Stacks, Bitcoin Layers, and the Nakamoto Upgrade: Here’s What’s Going On

Between Ordinals, Runes, BitVM, and a resurgent developer ecosystem, the modern era of crypto is marked by a return to its first and largest blockchain: Bitcoin.

The hype around Bitcoin layer 2s, rollups, and similar projects is a recent development, but some initiatives have been building on Bitcoin for years. One of those is Stacks, whose native token STX is up 70% in the past 3 months and is now a top-30 crypto by market capitalization.

On April 16, Stacks is due for its long-awaited “Nakamoto” upgrade, just in time for the Bitcoin halving.

“Stacks is currently the best L2 in terms of total value locked, developer activity, and other key metrics,” said Andre Serrano, product and growth lead at the Stacks Foundation, in an interview with Decrypt.

Launched in October 2018, Stacks ties itself to Bitcoin by storing a hashed copy of Stacks transaction blocks in Bitcoin’s ledger. It also rewards those who lock their STX in the network, known as “stackers,” with direct payments in BTC while rewarding “miners” who sacrifice their BTC with freshly minted STX.

“Bitcoin yield is something that we hear very strong market interest from, so that’s definitely a unique differentiator [from other L2s],” Serrano added.

Some of Stacks’ most notable features include cheaper, faster transactions compared to normal Bitcoin transfers and access to “smart contracts” to build advanced applications, such as in decentralized finance.

There are limitations, however. In its current form, Stacks transactions only reach full confirmation as fast as Bitcoin blocks are produced, which can take tens of minutes. Thankfully, the Namamoto release advances a solution expected to settle transactions within five to ten seconds.

“We’re able to achieve that by decoupling Stacks blocks from Bitcoin blocks so that a Stacks miner can produce multiple blocks within one tenure,” said Serrano. The upgrade will also protect the Stacks blockchain against “reorgs” by connecting Stacks forking behavior to Bitcoin directly, making Stacks transactions as secure as Bitcoin ones.

Beyond speed and security, the upgrade creates multiple benefits for the broader ecosystem, such as expanding the scope of viable DeFi applications and even improved yield for stackers.

“The native Bitcoin yield for participating in stacking has been a little bit suppressed because of the [Maximal Extractable Value] that we’ve been seeing,” explained Mitchell Cuevas, executive director of the Stacks Foundation. “We also believe that mining will get easier and more profitable, so you’ll have more players competing for these blocks… we do expect to see the APY go up.”

The next upgrade to follow Nakamoto in Stacks’ pipeline will introduce sBTC, a “trust minimized” method of bridging one’s BTC holdings over to the Stacks blockchain.

Trustless Bitcoin bridges have long been viewed as one of the biggest keys to unlocking BTC’s potential while remaining decentralized. No perfect solutions have emerged thus far, but Stacks says its method comes “pretty close.”

“It uses what’s called a threshold signature scheme,” explained Serrano. Every two weeks, Stacks network validators will undergo a “distributed key generation event,” receiving a shard of the private key that controls users’ layer 1 BTC that they’ve bridged over.

Validators include every network user who is stacking STX tokens, who will be required to connect as validators after Nakamoto goes live. 70% of those validators are required to approve BTC deposits and withdrawals.

“When sBTC launches, we are expecting twenty to thirty validators, and I think that there’s a path to scale that to be dozens if not hundreds in the future,” said Serrano.

He says Stacks’ bridge system will differ greatly from bridges employed by legacy networks like Liquid or Rootstock, whose bridge systems are managed by federations, creating an underlying element of centralization to their blockchains.

Today, excitement is growing in Bitcoin’s developer space over the potential for Bitcoin rollups powered by BitVM, which could drastically reduce the trust assumptions required to bridge BTC to other chains. There’s still some debate around their limitations and tradeoffs, but the consensus is that they show major promise. Working bridges could be live by early 2025.

“BitVM is very complementary to Stacks, and we are in direct contact with their team to try and support what they’re doing,” said Cuevas. “There’s the potential for BitVM to be a core piece of infrastructure for the Bitcoin ecosystem as we try to scale up around these layers.”

The Stacks Foundation has already allocated $500,000 toward BitVM research and development and has opened a job position in search of a BitVM researcher.

Cuevas believes the direction of BitVM and layered Bitcoin development is healthy and encouraging. Bitcoin devs can now look at the mistakes of developers before them who built on other protocols in a more reckless manner.

“The really important things that people need high security for, that they want that peace of mind for… you’re going to have a lot of options for ultimately hashing that down to Bitcoin,” said Cuevas.

“For us, it’s great to see that we’re not the only show in town anymore.”

Edited by Ryan Ozawa.