Smart contracts are the lifeblood of the cryptocurrency ecosystem. As self-executing programs, they power everything from cryptocurrency transactions to music royalties and supply chain management. In other words, they provide the basis for claims that blockchain technology is giving rise to a decentralized and more open global economy, in which Web3, non-fungible tokens, DeFi and metaverses will all play an increasingly important role.
While such claims are becoming increasingly common, most people within the cryptocurrency ecosystem have become accustomed to thinking of the new economy based on smart contracts in terms of Ethereum, Cardano, Solana, or any number of proof-of-stake networks.
However, the last few weeks and months have seen the emergence of a new narrative, in which the Bitcoin blockchain itself will become the underlying layer of an ecosystem based on smart contracts.
Caused largely by the launch of the NFT Ordinals protocol in January, this narrative has manifested itself in the growth of Stacks, a layer two network that brings smart contracts to Bitcoin. Its native STX token has been one of the best-performing tokens of 2023 so far, with an increase of 50% in one week, 230% in the last 30 days, and 366% since the beginning of the year (at the time of writing). Its growing adoption and traffic has merged with other attempts to turn Bitcoin into more than just a store of value, and given its recent advances, it looks like it may be able to do just that.
What Is Stacks? How does it turn Bitcoin into a smart contract platform?
As explained on its website, Stacks is a layer two network that “brings smart contract functionality to Bitcoin, without modifying Bitcoin itself.” It manages its own nodes, has its own native token, and allows developers to run smart contracts and dApps (decentralized apps) on it, but all of its transactions are ultimately settled on the underlying Bitcoin blockchain. As such, it offers additional functionality and greater scalability to Bitcoin, but also ensures that the latter remains the “most decentralized, most secure, and most immutable blockchain network” in the cryptocurrency ecosystem.
Stacks is different from many tier two solutions (e.g. “sidechains” like Polygon and Optimism) in that it records its entire history on the Bitcoin blockchain. For this reason, it claims to be as immutable as Bitcoin itself and more robust than two other levels for other blockchains.
Since launching in 2019, Stacks has grown steadily in terms of usage and the number of apps running on it. It currently lists 88 apps on its website, including open-source DeFi platforms like Alex and messaging-based social networks like Console. As for its total locked value (a measure of how much cryptocurrency is stored on its apps), this remains modest at $353 million. That said, this figure has increased by more than 250% since the start of the year, indicating how fast Stacks is growing.
Why STX Rally? And what are ordinals?
As for why Stacks’ growth has accelerated in recent weeks, this is largely the result of a new narrative that emerged in January and has only taken hold ever since. That’s the narrative surrounding Bitcoin-based NFTs, which began on January 21, when developer Casey Rodarmor launched Ordinals, a protocol that enables “native digital artifacts of the Bitcoin blockchain.”
The launch of the Ordinals mainnet sparked a wave of excitement, controversy and activity when it arrived late last month. It has enabled non-fungible Bitcoin-based tokens, with numerous observers commenting that it also marked the birth of a new era, in which Bitcoin becomes more than just a cryptocurrency.
Perhaps most exciting about the launch of Ordinals is that it has already attracted an influx of new Bitcoin users. According to data compiled by Dune Analytics, just over 210,000 ordinal inscriptions have been created to date, indicating how popular they may become in the future – and other Bitcoin-based NFTs.
The point to make here is that the rush to create these NFTs points to the high demand for Bitcoin as the base tier for new cryptocurrency services, digital items, and everything else. This was also indicated by how strongly Stacks (STX) increased in the wake of the launch of Ordinals, as the market recognized that Stacks could also help create a new Bitcoin-based ecosystem in combination with protocols such as Ordinals.
It was also indicated by the most recent news that Yuga Labs – the creators of the NFT Bored Ape Yacht Club series – will launch its own collection of Bitcoin-based NFTs. And it probably won’t be the first company to do so this year.
Why Bitcoin Could Become the Largest Smart Contracts Platform in Cryptocurrency
Needless to say, there is a high demand for a cryptocurrency ecosystem that has established itself in Bitcoin, and not simply from users. That demand – perhaps the most demanded – will come from entrepreneurs, startups and companies, who want to use a new wave of NFT and DeFi apps to tap into Bitcoin’s $500 billion market cap.
As noted above, Bitcoin remains the most secure blockchain in the cryptocurrency industry, given its extensive network and its constant use of a proof-of-work consensus mechanism. Moreover, with a fixed limit of only 21 million BTC, it also remains the “hardest” money in the ecosystem, probably deflationary over time.
This means that, if it becomes technologically feasible to run smart contracts and various dApps on the Bitcoin blockchain, most users and developers will choose to do so. They will prefer Bitcoin’s security and immutability over its proof-of-stake rivals, and tier two networks like Stacks will help them leverage that security and immutability.
And it’s not just Stacks, because other platforms are bringing smart contracts to Bitcoin, a testament to how eager people are to tap into it as a solid foundation for an app ecosystem. This includes the Internet Computer, which last year integrated with Bitcoin at the protocol level, allowing users to run IC-based smart contracts that transact with BTC on the Bitcoin blockchain.
When added to existing second-tier solutions like the Lightning Network and Liquid Network, such platforms reveal that Bitcoin really does have the potential to become an important level of settlement for smart contracts and apps. Yes, it may be slow and not very scalable, but with Stacks and innovations like the Ordinals protocol, Ethereum may have yet another new rival to compete with.
