Introduction

Stacks is an L2 that is preparing to revolutionize DeFi on the Bitcoin network with its Nakamoto release. This upgrade is considered the most significant event since the creation of Stacks, and it is expected to unleash Bitcoin’s economic value in a decentralized manner.

What is the Nakamoto upgrade, and how will it impact DeFi on Bitcoin? Let's delve into the details to find out.

Backstory

The digital asset ecosystem has come a long way since 2008. Spearheaded by Bitcoin, the ecosystem has grown exponentially. Bitcoin’s network effect and adoption as a store of value has led to a range of innovations and the creation of a new financial world, aka Decentralized Finance (DeFi). Although Bitcoin is in itself a decentralized digital financial asset and the biggest cryptocurrency by market capitalization, people have had to look elsewhere, to networks like Ethereum, to participate in DeFi.

That’s because Bitcoin's ability to support smart contract deployment and other DeFi-native applications is limited. Although the limitation translates to more secure operations, it also means people can hardly tap into the potential of Bitcoin beyond being a store of value or decentralized money.

Alternative blockchains like Ethereum have an application layer. Thus, they can support decentralized applications (dApps) and, consequently, DeFi. As of May 2023, over $35 billion is locked in the Ethereum DeFi ecosystem, compared to only $500 million on Bitcoin.

Introduction to Stacks

Stacks enables developers to use its smart contract capabilities and functionalities to build complex products on the Bitcoin network. The network is intricately connected to the Bitcoin network thanks to its consensus mechanism, Proof of Transfer (PoX). PoX enables Stacks to settle on the Bitcoin network and inherit its security. Furthermore, Stacks has it’s own token, which is used for the purpose of gas fees. Owners of Stacks token can choose to Stack it to secure the network, and in return, they are rewarded through a yield.

The Stacks blockchain has several features supporting DeFi on Bitcoin, but more work must be done. Now, thanks to the 2023 Nakamoto release, Stacks can change the face of DeFi on Bitcoin once and for all and help Bitcoin fulfill its potential, as discussed in this article.

The present state of DeFi on Bitcoin

Over the years, developers have explored several approaches to bring DeFi compatibility to the Bitcoin network. They have built sidechains and layer two scaling solutions and are even exploring changing the Bitcoin script to make smart contract creation possible. Another effective solution is the building of independent blockchains that are connected to the Bitcoin network, like Stacks and Mintlayer.

DeFi on Bitcoin features several prominent players, most jostling to become the go-to platform in the ecosystem. Rootstock is a Bitcoin sidechain with full EVM-compatible smart contract functionality. RSK functions through merged mining, a decentralized identity solution, swift transaction finality, lower fees, and Ethereum interoperability. Rootstock is a leading figure in the Bitcoin DeFi ecosystem, as it allows developers to reuse their Ethereum smart contracts on RSK, making it easier to deploy applications.

Then there is Lightning Network is a layer-two scaling solution for Bitcoin. ICP is building integration with Bitcoin to allow developers to create canisters (smart contracts) to interact with the Bitcoin network. Liquid Network is a sidechain that supports payment transactions.

Developers are building Sapio (a new programming language) and Discrete Change Logs to enable programmability on Bitcoin. Over $500 million is invested (Total Value Locked - TVL) across the four major protocols in the Bitcoin DeFi ecosystem. Also, it is essential to note that most current solutions are not entirely decentralized.

What is the Nakamoto Upgrade on Stacks?

Stacks has undergone a couple of upgrades and hard forks since its creation. When the initial version of Stacks launched in 2021, it came with features like atomic BTC swaps with other tokens, Clarity (the programming language to write contracts that react to BTC transactions), and transaction settlement on the Bitcoin network.

The Nakamoto upgrade is like Stacks' second version, allowing it to unlock Bitcoin's potential finally. The release is a set of new changes that will enable the Stacks layer to use its new trustless Bitcoin peg, among other improvements. For instance, after the Nakamoto upgrade is complete, transactions on Stacks will have Bitcoin finality—100 percent of Bitcoin's hash power and its security.

The Nakamoto release will allow Stacks to introduce its sBTC Bitcoin peg, a decentralized and trustless BTC peg, enabling users to move bitcoins between the Stacks layer and the Bitcoin network. The upgrade will also feature new forking rules, allow decentralized applications to write to the Bitcoin network, and pave the way for actual DeFi use cases with Bitcoin.

Benefits of the Nakamoto upgrade

Here are some of the benefits that will come from the Nakamoto upgrade:

• 100% Bitcoin finality: With the Nakamoto upgrade, transactions with over a day's confirmation on Stacks will enjoy the security of one hundred percent of Bitcoin's hash power. The Bitcoin network boasts excellent security. Thanks to the Nakamoto release, users of the Stacks layer can enjoy the same security privileges without transacting directly on Bitcoin.

• sBTC: Thanks to the Nakamoto upgrade, Stacks can now introduce its novel decentralized BTC peg, tied 1:1 to Bitcoin. sBTC will allow smart contracts to run cheaper, faster, and more safely. Also, the Bitcoin peg will enable smart contracts to write trustlessly to the Bitcoin layer and allow Bitcoin addresses to hold assets on the Stacks layer.

• Faster transactions and scalability: The Nakamoto upgrade will allow faster Stacks layer blocks to insert themselves between Bitcoin blocks, thus reducing the block time to 5 seconds from the current 10 minutes. Although transaction finality will depend on Bitcoin's network speed, the release will aggregate thousands of Stacks layer transactions into a single settlement on the Bitcoin L1.

• Bitcoin state knowledge: With the Nakamoto release, Stacks will fully know Bitcoin's state to execute smart contracts with Bitcoin transaction triggers and maintain the decentralized peg on the Bitcoin layer side.

How Nakamoto upgrade will change the Bitcoin DeFi ecosystem?

The Nakamoto upgrade will enable the Stacks layer to actualize Bitcoin finality for transactions, run the two-way trustless Bitcoin peg, allow smart contracts to write to Bitcoin, and add an edge of scalability through faster Stacks transactions between Bitcoin blocks. With these features, the Stacks layer will transform Bitcoin into a fully programmable network/asset, changing everything, thus unlocking a massive potential for developers to build Dapps and create a DeFi ecosystem on Bitcoin.

As of May 2023, over 400 billion dollars worth of Bitcoin is waiting to be unlocked. These assets lie passive due to the nature of the Bitcoin network. With the Nakamoto release, Stacks will unlock these assets for dApps, and bring BTC into the world of Web3. The best part is that Stacks will achieve all of this without compromising the core values of Bitcoin: open access and decentralization.

Closing thoughts

The present solutions and approaches to enhancing DeFi on Bitcoin are either in development, centralized, or limited in their ability to read the Bitcoin network's state. Hopefully, we’ll witness a furry of developers and users jumping in to build DeFi solutions on Bitcoin, commencing a brave new world.

The Nakamoto upgrade on Stacks brings all that and more to the Bitcoin DeFi ecosystem. When these changes go live on Stacks, the layer two solutions will be empowered to usher in a new era of DeFi on the world's foremost and biggest blockchain network – Bitcoin.

Vires In Numeris!