What is Blockstack (STX)? Bitcoin’s Smart Contract Network Explained

Bitcoin has proven itself to be the world’s most secure and longest-running decentralised network that is powered by blockchain technology. Because it is the first-ever cryptocurrency in the world, it can only be used to transact and store monetary value — in bitcoins. At least, that was the narrative for Bitcoin for over a decade. So, what is Blockstack (STX) anyway?

A new technology called Blockstack attempts to revamp the classic cryptocurrency, by making it even more powerful and useful, without changing any of Bitcoin’s source code. 

Specifically, Blockstack (more commonly known as Stacks) runs smart contracts off-chain and in parallel to Bitcoin, and then stores the transactions on the Bitcoin network. As a result, bitcoin holders can become more involved with DeFi, such as the NFT marketplace, without converting bitcoin into other cryptocurrencies. 

While smart contracts running with Bitcoin seems to be an exciting concept, the reality is a little more complex. Learn about how Blockstack (or Stacks) works in this article.

Read also: What is Bitcoin? A Complete Guide.

What is Blockstack (STX)?

Stacks is a Layer-2 solution for implementing smart contracts on Bitcoin. It is an entirely separate blockchain network from Bitcoin, but it shares the security of the Bitcoin protocol. 

In short, Blockstack (more commonly known as Stacks) is a smart contracts platform that runs in parallel with Bitcoin. Nodes use bitcoin to bid for a block leader position, and STX stakers receive bitcoin staking rewards.

In Stacks, the block leader mints new STX coins and receives transaction fees as rewards. As a result, transactions on Stacks are backed by Bitcoin’s security.

Essentially, dapp developers build dapps on top of the Stacks blockchain. This blockchain processes smart contract transactions, which are validated by nodes in the Stacks network. In order to reach network consensus, Stacks uses a unique protocol called the Proof of Transfer.

In Proof of Transfer, network nodes on Stacks use bitcoin to bid against each other in order to become the next block leader and to earn block rewards from the Stacks blockchain.

Once the Stacks network reaches consensus, the transactions on the new Stacks block are stored on the Stacks blockchain as well as the Bitcoin blockchain, which doubles the security of the layer-2 network. 

The bidder’s bitcoins are then sent over to two random Bitcoin wallets owned by STX staking pools (more on this below).

Stacks nodes are rewarded with transaction fees and freshly minted STX coins, the native cryptocurrency of the Stacks blockchain. The value of STX coin is therefore derived from bitcoin and the cost of its proof of work protocol.  

This is just a very general overview of how bitcoin and STX coin interact within the Proof of Transfer protocol. Apart from Bitcoin’s Proof of Work protocol, staking STX is also a big part of how Stacks works. We will go through this again in later sections. 

Read also: What is Proof of Work? A Closer Look.

What is the Stacks 2.0 blockchain?

The official name for the blockchain that powers the Stacks network is Stacks 2.0. This is to discern the decentralised network from the early version of Stacks, back when it was a more centralised test network controlled by Hiro Systems PBC, the chief developer of Stacks that we know today.   

Stacks 2.0 attempts to scale up the Bitcoin network by allowing the network users to experience fast transaction times (as opposed to waiting 10 minutes for a Bitcoin transaction) as well as near-instant finality.

Additionally, Stacks 2.0 anchors on Bitcoin to back the history of smart contract transactions, using a programming language that is designed for transparency and auditability, called Clarity.

As of now, more than 20 dapps have been launched on Stacks 2.0, such as: 

• Boom, NFT marketplace that is secured by Bitcoin.
• BTC.US, a registrar for .btc web domains.
• Ryder, a platform for managing “digital DNA” for self-sovereign digital ID.
• PlanBetter, a platform for staking STX coins for bitcoin rewards.
• Arkadiko, a decentralised stablecoin loan platform.

What is the STX cryptocurrency?

Like any other blockchain, Stacks rely on its own native cryptocurrency called STX for paying transaction fees, running smart contracts, and securing the network via staking.

You may wonder, if Stacks rely on bitcoin to run its consensus protocol, then why does the network still require an additional STX cryptocurrency?

STX is still useful for a few reasons:

• Stacks 2.0 is a separate blockchain from Bitcoin, so it still requires at least one medium of exchange, which we call STX.

• Bitcoin cannot be stored in Stacks 2.0. Rather, the consensus protocol uses bitcoin as an economic barrier of entry for network nodes. Nodes are more incentivised to work honestly as they lose their bitcoin in the process. 

• STX is required for staking. Without stakers, the bitcoin reward system becomes centralised.

• Bitcoin cannot process smart contracts, so bitcoin cannot be used to power Stacks smart contracts.

Fun fact: The term for staking that is used by the Stacks community is “stacking”, so if you go ahead and read the whitepaper or documentation, don’t be surprised with the word. 

Why did Stacks choose to work with the Bitcoin network?

The team that created Stacks believed that Bitcoin is underutilised, and the powerful network effect will be wasted if Bitcoin doesn’t deliver more functionality for various kinds of users.

They also believe that Bitcoin is the gold standard for all cryptocurrencies. The proof is that the value of a vast majority of cryptocurrencies depends on the performance of Bitcoin.

According to the Stacks whitepaper, once a protocol reigns supreme, it would be difficult to compete with it. This is already apparent in the early days of the Internet, where the TCP/IP protocol emerged as the standard Internet protocol among many, and that subsequent applications just stick to it. 

“Our thesis is that decentralized apps and use cases will eventually get built on Bitcoin, the strongest and most widely used blockchain network, instead of disconnected networks. In the early days of the internet, there were several competing protocols. TCP/IP emerged as the winning standard, and everything else was built on it. Bitcoin is that standard for crypto,”

– Muneeb Ali (2020) in the Stacks whitepaper.

More on Bitcoin: Is Bitcoin real money? A closer look into BTC as a currency.

How does Stacks 2.0 work?

Think about Stacks 2.0 for a moment as a regular blockchain. All blockchains must choose a different block leader for every block via a consensus protocol.

This random election can use Proof of Work, such as in Bitcoin’s case, or Proof of Stake, in which the protocol chooses based on assets invested by a node. 

Technically speaking, Stacks 2.0 runs on a modified version of Proof of Burn (PoB). In PoB, nodes must show their commitment to the network by consuming resources represented by a crypto asset. This is different from Proof of Stake, which sees the stakers being able to liquidate their staked assets after a period.

In the case of Stacks 2.0, bitcoin is the crypto asset. The difference is that bitcoin is not actually burned (removed from circulation), but is transferred to STX stakers.

Thus, in this network, there are 2 types of “stakers” — those who stake STX coins to receive bitcoin transfers from nodes, and nodes who “bid” (stake-to-burn) using bitcoin to be able to mint new STX coins. 

At one end, the protocol chooses those who are willing to lose their bitcoin, and on the other end, the protocol rewards those who are willing to decentralise the Bitcoin distribution.

With too few STX stakers, bitcoin transfer rewards will loop back to the bidders, and the system becomes centralised and unsecured.

Stakers are a proxy to make bitcoin usable again after the consensus process, but bitcoin is still the store of value that is used to incentivise honest behaviors in the network.

Of course, this is still an oversimplification of how Stacks 2.0 works. Here is the documentation outlining every detail of the Proof of Transfer protocol. 

Related: What is Proof of Stake and How Does it Work?

How are block rewards distributed in Stacks 2.0 blockchain?

STX rewards are minted and distributed in similar ways to bitcoin. Stacks 2.0 is made to synchronise with the Bitcoin network. This means every 10 minutes, as a new Bitcoin block is produced, a new Stacks block is also produced, which has data that relates to the new Bitcoin block.

Within the 10-minute time frame, the Stacks network nodes also produce several microblocks, which provides near-instant finality on the Stacks blockchain without having to wait for Bitcoin to produce the next block. 

When a block is produced on Stacks 2.0 blockchain, new STX coins are minted — coincidentally, new bitcoins are also produced on the Bitcoin blockchain. Like Bitcoin, the block reward on Stacks 2.0 is halved around every 4 years, following Bitcoin’s schedule.

In the first 4 years since release in 2020, 1000 new STX will be minted. In the following 4 years, 500 STX will be minted. This cycle proceeds until around 12 years when the issuance rate will be set to constant at 125 STX per block until the network reaches the maximum supply of 1.818 billion STX coins. 

Minting rewards comprise the block reward (as shown above) as well as the transaction fees. After the block leader successfully creates the new block, there is a 24-hour locking period before the rewards can be liquified.

This prevents the “rich get richer” feedback loop as STX coins cannot be staked immediately after the block leader earns it, to earn bitcoin back.

Takeaways for Blockstack (STX)

Layer-2 networks like Polygon (MATIC) have been very successful in scaling Ethereum and providing network interoperability to the smart contract platform giant.

If Stacks 2.0 could help the world’s largest cryptocurrency network the way Polygon has with Ethereum, there is a bright future for this layer-2 network.

Without changing the core of how Bitcoin works, Stacks leverages Proof of Work to secure its blockchain, while using the modified Proof of Burn protocol to distribute bitcoin rewards to STX stakers.

This relationship may increase the future value of both the Bitcoin and Stacks cryptocurrency, as users increasingly trust the long-standing Bitcoin security with their money.

If you are bullish on Stacks as well as Bitcoin, you can buy and sell them easily through Easy Crypto. Don’t forget to subscribe to our monthly newsletter to receive a well-curated collection of content that is relevant to you.

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