Are Layer 2 Networks the Future of Bitcoin?

By  Ayush Sharma March 28, 2024

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The Future of BTC: Layer 2 Networks?

With Bitcoin consistently hitting all-time highs, naturally a lot of interest is growing around it. This inevitably leads to an increase in transactions and traffic over the Bitcoin blockchain and ultimately network congestion and high gas fees. This is where Bitcoin Layer 2s come in, greatly reducing the network traffic by funneling transactions off chain to unburden Layer 1 with Stacks being one of the most popular ones in the space.

What is Stacks?

Stacks is the leading Bitcoin Layer-2, enabling smart contracts and decentralized applications to use Bitcoin as a secure base layer. Stacks extends the capabilities of Bitcoin without changing Bitcoin, unlocking billions in latent capital. Rather than just scaling functionality of the Bitcoin ecosystem, Stacks aims to enhance Bitcoin's capabilities by building on top of it. The project has its own nodes, its own network, its own miners as well as its own coin. It's designed to enable smart contracts and decentralized apps on the Bitcoin blockchain. This might just sound like what a sidechain would do but contrary to Bitcoin sidechains, Stack's coin (STX) is not pegged to on-chain BTC. Additionally, its unique consensus mechanism Proof of Transfer (PoX) gives it an edge over its competitors.

Proof of Transfer (PoX)

Stacks employs a unique consensus mechanism known as Proof of Transfer (PoX). It recycles Bitcoin's Proof of Work, offering Stacks transactions the benefit of Bitcoin's full finality, meaning Stacks transactions become as irreversible as Bitcoin's post- Nakamoto upgrade. This mechanism is an extension of Proof of Burn (PoB). In PoB miners compete to ‘burn' a Proof of Work (PoW) token as a substitute for computing resources. Instead of burning the coins like PoB, PoX miners transfer BTC to the network as part of the mining process, and these BItcoins are then distributed to STX holders who actively participate in the network. This innovative approach allows Stacks to settle transactions to BItcoin, leveraging Bitcoin's security without modifying the blockchain itself.

Current Problems

Stacks' heavy reliance on Bitcoin's block production rate has led to a sluggish transaction confirmation process, often leaving applications in limbo. The disconnection between Stacks and Bitcoin forks has exposed Stacks to inexpensive reorganizations, undermining the blockchain's integrity. The ease with which the miners could reorg the Stacks chain, coupled with the exploitation of the Proof of Transfer (PoX) payout by certain Bitcoin miners, has called for an urgent overhaul to the protocol.

The Nakamoto Solution

To solve the issues mentioned earlier, Stacks is doing a hard fork upgrade on the network, named the Nakamoto release which is set to happen between April 15-29, 2024. It's designed to bring several benefits, chief among them are increased transaction throughput and 100% Bitcoin finality, making Stacks a true Layer 2 solution. With the upgrade, once a transaction is confirmed on the Stacks blockchain, it becomes as immutable as a Bitcoin transaction.

Nakamoto also revises the sortition algorithm, preventing Bitcoin miners from leveraging their position to dominate Stacks mining. This ensures that all miners must invest a competitive amount of Bitcoin to earn STX rewards.

Stacks blocks will be produced at a fixed cadence rather than being tied to miner elections. This will greatly reduce the time taken for a user-submitted transaction to be mined within a block. Nakamoto ensures that transaction confirmations will occur in seconds rather than minutes, allowing a winner miner to produce multiple blocks without waiting for the next sortition.

sBTC

After the Nakamoto upgrade, the Stacks community will launch a second hard fork introducing sBTC . sBTC is a 1:1 Bitcoin-backed asset on the Stacks Bitcoin L2 that will allow BTC to be locked on the L1 and deployed on the L2 through smart contracts. This is the missing link to deploy BTC directly into dApps, unlocking the $1T market opportunity. With sBTC, builders unlock Bitcoin as a fully programmable asset — opening the door for Bitcoin-backed DeFi, NFTs, and more. The network is operated by a dynamic set of economically incentivized open-membership signers, not a set of federated or centralized parties.

Tokenomics

Stacks boasts an expansive supply of 1,818,000,000 STX, with a significant 79% already vested. The vesting schedule will lead up till 2050, although this could be subject to adjustments as the network evolves. This gradual release of tokens ensures a steady influx of STX into the ecosystem, aligning long-term interests with network health.

The genesis block, dated October 30th, 2018, saw the initial allocation of 1.32 billion STX tokens, setting the stage for the network's launch. 34% was earmarked for investors and token sales, followed by the Stacks ecosystem being allocated 29.3% and 25.9% designated for mining emissions. Additionally, 10.8% of the tokens were allocated to the team.

Approximately, 30% of the total STX supply is actively being staked. This staking mechanism not only secures the network but also fosters user participation in consensus and governance. Mirroring Bitcoin's scarcity model, the Stacks network incorporates a halving event every four years for mining rewards, ensuring a controlled release of new STX tokens into circulation.

Conclusion

It's an exciting time at Stacks as the voting phase for Nakamoto's release comes to a close and the milestone of one million wallets on the network has been reached. TVL also reached over $140 million, an increase of 1,400% from October last year.

Additionally, eight new signatories with cumulative assets worth billions of dollars announced their support for the Stacks network, including names like Blockdaemon, NEAR Foundation, DeSpread and others.

With major changes incoming after the Nakamoto release, it will be interesting to see how Stacks will impact the Bitcoin blockchain and if it turns out to be the "future" of Bitcoin as many envision it to be.