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Bitcoin based DeFi and smart contract platforms are taking many approaches, but the ultimate question is how to unlock the $1T in bitcoin capital.
Decentralized technology has opened a world of opportunities, business models, and community involvement. Bitcoin is an effective store of value because it takes a limited functionality approach, but Bitcoin capital can be better deployed to take advantage of the innovation we’re seeing in DeFi products, apps, scaling innovations and more that are all accessible in the Ethereum ecosystem today.
A number of projects have made headway on different approaches on the space and there are some early traction points to explore. This is a snapshot of some of the commonly referred to projects building on Bitcoin, all collectively adding to discourse that Bitcoin unlocks more opportunity for entrepreneurs to serve untapped Bitcoin capital. Disclaimer: I am employed by an entity that builds in the Stacks ecosystem. DYOR!
A typical first question when approaching Stacks and other Bitcoin based projects is to try to identify what layer they are. Sidechains and Layer 2s are well known approaches within the crypto ecosystem, but there are additional models to explore when it comes to expanding functionality of Bitcoin as a base cryptocurrency.
Sidechains typically port a direct 1-1 relationship value from a token to a new blockchain. In the case of RSK and Liquid, there is no new token introduced, rather a tokenized version of bitcoin to be used on a different network, usable in ways that it can’t be on the Bitcoin blockchain natively today.
Layer 2s like Lightning introduce scalability through protocol developments on top of a base blockchain, in this instance Bitcoin. Note: there are a ton of exciting developments in the Bitcoin dev ecosystem like Taproot and Sapio that are improving upon the Bitcoin network directly, but are not focused on in this article.
Stacks is an independent chain — with a native token to incentivize Stacks miners — that’s anchored to Bitcoin via the PoX consensus. The Stacks network introduces a token for transacting on the network, as is the case with almost every smart contract platform to prevent spam and ensure efficient network and compute resourcing. It doesn’t port bitcoin value 1-1 as a side chain, and is a fully separate blockchain — so not quite a layer 2 blockchain, either.
Stacks introduced the first consensus model between two blockchains and builds on Bitcoin as a secure and decentralized store of value protocol. Stacks adds scalability and smart contract functionality to the Bitcoin ecosystem, allowing for business models that have flourished on smart contract platforms such as Ethereum to be built on the Bitcoin standard. Stacks builds upon the strengths of the Bitcoin network’s security, open access, and decentralization and expands the Bitcoin ecosystem and value proposition. Stacks is not a store of value; it is used for transaction fees and running smart contracts that are anchored to the Bitcoin blockchain, and by holding STX end users can participate in Stacks consensus and earn Bitcoin rewards in the process.
Another question is about opportunity space and access to capital. Liquid, RSK and Lightning require locking or provisioning BTC capital to access benefits of the network. Stacks runs adjacently to the Bitcoin blockchain, so users don’t have to make a decision to move their BTC elsewhere to participate — they can do so fully through the native Stacks token.
Many projects are creating bridges between ecosystems and have found some traction porting BTC liquidity to Ethereum (wBTC, REN, RSK). These projects allow BTC holders to cross ecosystems and take advantage of DeFi primitives in the Ethereum ecosystem. While these efforts are a step forward in putting Bitcoin capital to work, Stacks doubles down on this value add by allowing for tokenized bitcoin on Stacks or xBTC more natively in the Bitcoin ecosystem.
Instead of having to exit the BTC ecosystem in some way, Stacks provides a native connection to Bitcoin chain state allowing for smart contract functionality for Bitcoin. The two layer-one blockchains act in tandem — Stacks blocks settle on the Bitcoin blockchain and smart contracts on Stacks have direct visibility into the Bitcoin chain state.
Transactions on the Stacks blockchain are settled on Bitcoin. All fork histories of Stacks are secured by Bitcoin and to alter them an attacker would have to reorg Bitcoin. This is done without Bitcoin miners having to be aware of Stacks’ existence or taking part in validating Stacks transactions.
Bitcoin grows stronger with each project taking a unique approach to growing the Bitcoin based GDP. Developer adoption is still incredibly early, but Bitcoin as the largest and strongest cryptocurrency remains an untapped resource for builders. Stacks is taking a unique approach to adding functionality to the Bitcoin blockchain without changing Bitcoin. The design decisions of having a token asset for smart contract deployment and allowing an open mining system allow a fully decentralized approach.
It’s still early days, but gradually I expect to see a shift in narrative. Building and Bitcoin don’t need to be either or. We have yet to see what can be built on Bitcoin, but with additional use cases the bull case for Bitcoin grows.