Key Insights

Primer on Stacks

Stacks is a Bitcoin layer for smart contracts. Decentralized applications are executed on Stacks and settled on Bitcoin, leveraging the security and capital of Bitcoin while offering arbitrary programmability that is not possible on Bitcoin’s scriptable settlement layer.

Stacks has knowledge of the full Bitcoin state, thanks to its Proof-of-Transfer (PoX) consensus mechanism and Clarity programming language, enabling it to read from Bitcoin at any time. With PoX, miners commit BTC to eligible Stacks addresses that participate in consensus. This process of STX holders participating in consensus and earning BTC from miners is known as Stacking and was launched as part of the Stacks Mainnet launch in January 2021. PoX runs parallel to Bitcoin’s Proof-of-Work (PoW) consensus, hashing and settling Stacks transactions on the Bitcoin L1. Metadata from newly mined Stacks blocks are anchored to every Bitcoin block, allowing users to verify the canonical Stacks chain via Bitcoin blocks.

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Key Metrics

Performance Analysis

Network Overview

Average daily transactions declined 22.7% QoQ, from 9,200 to 7,100. Average daily active addresses (DAA) declined more severely, down 44.8% QoQ from 3,100 to 1,700. While daily transactions and DAA were down QoQ, they were still up 47.1% and 24.0% from their bottoms in Q3’22, respectively. In general, Stacks’ activity metrics calmed down in Q2 after the Bitcoin Name Service (BNS) activity and the Bitcoin Inscriptions craze that fueled activity metrics in Q4’22 and Q1’23.

Despite activity metrics cooling down, plenty of infrastructure continued to be built to capture and amplify the next wave of activity to come in from Bitcoin Layer-1 (L1) programmability (more details in the Qualitative section of the report).

This relative persistence of daily transactions implies that the users that did remain active in Q2 were high-frequency users, executing more transactions on average than the users that were not active in Q2.

These statistics could also have been skewed by bots (Note: bots are not exclusive to Stacks and occur at some level on all chains) that executed a disproportionately high amount of transactions and remained active while many users were inactive.

Unlike previous quarters, overall activity trends were not shaped by BNS activity. Instead, the activity sources were diversified among alternative NFT collections like Metaboys and DeFi applications like ALEX. While average daily transactions did decrease 22.7% QoQ, they held up relatively well, considering the previous activity catalyst, BNS, was nearly inactive.

Financial Overview

STX is the native token on Stacks and is used primarily for transaction fees and miner rewards. STX’s circulating market cap decreased 25.8% QoQ from $1.29 billion to $955 million, lagging behind the total crypto market cap’s increase of 0.4%. However, STX’s market cap is still up 53.3% YTD, as this Q2 pullback did not erase the massive price gain seen in Q1’23.

Revenue is measured as total transaction fees and is distributed to Miners through Stack’s PoX mechanism. Q1’s quarterly revenue of $65,000 was primarily due to a couple of extreme days in late March near STX’s price peak. Q2’s revenue of $42,000, while down 35.5% QoQ, is still up 105.5% YTD. The introduction of more assets into Stacks’ growing ecosystem will create more urgency around transactions, which in turn should increase network revenue as users seek to outbid each other. Small spikes can be attributed to events such as NFT mints and times of high volatility when many users are trying to make exchanges.

Stacks is tightly coupled with Bitcoin not only in technical architecture but also in activity and price action. Through the first half of 2023, STX price increased 73.7% relative to BTC.

Ecosystem Overview

Much like various network and financial metrics, ecosystem metrics also had a pullback after a massive Q1. However, TVL (USD) was relatively resilient, only decreasing by 7.5%. TVL (USD) finished the quarter up 247.9% YTD. This relative stability in TVL brought the market cap / TVL ratio down from 48.3 to 38.7. The movement could be a good sign as a smaller market cap / TVL ratio indicates a larger ecosystem relative to the token’s size.

Daily contract calls and NFT activity declined in Q2. Contract activity remained slightly positive YTD, but NFT transactions and NFT trading volume decreased 66.3% and 52.0%, respectively, bringing them to yearly lows.

ALEX

ALEX is a multi-headed DeFi protocol, focused on trading and lending/borrowing cryptoassets with Bitcoin as the settlement layer. The automated market-making (AMM) protocol is at the core of ALEX’s ecosystem, providing liquidity for its Launchpad and Orderbook. ALEX’s average daily DEX volume increased 47% QoQ and 564% YTD. Trading pairs involving ALEX’s tokens and STX accounted for themajority of the volume. Volumes surged in mid-May following the launch of ALEX B20.

ALEX continued to gain TVL dominance for the second consecutive quarter. ALEX has firmly established itself as the heart of Stacks DeFi, with 92.1% TVL dominance as of Q2. The immediate focus for ALEX is to build the most user-friendly, scalable BRC-20 trading DEX. Other services include Trading Pool, Lend/Borrow, and Launchpad, with more to come in its new roadmap.

On May 16, TVL (USD) set its yearly high of $36.0 million, and TVL (STX) set its all-time high of 56.4 million STX. These milestones are due to multiple factors, including

NFTs

BNS, the Bitcoin Name System, remains the most popular NFT on Stacks. Gamma, both a marketplace on Stacks and an Ordinals marketplace on Bitcoin, is the most dominant NFT marketplace on Stacks.

In early May, contributing factors to the spike in NFT sales volume include sales of gaming project MetaBoys and a single 7,500 STX sale of a Megapont Ape. Megapont Ape Club is the largest PFP collection on Stacks, with over 5 million STX in lifetime volume and over 1,000 holders. However, the largest overall NFT collection on Stacks is BNS, with over 1.4 million STX in lifetime volume and over 300,000 holders.

BNS allows users to interact with wallets via human-readable domain names, similar to other domain services such as ENS and ADA Handle. There are eight different types of BNS contract calls, but 99.9% of BNS transactions come from only four types: name-update, name-transfer, name-register, and name-preorder.

Despite an 89.7% QoQ decline in BNS registrations, the total number of BNS names crossed 300,000 in Q2. The only BNS transaction type to increase in activity QoQ was name-update. This metric will likely increase in activity over time regardless of overall BNS activity, as the number of names that can be updated will continually increase.

Staking Overview

Stacking rewards were impacted by a bug in the stacks-increase function. The community and developers reached a consensus on resetting the Proof of Transfer (PoX) state and implementing a fork to revert the network to proof-of-burn temporarily. PoX Stacking was disabled for cycles 58 and 59, approximately one-third of Q2. The Stacks 2.4 hardfork re-enabled Stacking on May 26 prior to Cycle 60, ~5 weeks after the bug was identified.

Qualitative Analysis

Community

Development

Notable core development efforts and achievements include:

Notable ecosystem developments include:

Bitcoin MEV

Stacks experienced an MEV issue related to Bitcoin miners. The MEV issue itself was not unexpected, as shared security models carry various risks. These risks include:

Stacks’ PoX is similar to merge-mining in that a miner on the “parent chain” (i.e., Bitcoin) could carry out an attack with no risk of financial loss. This occurred when a major Bitcoin mining pool started to only include commitments from their own Stacks miner, collecting a disproportionate amount of rewards or even all of the rewards. This extraction of value was technically always possible, but it was only recently exploited as Stacks has grown larger and become more profitable.

The community has been exploring several solutions, including ideas such as:

sBTC

Gaining access to BTC’s liquidity in a smart contract-enabled environment would mean gaining access to massive amounts of liquidity. Ethereum’s wBTC had a market cap of $4.8 billion as of the end of Q2. sBTC, however, promises an even more trustless version of BTC in the Stacks ecosystem. sBTC entered alpha testing in Q2 and could prove to be the most attractive version of bridged BTC yet. Bitcoin Writes provides weekly sBTC updates.

The sBTC whitepaper, released in December 2022, details a trust-minimized two-way Bitcoin peg system. sBTC is still in development and is positioned to be the first decentralized, non-custodial Bitcoin peg that allows smart contracts to write back to the Bitcoin blockchain. sBTC allows BTC to move freely between the Bitcoin and Stacks networks and deploy liquidity from Bitcoin directly to Stacks for DeFi, NFTs, and more. As with other bridged versions of BTC, moving off of the Bitcoin network is simpler than moving onto it.

In the case of Stacks and sBTC, users send BTC to a threshold wallet where sBTC is minted by Stacks consensus and backed by BTC 1:1. Because Stacks already reads the Bitcoin mainchain, there are no additional trust assumptions outside of Stacks and Bitcoin.

However, the peg-out – moving from sBTC on Stacks to BTC on Bitcoin – is not as straightforward and comes with additional trust assumptions. By utilizing the open-source and dynamic set of stackers and delegating them to be threshold signers, Stackers inherit the responsibility to fulfill sBTC peg-out requests. Since Stackers already have an economic incentive, peg fees become unnecessary. There is an economic trust assumption on the peg-out, unlike the cryptographic trust assumption on the initial peg. Due to this trust assumption, the peg is just trust-minimized and not entirely trustless.

Unlike other synthetic BTC variants, like wBTC (wrapped BTC) and RBTC (Rootstock BTC), sBTC doesn’t rely on federations or centralized custodians. Instead, sBTC relies on an open network in which anyone can help maintain the peg. The open membership of users is maintained by incentivizing users to behave rationally as the most profitable course of action. sBTC is somewhat similar in design to tBTC (Keep Network BTC), a permissionless Ethereum-wrapped BTC. However, tBTC is settled on Ethereum, and it utilizes an additional set of signers for peg requests and overcollateralization ratios.

Nakamoto Release

The Nakamoto Release whitepaper describes the protocol changes required to enable that two-way peg system. The first of these changes was implemented in Stacks 2.1. Aside from sBTC, the promise of faster block times mustered community interest in the Nakamoto release. Faster block times, via ‘light blocks’ that occur more frequently than Bitcoin blocks, would open many doors on Stacks, specifically in DeFi. Faster block times improve UX and make the experience on Stacks more comparable to other DeFi platforms, such as Ethereum and Cosmos, with one key difference: trust-minimized access to BTC liquidity.

Bitcoin

As a Bitcoin layer, Stacks activity tends to follow the larger trends around the greater Bitcoin ecosystem. Bitcoin experienced a resurgence in the first half of 2023, regaining 50% dominance of the total crypto market cap, a level last witnessed in Q2 2021. Inscriptions and BRC-20 tokens have proven that the Bitcoin ecosystem has a serious demand for NFTs, fungible tokens, and DeFi.

With its added functionality and deep Bitcoin compatibility, Stacks is perfectly positioned to meet the demand for Bitcoin programmability — not only the demand coming from inscriptions but also from future catalysts, such as TradFi interest.

Inscriptions

The Bitcoin network saw new innovation in 2023, leveraging the Segwit and Taproot upgrades. More importantly, these Ordinals and inscriptions innovations revealed a serious appetite for added functionality in the greater Bitcoin ecosystem. After the first Ordinal inscription on December 14, 2022, it only took a few months for activity to explode, reaching thousands of daily inscriptions. The number of Ordinals inscribed increased from 660,000 in Q1 to over 14.4 million by the end of Q2.

New asset types such as stamps and recursive inscriptions contributed to increased activity, as well as new tools and infrastructure such as Hiro’s Ordinals Explorer. Bitcoin block times, throughput, and scriptable settlement are limited with regard to supporting functionality around these assets. But that’s where Stacks fits in, enabling added functionality with its Clarity smart contracts and upcoming trust-minimized bridges.

TradFi

Traditional finance has been consistently more interested in Bitcoin than the rest of the cryptocurrency market. While the perception of cryptocurrencies as a whole remained steady YoY, a larger proportion of investors expressed positivity towards Bitcoin compared to the broader crypto sector (47.3% versus 33.2% respectively), according to Binance’s Institutional Crypto Outlook Survey. This interest can be seen by the series of ETF applications submitted in Q2 from major TradFi players such as BlackRock, Fidelity, ARK Invest, Invesco, and more.

Once BTC spot and futures are established, TradFi will then pursue leverage, perpetuals, lending, and perhaps most importantly, yield. Binance’s institutional survey noted that institutional investors interacted most with spot DEXs, perpetuals DEXs, and lending. While some of these investors will prefer custodians as the solution for this Bitcoin functionality, others will inevitably want to explore more decentralized situations, of which Stacks is best positioned to onboard institutional investors.

Competition

Bitcoin modularity is being explored in several directions. There are the more established layers, such as Stacks, Lightning Network, Rootstock, and Liquid. However, Stacks is the only option with a focus on both programmability and permissionlessness. Newer protocols, such as Arkpill and Babylon, generally focus on either offering a specific use case (i.e., privacy) or using Bitcoin for data availability. Stacks does not appear to have any immediate competition among other layers nor from centralized and permissioned entities such as custodians.

Closing Summary

Stacks experienced a Q2 pullback in several network, financial, and ecosystem metrics, but it remains up in almost all categories YTD. Market cap is up 53.3% YTD, TVL (USD) is up 247.8% YTD, and average daily active addresses are up 3.4% YTD. ALEX is the substrate for increased ecosystem activity through its AMM DEX, cross-chain bridges, BRC-20 DEX, and other products.

This already-fast growth may further accelerate as new Stacks features are deployed on mainnet. The upcoming Nakamoto release aims to benefit DeFi UX with shorter block times, and the launch of sBTC aims to grant Stacks users access to a massive amount of BTC liquidity via a trust-minimized bridge.

With its added functionality and deep Bitcoin compatibility, Stacks is perfectly positioned to meet the demand for Bitcoin programmability. The demand will not only come from inscriptions but also from future catalysts, such as TradFi interest.

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