It has long been known that Bitcoin lacks functionality more commonly available in newer blockchains. Some of the primary limitations are a lack of smart contract capabilities and the inability to handle large numbers of transactions efficiently.
Although these limitations aim to maintain decentralization and security, they have inadvertently led to the development of innovative use cases for cryptocurrencies to occur on other blockchains that offer greater flexibility and functionality.
However, circ*mstances are changing thanks to a new up-and-coming blockchain known as Stacks(CRYPTO:STX).
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Bitcoin's loyal sidekick
Known as a Layer 2 blockchain, Stacks makes Bitcoin programmable through the use of smart contracts, the foundation of decentralized applications. Now non-fungible tokens (NFTs), decentralized finance (DeFi) applications, stablecoins, and much more can be created all while maintaining finality with Bitcoin's highly secure main chain.
Not only does Stacks add programmability, but it also helps scale Bitcoin so that transactions are handled faster while minimizing pesky fees.
A flourishing network
Statistics show that demand for Stacks' native token, STX, which is used to pay transaction fees and reward miners for securing the network, is growing at an impressive rate.
In a recent first-quarter overview presentation, management highlighted several metrics that portray just how much growth is occurring on the young blockchain. From the fourth quarter of 2022 to Q1 2023, the total number of STX addresses grew by 16%. In the same time frame daily active addresses increased 33%.
With more active addresses, transactions followed a similar pattern. Between Q4 2022 and Q1 2023, transactions increased 45%. Furthermore and perhaps most importantly, the total number of smart contracts built grew 150%, a sign there is more development occurring on the blockchain.
The path less traveled
Since the failure of multiple cryptocurrency companies in 2022, the Securities and Exchange Commission (SEC) has been on a tear trying to rein in the industry through lawsuits and enforcement actions. While other cryptocurrencies will likely suffer as the agency continues its campaign, Stacks might avoid a worst of it because its founders willingly navigated regulatory red tape and obtained recognition as a security with the SEC back in July 2019.
Regulatory clearance can reassure holders that the potential for unforeseen allegations or lawsuits is unlikely, a level of certainty that sets Stacks apart from most other cryptocurrencies.
Continued innovation
The Nakamoto Release, scheduled for later this year, will unveil a slew of added features to the network that help increase security, capabilities, and scalability.
Perhaps the most anticipated aspect of the upgrade is the introduction of sBTC, a trustless, non-custodial 1-to-1 Bitcoin pegged asset, which will take capabilities to a new level. By enabling seamless interoperability between Bitcoin and smart contracts, sBTC bridges the gap between the traditional Bitcoin market and the decentralized finance ecosystem, empowering Bitcoin holders to explore DeFi applications without having to relinquish control of their Bitcoin. This groundbreaking development is a true game changer and unlocks a new world of possibilities by granting Bitcoin full programmability in truly trustless fashion.
In addition to sBTC, the Nakamoto Release will introduce new scaling features to promote frictionless transactions. Transactions are currently constrained to Bitcoin's 10 minute block time, but the introduction of "fast blocks" will speed up transaction finality to about 5 seconds.
Most importantly, as a result of the Nakamoto Release, Stacks' security will be completely backed by all of Bitcoin's hash power. This means that to infiltrate the Stacks network, hackers will have to target the Bitcoin blockchain, a feat yet to be accomplished and unlikely to ever happen.
The case for Stacks
A handful of timely developments and recent recognition of Bitcoin's evolving use cases seem to be helping Stacks build momentum. In the last month alone it is up about 23%.
Yet Stacks likely has plenty more room to run. For reference, compare Ethereum, the most widely used programmable blockchain for DeFi use cases. Today, Ethereum's market cap is around $225 billion with about $25 billion locked into its DeFi ecosystem, or roughly 11% of Ethereum's total market cap.
If you apply the same logic to Bitcoin's potential DeFi economy, with its $600 billion market cap, that means Stacks is on the verge of tapping into a near $60 billion economy, a far cry from its current valuation of just over $1 billion.
RJ Fulton has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
