanding startup teams who are building on Bitcoin with Stacks.
For those building innovative Web 3.0 startups in DeFi, NFTs, or other blockchain focused projects, this essay is meant as a primer to explain to you the Stacks blockchain and technology stack.
Before proceeding, read the Stacks 2.0 Whitepaper written by Stacks Co-Founder Dr. Muneeb Ali. This is the best starting place to understand the different aspects of the Stacks technology stack.
The Python Paradox
In 2004, YCombinator founder Paul Graham penned his influential essay The Python Paradox with the opening line, “you could get smarter programmers to work on a Python project than you could to work on a Java project.” Back then, Python was not widely adopted, and this was a controversial statement that many people disagreed with. Today, Python is one of the most popular programming languages. In this same vein, whatever blockchain stack is popular today may not be popular tomorrow. “People don’t learn Python because it will get them a job; they learn it because they genuinely like to program and aren’t satisfied with the languages they already know,” asserts Graham. Experienced developers are always looking for new challenges and want to work with the best technology frameworks, not the most popular ones. Because startups want to hire experienced developers, it’s advantageous for them to choose the superior framework over the more popular ones. This in turn grows these technologies.
Take another example, PHP, the most popular web framework in the late 2000s. While the PHP community is even larger today than it was a decade ago, it has lost significant market share to Ruby on Rails and NodeJs. Startups including Stripe, Airbnb, Shopify, and Coinbase were all started in the early 2010s on Ruby on Rails, which was not as popular as PHP or other stacks at the time.
So how about Stacks? We believe that Stacks today is like Python, Ruby on Rails, or NodeJs when it launched. And I hope to demonstrate this to you in the rest of this essay.
The success of any technology stack starts with the team. Much of what I’m about to say about Stacks almost sounds too good to be true, until you understand the team behind the technology.
Stacks was co-founded by two Princeton computer scientists, Dr. Muneeb Ali and Ryan Shea. Ali and several others in the Stacks core team have PhDs in decentralized systems. This initial team was funded by the A-level of Silicon Valley investors, including YCombinator and Union Square Ventures, and Stacks even made the first SEC-approved token sale. Today, Stacks is a coalition of multiple entities, including the non-profit Stacks Foundation and Hiro Systems run by Dr. Ali. The Stacks blockchain is not controlled by any single entity, and the STX token trades as a utility in the US and abroad.
It’s no secret there’s a lot of hype in the blockchain industry. There are popular projects who not only haven’t released their products yet, but also have pushed back their deadlines months and even years. When it comes to Stacks, the ecosystem is run professionally and harmoniously, by teams that ship features on time, keep promises, and avoid marketing hype. Stacks 2.0 already offers many features today that are only promises on the roadmaps of other chains. I was an early advisor to Stacks since 2014 and have followed every major decision made by the co-founders over the past seven years. They have acted rationally and with integrity throughout. This, in addition to the fact that I consider the technology to be the best in the market, is why I’m doubling down on Stacks by founding the Stacks Accelerator and investing more of my time and money into the ecosystem.
Outside of the Stacks 2.0 Whitepaper, you can also see the Technical Specifications in the Stacks docs for more information.
The key benefit of Stacks is the ability to use Bitcoin as a secure settlement layer and interact programmatically with the state of Bitcoin directly. This is made possible by Proof-of-Transfer (PoX), a consensus mechanism invented by Stacks and, today, only available on Stacks.
PoX is not only as scalable as Proof-of-Stake (PoS), but also more secure, all while enabling exciting new functionality. Said another way, PoX combines the benefits of Proof-of-Work’s (PoW) security with the benefits of PoS scalability, and then adds some magic sauce on top.
Beware of TPS Vanity Metrics
Scalability in terms of Transactions Per Second (TPS), without respect to application demands, transaction size, security and settlement assurances, is what we call a vanity metric. It’s a metric that is meaningless and tells us nothing because it contains no context. Comparing blockchains based on TPS is like comparing apples to oranges.
A credit card transaction is nothing like an ACH transaction, which in turn is nothing like a FEDWIRE or SWIFT transaction. They aren’t trying to do the same thing. You may make several small purchases each day on your credit card, use ACH to pay your employees every two weeks, and send a wire transfer once in a while on an as-needed basis. Unlike any of these payment methods, Bitcoin can transfer a billion dollars (or your life’s savings) anywhere in the world in a single and immediate transaction. In order to determine its scalability, one must understand what an actual transaction represents and how much value it can contain. If a transaction on one platform contains 1 smart contract, but on another platform it contains 1,000,000 smart contracts, we can’t accurately compare the two based on TPS. For a longer critique on TPS as a vanity metric, read Transaction count is an inferior measure by Nic Carter.
Uniswap, the largest and most active app on Ethereum, only averages 1 TPS based on daily demand. If your startup becomes even 10% as successful as Uniswap, you will have the resources and capability to implement something called app chains on top of Stacks. App chains are supported out of the box through PoX. It’s a concept similar to rollups (and in some ways comparable to sharding) being used to scale other chains today. There is no technical limit to the number of streamed transactions in a Stacks block with app chains. A single hash in a Bitcoin block can contain millions of smart contracts through Stacks app chains.
Beware of blockchains that claim very high TPS on the base layer. A centralized system will always be faster and more scalable than a decentralized system. You can’t get something for nothing, and there are diminishing returns to performance when it comes at the cost of security, developer experience, or time to market. All developers understand that C++ is 10–100 times faster than Ruby on Rails, but there’s a reason why far more unicorn web startups were built on Ruby on Rails than on C++. The correct answer is about finding the balance, which we believe exists with Stacks PoX.
The security of a decentralized network comes from its distributed nature, creating no single point of failure. For instance, if a part of the network fails, is taken down, or even hacked, the applications & platforms running on it continue to function. However, networks are still vulnerable to various types of attacks, with the most feared being an attack that takes over more than 51% of the network. Blockchain networks prevent this by distributing their control throughout the network and leaning on the anonymity of those parties.
Blockchains have different structures, tokenomics, and ways of handling transactions to keep their decentralized nature. The most traditional being Proof-of-Work (PoW), which Bitcoin uses, and Proof-of-Stake (PoS), which many newer blockchains use. However, these networks are no longer efficient for the next wave of applications being created by developers today. This shift led to the development of Proof-of-Transfer or PoX, which Stacks (STX) leverages. Compared to the PoW or PoS networks, PoX blockchains are automatically more secure by leveraging the secure nature of Bitcoin’s PoW network. Every transaction is settled on Bitcoin, making it more difficult to reverse. You could think of it almost like two-factor authentication. Even if one system is compromised, the hacker is still locked out.
The second factor to consider after choosing a network is pseudonymity. Even if a network is decentralized, a powerful enough organization could co-opt the key players to take control of the network without pseudonymity. With Bitcoin, no one knows the real identity of its creator, Satoshi Nakamoto. Additionally, PoW miners are more pseudonymous than PoS validators. Said another way, every network has founders or critical players who could be at risk for network control, but this risk is especially pronounced in PoS. This is because the most active validators in a PoS network are also the most significant token holders—usually the co-founders, early team members or core devs, and early investors—who can easily be identified if they are not already publicly documented.
Lastly, PoX provides increased security over PoS and its built-in fatal flaw. When making token holders the network’s validators, there is no way for anyone to buy into the network if a single entity controls 51% of the token supply. Meaning, whoever controls 51% of the total tokens in circulation never has an obligation to sell or further distribute regardless of price. Large exchanges that hold custody of people’s tokens are also likely actors in a potential attack. In PoW networks, anyone can add hardware to the network for the cost of electricity, making possible attacks both avoidable and temporary. Mining in PoX can also be done by anyone and is not dependent on current token holders like in PoS. Stacks miners can buy into the network to any degree they choose by sending BTC transactions to Stacks holders. This makes any potential attacks on the Stacks network, like in PoW, both avoidable and temporary.
All of the security advantages I mentioned above for PoX over PoS come without impacting the environment. Miners in PoX make BTC transactions instead of using mining hardware that consumes electricity. While some may still complain about the energy consumption of Bitcoin, it’s essential to put things into perspective. Stacks make Bitcoin orders of magnitude more valuable and efficient in terms of what can be done in a single block. There is always a tradeoff between centralization and resilience. One must ask what is it worth to have a resilient and secure alternative monetary system that does not require millions of global government and banking employees to function while offering more freedom and sovereignty for any person who can write down or remember a single seed phrase. Bitcoin mining can run perfectly well on top of 100% renewable energy. In fact, many argue there’s a direct incentive for large mining operations to seek renewable energy due to its lower cost.
Magical Powers of PoX: Bitcoin State and Monetization from Stacking
We just made a case for PoX security and scalability. Now we’re going to make the case that no other chain can compete on: building smart contracts and apps that directly interact with Bitcoin state and can monetize through PoX’s native Stacking functionality. As I’m writing this, Stacks 2.0 was launched about three months ago. We have still yet to understand all the possible applications of these magical powers and how they can foster the development of apps and user experiences that were not possible before.
Clarity contracts read and can react to changes in Bitcoin’s state. This means we can have a smart contract on Stacks that sees something happen in Bitcoin and automatically executes. Imagine BTC lending where BTC never leaves the main chain. Through Stacks, you can do this in a 100% trustless way, without oracles, custodians, or middlemen. Party A sends a BTC transaction to Party B (the borrower), and the Clarity contract auto starts the timer on loan, expressed in BTC blocks. If the BTC does not come back to a specified BTC address by the given BTC block, the contract will auto-release Party A’s collateral. And because Clarity is an interpreted language, you can read the contract on the Stacks blockchain and have formal proof that it’s going to do what you expect. The final consensus happens on Bitcoin as the settlement layer, and we’re back to where we started. This is just one of the potentially unlimited use cases for Stacks we have only yet to consider.
Now let’s talk about Stacking. Stacking is a smart contract, written in Clarity, which has nearly $1B in capital committed to it. It allows STX holders to lock up their STX and participate in the network’s consensus. BTC transactions from miners are sent to Bitcoin addresses that each stacker designates. To date, Stacking has generated an average APY of more than 10%. Let’s apply this concept to a new business model. Suppose you are building a decentralized competitor to Patreon, which lets creators offer membership plans to their fans to support the creators’ work. Instead of paying $10 / year in USD to a creator you want to support, you could buy $100 in STX and delegate your stacking rewards in BTC to the creator’s address. The net result for the creator is the same — he gets paid $10 / year — except you keep your original principal. The principal never leaves your possession, and after a year, it might even be worth more than $100. This simple example can be applied to a potentially unlimited number of other businesses. Imagine “free” SaaS services of all kinds where customers pay only by locking up their STX and delegating their rewards to the provider’s BTC address.
DeFi with Stacking is Better than Staking
DeFi from Stacking Stacks is economically superior to DeFi from Staking on any PoS chain for one crucial reason. In PoS, stakers earn the base currency; Ethereum stakers earn Ethereum. On Stacks, miners trade BTC for Stacks, and Stackers earn BTC. While PoS operates in a vacuum — Stacks’s continued existence is based on validation from the market of Bitcoin holders. Even STX holders need to buy back into the system to accumulate more Stacks. Another way to say this is that every point of APY earned in PoX is determined by Bitcoin holders who felt it was worth it to buy into Stacks, whereas fees self-determined by the network determine every point of APY earned in PoS.
Let’s take the example of collateralizing NFTs. Everyone understands how you can collateralize a mortgage — you buy a house, and then you take out a loan on the value of that house with the bank. You can do the same thing with NFTs on Stacks, assuming an oracle or other system gives you the loan (we are actively investing in projects to do this today). In addition, that loan can automatically be Stacked and earn BTC. This is just one of the numerous examples of how Stacking as a DeFi primitive makes new applications not only possible but superior to what exists in the market today.
Clarity: Better Developer and End User Experience
As we mentioned above, Clarity is an interpreted language, not a compiled one like other smart contract languages. Outside of blockchains, this might not be such a significant advantage. Most new compiled languages today can match the benefits of interpreted languages while offering better performance. Not only is this not the case for blockchain, but it won’t ever be in the future. As an interpreted language, the source code of every Clarity contract is published directly on the Stacks blockchain. This allows you to plug the code into a testing environment to verify what it will do before it goes live formally. With a compiled language, the machine code is on the blockchain, not the source code, and there’s no way to prove what the corresponding source code is for that machine code. This is not only more secure for developers and leads to fewer bugs, but it is more secure for end-users. Imagine the trust that can be achieved with your end users when they can formally verify what your code will do with a neutral third party. Smart contracts have now become better than actual legal contracts. Customers can have confidence they won’t need to sue you if you act irresponsibly. It’s like putting Test-Driven Development in the hands of customers for blockchain.
The second key advantage of Clarity smart contracts is that they are decidable. Unlike Turing complete languages like Solidity, infinite loops are not possible in Clarity. This means you can take any Clarity code and the output can be determined with 100% certainty. This makes smart contract auditing easy. It means you can use a third party to verify what any smart contact will do, knowing it won’t run into bugs or other edge cases. To learn more about what Turing completeness means and why it must lead to indeterminate outcomes, watch this video by Veritasium.
Ecosystem & Traction
We’ve now covered the Stacks team and technology from a business perspective; the final thing you want to evaluate as an entrepreneur, developer, or investor is the ecosystem and traction. By ecosystem, we mean the number of developers, educational materials, community-supported tools, and libraries, as well as the kind of opportunities for new projects to get funding and other support. By traction, we mean the number of apps with breakout success.
There is no doubt that there are more developers, educational materials, and community-supported tools in the Ethereum 1.0 community. Whether and when Ethereum 2.0 will get adopted, and how different the tooling will be is yet to be seen. The Stacks community is approximately 300,000 people based on internal metrics. It is likely larger than comparable next-gen blockchains among the Top 50 projects by market capitalization. We would also argue that, based on The Python Paradox, the average developer quality is higher in the Stacks community. It’s usually the most skilled developers in other blockchains that get fed up with the limitations and start looking for a better way. Stacks allows those developers to be the big fish in a faster-growing pond — to have an influential role in open source and get to work with other top developers and core dev team members with more ease.
Get Funded Faster on Stacks
When it comes to opportunities for new projects to get funding and other support, Stacks excels in this regard. You are far more likely to get 1-on-1 attention from core developers, the Stacks Foundation, and other key people in the smaller but faster-growing ecosystem like Stacks. Since Stacks 2.0 is new, there are many greenfield opportunities to build something in Stacks that has already been proven on another chain and get the community behind you. The non-profit Stacks Foundation has a 100M STX treasury dedicated to holding frequent community events and offering grants for open source contributions. To date, only a few hundred thousand dollars worth of grants had been claimed. In addition, our newly-launched accelerator program is investing up to $50k in each team on an uncapped note and offers access to some of the best investors in the world.
Stacks Foundation: Grants for Open Source Contributions
As I mentioned above, the Stacks Foundation has 100M STX treasury to invest in open source contributions to Stacks. In the event that there’s a library on another platform that you need for your startup on Stacks, the Stacks Foundation may offer you full grant funding to develop it. Not only this, but for any piece of code you need to develop that could be used more broadly by other startups in the Stacks ecosystem, the Stacks Foundation is eager and likely will offer full grants directly to you to develop it. There’s nothing better than equity-free cash. Smart startups see this as an opportunity to contribute to the community—and to grow their teams in the process. It’s one of the biggest advantages of getting into Stacks now; you have direct access to the decision makers in the ecosystem that would be nearly impossible to get in a bigger ecosystem like Ethereum.
When it comes to traction, the number of apps with breakout success, Stacks 2.0 is still early in the game as it was launched in January 2021. The most widely used smart contract on Stacks is Stacking—which has approached nearly $1B in capital committed to it. This is proof that startups on Stacks can scale to work with billions of dollars.
Still, Stacks Accelerator just kicked off our first cohort with 25 exciting early-stage projects. We will invest in the best 100 new startups in crypto we find over the next 2–3 years, tapping founders not just in the Stacks ecosystem but from everywhere.
We’ve introduced in this essay The Python Paradox and how newer and less popular but more compelling technology Stacks (pun intended) usually win as smart developers want to build on them. Self confident developers are not as concerned with the lack of educational tutorials and pre-existing libraries because they know how to figure things out themselves. Many developers start in one ecosystem and move to a better one once they discover it. These developers would rather have a more scalable and secure technology that benefits them in the long-term. With Stacks, the network is designed to give you the best of both worlds—the security of PoW with additional security from settling on Bitcoin, with scalability comparable to PoS. Clarity gives you a better developer and end user experience. Stacking unlocks new functionality that’s not possible on other chains.
The success of a startup comes down to surrounding yourself with the most talented individuals, and rallying the support of a community around you. While the Stacks ecosystem is not as large today as Ethereum, we argue promising startups will have easier access to support, funding, and talent needed to break out from the pack. There are significant long-term advantages to being a big fish in a fast growing pond. While the future of Ethereum is uncertain and to be seen whether Eth 1.0 on PoW or Eth 2.0 on PoS will dominate, there is already a better way with PoX that you can use today. Assuming you are considering Eth 1.0 PoW, you will still need to find a Layer-2 in order to scale. So why not build on top of the more decentralized and pseudonymous network—Bitcoin—with the already proven scalable Stacks PoX?
Next Steps: Stacks Accelerator
If this essay has convinced you that building your next project on Stacks is a worth exploring, the Stacks Accelerator would love to hear from you. We are currently investing $50k uncapped notes (the most generous terms available in the startup industry) in outstanding teams to help their dreams become a reality and connecting them with some of the best mentors and investors on the planet.