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

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.

The Python Paradox can be explained by the different wants of Experienced vs Inexperienced Developers

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.

Stacks Team

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.

The team behind Stacks is top-notch

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.

Stacks Technology

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.

Comparison of different blockchain consensus mechanisms

Beware of TPS Vanity Metrics

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.

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.

Security

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.

Environmental Impact

Stacks gets it’s power from Bitcoin, and stacking Stacks earns a Bitcoin yield

Magical Powers of PoX: Bitcoin State and Monetization from Stacking

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.

Stacks empowers Web 3.0 startups to utilize the security and network of Bitcoin

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

Unlike Solidity, anyone can read Clarity smart contracts on the blockchain and know exactly what they will do.

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

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.

Mentors and Speakers for the Stacks Accelerator

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.

Traction

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.

Stacks Accelerator’s first cohort of 25 investments building on Bitcoin w/ Stacks

Conclusion

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

Learn more on our website and apply by May 14th for our first program

Managing Partner at Stacks Accelerator