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Key Takeaways

Stacks is a Layer 2 blockchain designed to extend Bitcoin’s functionality by adding support for smart contracts and decentralized applications (DApps).

Stacks uses a Proof of Transfer (PoX) consensus mechanism to anchor its blocks to Bitcoin, enabling the network to leverage Bitcoin’s security.

sBTC is a 1:1 Bitcoin-backed token on Stacks that enables BTC to be used in smart contracts and DeFi applications.

STX is the protocol’s native token. It’s used to pay transaction fees, support stacking, reward miners, and incentivize peg-out signers.

What Is Stacks?

Stacks is a Layer 2 blockchain designed to extend Bitcoin’s functionality by adding support for smart contracts and decentralized applications (DApps). The protocol works in conjunction with Bitcoin, using its security and settlement layer as the foundation for programmable features.

Through a consensus mechanism called Proof of Transfer (PoX), Stacks anchors its blocks to the Bitcoin blockchain, allowing network activity to be verified through Bitcoin. The network uses Clarity, a native smart contract language that can access Bitcoin’s state, and sBTC, a Bitcoin-backed asset that enables BTC to move between Bitcoin and Stacks in a decentralized way. 

These features enable Stacks to support applications such as financial protocols, digital assets, and identity systems that can connect to Bitcoin while preserving the security and stability of the Bitcoin network.

How Stacks Works

Proof of Transfer 

Proof of Transfer (PoX) is the consensus mechanism that connects Stacks to Bitcoin. PoX extends Bitcoin’s Proof of Work (PoW) model by using BTC to secure and operate the Stacks network, eliminating the need for new mining hardware or energy expenditure.

In PoX, miners transfer BTC to Stackers, who lock their STX, the protocol’s native token, to support network consensus. The more BTC a miner commits, the higher their chance of being selected to produce the next block. The selected miner receives newly minted STX tokens and transaction fees, while Stackers earn BTC rewards for maintaining network stability.

Once Stackers meet the staking requirements, they can also act as signers, validating new blocks and authorizing sBTC deposits and withdrawals. Every Stacks block is recorded on the Bitcoin blockchain, meaning that reversing a Stacks transaction would require reversing a Bitcoin transaction. This design allows Stacks to inherit Bitcoin’s security while adding programmability and smart contract functionality on top of it.

Key Features

sBTC

sBTC is a 1:1 Bitcoin-backed asset on the Stacks network that represents BTC, allowing you to use your Bitcoin in decentralized finance (DeFi), and other on-chain applications. sBTC operates through an open two-way peg, where signers and smart contracts collectively manage deposits and withdrawals.

To mint sBTC, you deposit BTC into the sBTC peg wallet on the Bitcoin blockchain. A decentralized group of signers verifies the deposit and mints an equal amount of sBTC on Stacks. You can then use sBTC for activities such as trading, lending, or interacting with smart contracts while your BTC remains secured and verifiable on the Bitcoin network.

When you want to convert back, you can send your sBTC to the Stacks protocol, which burns the tokens and releases the corresponding BTC from the peg wallet to your Bitcoin address. Each transaction is verified by multiple signers to maintain security. This setup helps reduce counterparty risk, avoids single points of failure, and ensures that all BTC remains verifiable on the Bitcoin base layer.

Clarity

Clarity is the programming language used for smart contracts on the Stacks network. It was designed to make contracts easier to read, understand, and verify, reducing the risk of unexpected behavior after deployment. Clarity runs directly on the blockchain rather than being compiled, allowing anyone to examine and verify a contract’s logic before it executes.

Because each Stacks block is linked to a Bitcoin block, Clarity contracts can also access Bitcoin data. For example, a contract can check whether a specific Bitcoin transaction has occurred before executing a function on Stacks. This approach allows developers to build applications and financial tools that can interact with Bitcoin’s state while running on the Stacks network.

Dual stacking

Dual stacking is a feature of the Stacks network that allows you to earn rewards in Bitcoin. To participate, you can lock BTC to mint sBTC, then enroll in Dual stacking to start earning rewards distributed in sBTC. If you also lock your STX tokens, you can increase your share of the reward. While your assets are enrolled, you can still use them within decentralized applications on Stacks, and rewards are distributed at the end of each cycle based on your level of participation.

Use Cases

Bitcoin DeFi: Developers can create lending, trading, and yield protocols that use Bitcoin as collateral, expanding its role in decentralized finance.

Non-fungible token (NFTs): NFTs can be created and managed through Clarity smart contracts on the Stacks blockchain, with all transactions anchored and settled on the Bitcoin blockchain.

Identity: The Blockchain Naming System (BNS) enables users to register decentralized usernames and namespaces, connecting on-chain identities to off-chain data without central control.

The STX Token

The STX token is the native token of the Stacks ecosystem, and it’s used within the protocol for multiple purposes, including:

Network fees: When you interact with applications or send transactions on Stacks, you pay fees in STX. These fees are given to miners who process transactions and help keep the network secure and stable.

Stacking rewards: By locking your STX, you can participate in the PoX consensus mechanism. This system connects Stacks to Bitcoin and rewards you in BTC for contributing to the network’s security and operations.

Incentives: Newly minted STX tokens are distributed to miners as rewards for producing new blocks on the Layer 2 network. Signers who help move assets from Stacks back to Bitcoin, known as peg-out operations, also receive STX rewards for maintaining reliable cross-chain transactions.

Closing Thoughts

Stacks is a Layer 2 network that introduces smart contracts and decentralized applications to Bitcoin while preserving its security and simplicity. Through the PoX consensus, Stacks connects directly to Bitcoin, enabling new use cases such as DeFi, NFTs, and programmable Bitcoin assets. With features such as Clarity, sBTC, and Dual Stacking, Stacks enables you to interact with Bitcoin in more flexible ways while remaining fully verifiable on its base layer.

Further Reading

Who Owns the Most Bitcoin?

BlackRock and Bitcoin: Understanding the Bitcoin ETF

The Bitcoin Whitepaper Explained

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