Stacks (STX): a Bitcoin-based solution for smart contracts

Stacks is a layer 2 solution meant to infuse Bitcoin with the power of smart contracts. This allows developers to more efficiently create decentralized apps built on this network, build DeFi solutions, and even mint NFTs. The opportunities in this are immense and nigh unlimited.

Defining Stacks

Stacks is a layer 2 network built atop Bitcoin proper. It's technically a blockchain, meaning that it follows many of the same principles as Bitcoin itself or other networks. However, it's still not completely independent in terms of its consensus mechanism, the block-creation process, and more.

Much of Stacks is pure Bitcoin, but several key processes are unique. They are the exact part that provides users with the extensive smart contracts functionality, as well as the infrastructure that supports them and several advantages that make all this activity cost-effective.

As such, the Stacks functionality can be defined in these takeaways:

• Availability of smart contracts on the same level as Ethereum;
• Increased throughput and scalability to make the use of smart contracts more cost-effective;
• A unique consensus mechanism that doesn't use the proof-of-work.

So, let's delve into each of these sections one by one.

Smart contracts

Smart contracts are a staple of much of modern decentralized technology. Ever since they were introduced in the Ethereum release back in 2014, they have been used to create a large multitude of cutting-edge solutions on blockchain—from banking and entertainment to web design and beyond.

Their main advantage is automation. They can be programmed to quickly respond to given requirements, creating long sequences of orders to achieve some goal or address some function. This incredible flexibility allows one to automate basically any process. This, in turn, allows developers to decentralize any process on the blockchain.

Right now, the absolute majority of decentralized solutions have something to do with finance. This field is called decentralized finance (or DeFi). The reason it's so popular is that blockchain tech favors financial transactions a lot. It's incredible for moving money around, but not very cost-effective unless you use smart contracts.

And that's right where Stacks comes in handy.

Smart contracts on stacks

Smart contracts on Stacks are implemented as part of the layer 2 expansion. It's a new set of algorithms built atop Bitcoin, complete with its own consensus mechanism, utility token, and microblocks functionality. In short, it's a different structure, although very much tied to Bitcoin and the larger ecosystem.

The end goal is to combine all the advantages of the Bitcoin blockchain with the benefits of smart contracts. The result would be a scalable, cost-effective network with a seamless connection to the world's biggest crypto user base. The potential is immense, although it's also not without shortcomings.

Consensus mechanism

A consensus mechanism is a way by which new blocks are added to the ledger. In the practical sense, it's closely associated with the release of new coins (mining). The main purpose of consensus is to determine who gets the right to secure a new block. The monetary rewards come with the completion of the block. That's how mining is done.

To do that, there needs to be a method of selection:

In Proof-of-Work (PoW), those attempting to take part in the election process need to contribute computing power. The more computing power you contribute, the more likely you are to be selected. The selection is automatic and one by a strict function that determines the winner randomly, but with regards to contributed resources.

In Proof-of-Stake (PoS), the determining factor is instead one's financial contribution. The more existing tokens you stake, the more likely you are to be selected. This method doesn't require computing power, which makes it more sustainable, effective and fast. Smart contracts are built on networks with this type of consensus.

Stacks has neither. Instead, its mechanism is called Proof-of-Transfer. It selects a user based not on how much crypto they've staked, but instead how much crypto they've sent to the other user. There is a complex, thought-out system for this, which has a lot of advantages.

Proof-of-Transfer

Proof-of-transfer (PoX) is a rather recent algorithm, created specifically for the use of Stacks. It's actually one of their primary creations, and they are happy to share it with other projects that want to have a go at it. There are two parties to this exchange:

• Miners. Miners contribute a certain amount of BTC to the consensus. If the block is won by a miner, they transfer this amount to a Stacker, the other party. In exchange, they receive a larger reward in the native currency, STX.
• Stackers. Stackers are a separate group of people that contribute STX to the mechanism in order to receive BTC. They essentially exchange funds with Miners, which ensures the continuous circulation of both assets in the network.

Microblocks

Microblocks are a way of increasing the scalability and throughput by Stacks. In addition to regular blocks, which are created with largely the same speed as blocks on Bitcoin proper, Stacks also introduces microblocks. They are smaller pieces of information created alongside their bigger counterparts and with the same algorithm.

These supplementary blocks allow Stacks to process a much larger amount of information at a time. Since on blockchains data exchange is at the core of every function, it means that this network can work and process orders faster than a regular BTC network. This also means higher scalability potential and lower costs.

This doesn't just mean more comfort for the users, but also much faster operations on the whole. Accordingly, the development of apps is also made more effective and cost-efficient than it would be without it. It's hard to say whether it's better than Ethereum, but it certainly contributes hugely to the Bitcoin ecosystem.