Investment Memo : Stacks

An in-depth analysis of Stacks and why it could emerge as a $90 billion opportunity.

Disclaimer

Please note that the opinions, analyses, and evaluations provided in this memo are my own and are shared for educational and informational purposes only. They should not be considered as financial advice. I am personally exposed to Stacks, which may influence my perspective.

Intro

Institutions are increasingly adopting Bitcoin (BTC) as a store of value, and the influx of their liquidity is expected to drive BTC to new highs.

Bitcoin is rightly considered a store of value because it’s one of the safest networks on Earth.

However, we are facing a critical challenge: we have only ten years to resolve the economic security issue of Bitcoin. The solution is emerging from the Bitcoin ecosystem, primarily through Ordinals fees and, gradually, from Bitcoin Layer 2s (L2) fees. A substantial part of the Bitcoin community agrees on the importance of the Bitcoin Ecosystem and supports its development.

This is where Stacks comes into play. As one of the leading Bitcoin L2 solutions, Stacks transactions are secured by Bitcoin and will soon upgrade to inherit 100% Bitcoin finality, making it poised to unlock the liquidity of Bitcoin Layer 1, rendering it programmable. This contributes to increasing the utility of BTC as a store of value and making it more productive.

Given its significant importance to the Bitcoin ecosystem, let me share with you why I believe Stacks can become a $90 billion opportunity.

Key Players in Stacks' Development

The Team

Stacks, initially known as Blockstack, was co-founded in 2013 by Muneeb Ali and Ryan Shea in the Princeton Research Labs. Stacks really started to follow the path of becoming a Bitcoin L2 in 2017.

An open-source community drives Stacks, and here are some community members that should be worth following:

• Muneeb Ali: As a co-founder of Stacks and CEO of Trust Machines, Muneeb is a crucial advocate for Stacks and the Bitcoin Ecosystem. He holds a Ph.D. in blockchain and distributed systems from Princeton and is a YC alumni.

• Alex Miller: CEO of Hiro, helping build Stacks Ecosystem. Alex contributed eight years to Stack Overflow, a prominent hub for programming knowledge exchange and technical problem-solving.

• Mitchell Cuevas: He is an early member of Startup Weekend later acquired by Techstars, worked there for years before his consultancy introduced him to Stacks. He is now Interim Executive Director at Stacks Foundation, leading the onboarding of key infrastructure and talent into Stacks.

• Jude Nelson: He is one of the architects behind Stacks. He has a PhD in distributed systems from Princeton where he met Muneeb. During his time at Princeton, he was a core member of the award-winning PlanetLab team. Notably, PlanetLab was the first cloud deployment and testbed, pioneering work that significantly contributed to the inception of the cloud computing industry.

• Friedger Müffke: Friedger is also one of the architects behind Stacks, known for his prolific contributions. He ran the biggest Stacking pool until it was recently acquired by Ryder. Although he doesn't use Twitter, have a look at his GitHub.

The Stacks community includes top-tier talent, like professors from Princeton, Ph.Ds in CS from Princeton and MIT, and professionals from USV, Dropbox, Coinshares, and Zcash, to name a few.

Here is a non-exhaustive list of Stacks Major Contributors.

Source: Stacks

From this list, I would like to highlight the following 3 organizations :

1. Stacks Foundation: Dedicated to the growth of the Stacks ecosystem through governance, research, education, and funding.

2. Hiro Systems: Plays an important role in developing tools for Stacks and the Bitcoin Ecosystem. Hiro built the most used Ordinals indexer and contributed to Clarity (Stacks programming language).

3. Trust Machines: Aims to create the largest dapp ecosystem on Bitcoin, including Stacks, and has raised $150m in that endeavor.

Funding

Stacks has successfully raised $77.1 million from prominent VC firms, including USV, Blockchain Capital, Spartan Group, and Hashkey Capital, among others.

Funding Round (January 2017): $4m led by USV, other investors include DCG, Naval Ravikant, Lux Capital, Version One, and Compound VC - source

ICO (Public Token Sales - December 2017): $50m from USV, Foundation Capital, Lux Capital, Winklevoss Capital, Blockchain Capital, Qasar Younis (YC), Michael Arrington and Kevin Rose - source

Strategic Round (Public Token Sales - July 2019): $7.6m from Hashkey, SNZ, Fenbushi, IOSG, Spartan Group, Fundamental Labs and Tembusu Partners - source1, source2

Coinlist Sales (Public Token Sales - July 2019): $15.5m raised - source

Other investment firms, including Pantera Capital and North Rock Digital, decided to gain liquid exposure to Stacks.

*I intentionally left out the 2014 fundraising because it was for a different project.

The Tech

Proof of Transfer (PoX)

Proof of Transfer (PoX) is an innovative consensus algorithm where miners spend BTC from Bitcoin L1 instead of spending computational power. The more BTC miners bid, the more likely they will be chosen to mine the next block. Miners are rewarded in STX; these yields come from the coinbase rewards and transaction rewards.
The spent BTC are 'transferred' to Stackers as rewards for holding and locking up STX through stacking collectively or independently. By leveraging BTC to provide rewards to Stackers instead of issuing new STX tokens, Stacks cleverly avoids additional supply pressure.

Source: Stacks Documentation

Nakamoto Upgrade

The Nakamoto upgrade is the next key milestone for Stacks, potentially being released between April 15-29, 2024.

Stacks will become a true Layer 2, by inheriting 100% Bitcoin finality. All data and transactions on Stacks will automatically get hashed and permanently stored on Bitcoin's Layer 1 in each Bitcoin block. To alter Stacks transactions, you would need to reorganize Bitcoin blocks. Ready to face 100% of Bitcoin's hash power?

• Significant UX Enhancement: Stacks plans to switch to a much faster block production time of 5 seconds. Nakamoto Upgrade will make using Stacks more convenient than Bitcoin, all while making Stacks more secure than before.

• MEV-mitigation: Pre-Nakamato, Bitcoin miners with significant hashrate influence could block other Stacks miners' transactions, monopolizing rewards when also winning Bitcoin blocks. This allowed occasional low-cost wins in PoX, reducing Stackers' BTC rewards and distorting mining incentives. To address this, Nakamoto revised the sortition process for fairer mining. More details can be found here.

• Stackers are now validators: The amount stacked contributes to the network's security, in addition to the BTC spent by miners. This creates two layers of security: miners producing the blocks and stackers validating them.

• Facilitate builders' onboarding: Stacks has a programming language called Clarity. Clarity has many strengths, including its security, but it's a new programming language. One of the upcoming potential solutions to make onboarding easier is their plans to support Wasm on Stacks L2 driven by the Clarity Wasm WG. It could enable other languages like Rust or Solidity through transpiling or other methods.

For more info regarding the Nakamoto Upgrade, I recommend having a look at those 3 resources: SIP-021 Nakamoto | The Ultimate Stacks Nakamoto Guide | Nakamoto Milestones

sBTC

One of the most significant upcoming milestones is sBTC.

We are already witnessing interest in a synthetic version of Bitcoin, as seen with wBTC, but sBTC is different. Here’s why:

1. sBTC does not target the same community as wBTC. sBTC strongly appeals to a BTC-centric community, whereas wBTC addresses an ETH-centric community.

2. sBTC inherits security from the Bitcoin blockchain itself, which enables sBTC to be a native, programmable version of Bitcoin without the need for a centralized custodian. Stackers will be responsible for maintaining the decentralized threshold signature wallet, which means that STX will play a crucial role in the security of sBTC.

Source: Stacks Documentation

3. sBTC will unlock Bitcoin liquidity by offering use cases that we are familiar with wBTC, but with a level of security/trust that we never had before. These include an sBTC-pegged stablecoin, collateralized lending, derivatives, and more.

With the upcoming exponential wave of innovation in the Bitcoin ecosystem, I am excited to see how developers will leverage sBTC.

sBTC should be fully operational in the coming months after the Nakamoto upgrade, possibly in June-July 2024.

Subnets

I couldn't finish this section regarding Stacks Tech without mentioning one of the most exciting of them, in my opinion : Subnets, which Hiro built.

Although improvements will be made with the Nakamoto upgrade, further enhancements are necessary to support a massive influx of users. Subnets will offer high throughput and low latency, which is crucial for increasing liquidity and onboarding institutions.

You can think of subnets like Layer-3s (L3s). Builders will be able to choose the execution environment tailored to their specific needs, EVM, Rust, or even Zk, then settle on Stacks.

Subnets combined with sBTC are going to create a huge TAM. Top protocols on EVM/Solana could establish their dapps on compatible subnets, leveraging sBTC to enhance liquidity and extend their market reach. Private Zero-Knowledge subnets could offer new use cases like an institutional-grade dark pool utilizing sBTC for example. I also think app-specific subnets could play an important role, especially as RollApps become more popular.

The community should unveil the full potential of Subnets once the Nakamoto and sBTC updates are implemented.

In the end, once the Stacks ecosystem begin to build with subnets, that’s when sBTC’s new wave of use cases will start.

Stacks Token (STX)

Token Utility

STX has several utilities that I would like to highlight :

• Stacking: In addition to participating in securing both Stacks and sBTC, it offers a native BTC yield.

• Rewards for miners

• Gas token

• Governance token

• Incentive for the ecosystem

Value Accrual

STX accrues value through several key mechanisms:

1. STX as Gas Fees: An essential strategy for leveraging network effects is through gas fees. With the growth of activity in the Stacks ecosystem, there's a resulting increase in buying pressure, driven by the higher demand for STX to cover gas fees. Two things are worth pointing out:

   1. It's important to note that 100% of gas fee revenues are allocated to miners.

   2. The implementation of sBTC for gas fees is currently in discussion phase.

2. A Central Role in Security: Thanks to the consensus algorithm used by Stacks, STX is responsible for securing the Stacks network and ensuring the security of sBTC. As usage of both rises, the significance and potential value of STX also increase.

3. Stacking Slots Scarcity: As network traffic on Stacks increases, people will pay higher gas fees, which will directly result in increased BTC yield rewards for stackers, offering returns even more appealing than the already attractive 9% APY via Xverse. However, the number of stacking slots is limited to 4,000.
   Currently, 1 stacking slot equals 90,000 STX. If rewards were to increase, then the minimum required for a stacking slot would also rise, necessitating more STX to be stacked to secure the network and to get the higher BTC yield, thereby reducing the circulating supply of STX.
   Therefore, increased network traffic leads to greater value of STX, as the BTC yield increases.

4. STX Halving: The coinbase rewards undergo a halving every 4 years, reducing STX tokens' emission supply over time. The first token-emissions halving is scheduled for January 2025.

Ultimately, Stacks' value accrual stems from robust demand for using and securing the network, coupled with a gradually decreasing supply emission. This suggests significant value growth for the token.

Tokenomics

Supply and Vesting: Stacks has an uncapped supply of 1,818,000,000 STX, 79% of which has already been vested. The full vesting is expected by 2050, but this timeline could be subject to change.

Staking: About 30% of the total STX supply is being stacked.

Mining Rewards and Halving: The Stacks network implements a halving mechanism for mining rewards, similar to Bitcoin. This halving occurs every four years. The first such event is anticipated to take place like mentioned earlier, in January 2025.

STX Allocation

Source: Stacks Foundation

• The initial allocation of STX tokens occurred in the genesis block on October 30th, 2018, with 1.32 billion STX being distributed.

• 34% allocation for investors and token sales :

  • Equity Investor that invested during the Funding Round got the token at $0 strike price ($0.07 collectively for the stock plus token) - source.

  • In 2017 for the ICO, STX tokens were priced at $0.12 each during issuance.

  • In 2019 for the Strategic Round the price was set at $0.25 per token. Additionally, in the same year, there was the coinlist sale at $0.30 per STX.

• 29.3% to the enhancement of Stacks and its ecosystem

• 25.9% regarding the Mining Emmissions

• 10.8% to the team which received tokens at $0 strike price.

Token Release Schedule :

Please be aware that the Token Release Schedule hasn’t been updated since 2020 and may be subject to change if a SIP proposal receives a favorable vote from the community.

I got confirmation from the Stacks Foundation that all tokens purchased through the public token sales (2017 and 2019) have been fully unlocked.

Ecosystem

Stacks Ecosystem

The Stacks ecosystem is still in its early stages but already showing impressive growth - over 740% YoY. This growth has been driven by inscriptions, STX-20, and sOrdinals, with a recent surge of activities in Liquid Staking Derivatives (LSD) protocols like StackingDAO.

Source: DeFiLlama

This growth is likely to speed up in 2024 with the upcoming innovations from Stacks and its ecosystem, let’s have a look :

Currently, Stacks has only a few dapps, including ALEX, a DEX handling 80% of Stacks' TVL (based on DeFiLlama data). StackingDAO for liquid staking of STX, Arkadiko, an issuer of overcollaterized stablecoin (like Maker), Bitflow Finance, a stable swap DEX, and @XLinkbtc, which bridges from Bitcoin L1 and EVM chains to Stacks.

For more info regarding the leading DeFi apps on Stacks, check this Flagship.fyi article.

This growth is likely to speed up in 2024, here’s why:

1. sBTC: The anticipated launch of sBTC is set to unlock significant liquidity from Bitcoin Layer 1. Its programmability will foster new use cases, driving further adoption.

2. ALEX's Future Plans: ALEX aims to introduce lending, borrowing, yield products, and perpetual futures using sBTC. Look at the DeSpread Research report for a deep dive into ALEX.

3. Native Stablecoin Liquidity: Stacks currently lacks a native stablecoin. If Circle or Tether were to partner with Stacks, we could expect a substantial increase in liquidity and interest since those stablecoins would be secured by Bitcoin.

4. Zest launch: Zest, the Maple Finance for Stacks, will make BTC productive for retail and institutional investors.

5. Programs to onboard builders : Several initiatives have been made to grow the Stacks ecosystem, here is a non-exhaustive list of it :

   1. Bitcoin Frontier Fund (formerly Stacks Ventures) is deploying capital into the Stacks and Bitcoin ecoystem and they also have an accelerator program called the Ordinals Accelerator. It’s a 4-month program providing a $100k allocation to selected projects. Leading Stacks applications like ALEX, Arkadiko, and Xverse have benefited from it.

   2. Stacks Foundation Grants: They have different grants programs which are focusing on infrastructure for 2024.

   3. Bitcoin Odyssey: It’s a $165m pledge program for Stacks and the Bitcoin Ecosystem. The initiative was led by OKX (prev. Okcoin) and Stacks Foundation, and it’s backed by key actors, including Digital Currency Group, GBV Capital, White Star Capital, GSR, and others.

   4. n21.stacks.co is a free go-to-market prep program supported by Trust Machines and VCs including Bitcoin Frontier Fund, Spartan Group and Portal Ventures.

6. Clarity-wasm and Subnets: Clarity-wasm may enable developers to write in languages other than Clarity, taking advantage of Wasm, one of the biggest standards in web2, opening doors to languages like Rust and Solidity. Additionally, the enhanced customizability and new use cases unlocked by Subnets are expected to attract more builders.

7. Pyth Network x Stacks: The integration of Pyth price feeds into Stacks marks the beginning of new partnerships that will pave the way for the next generation of DeFi apps on Stacks.

8. Wallet UX is great: Wallets such as Xverse (my favorite one), Leather, OKX Wallet and Ryder ID feature well-designed UX, which will facilitate the onboarding of new users.

9. Big players are getting onboard as signers: Figment and Copper.co have recently confirmed their commitment to bringing their institutional users to Stacks, which could drive Stacks' liquidity higher. Many others have also confirmed their involvement, details of which are yet to be released.

With upcoming upgrades and increased interest in the Bitcoin ecosystem, a new wave of builders is anticipated on Stacks.

The growing interest from Asia

The more value the Bitcoin ecosystem secures, the more it benefits Stacks. Currently, Asia is well-positioned to enhance both, here's why:

Regarding Bitcoin Ecosystem :

First, QCP Capital, a well-known crypto trading firm in the Asia-Pacific region, has highlighted, "Many have observed that this narrative (BRC20 ecosystem) is primarily Asia-driven with the West having not caught on yet." - source.

Indeed, we have seen, particularly in China, a lot of interest in BRC20s, partly motivated by the number of miners in the country trying to drive up demand for block space. It's not only retail; many Chinese VCs are also gaining exposure to BRC20s in the private market.

Source 1 | Source 2

Secondly, this trend is further evidenced by the fact that only Asian CEXs, such as OKX and Binance, have adopted and supported this ecosystem.

Lastly, the increasing involvement of large Asian crypto investment firms is a significant indicator. For instance, Animoca Brands, a top Hong Kong-based crypto firm, is actively developing a comprehensive Bitcoin-based gaming ecosystem through one of its subsidiaries. Additionally, Du Jun, co-founder of ABCDE, a $400m fund, has expressed a strong commitment to contributing significantly to the construction of the Bitcoin Ecosystem.

Regarding Stacks:

Stacks' biggest market is Asia. Indeed, they've expanded their reach in Asia for many years and solidified it with their strategic Asian round, believing that Asian countries have notably high penetration among crypto users and developers. There is especially one country in Asia where Stacks penetration was noteworthy: South Korea 🇰🇷

A significant indicator of this interest is the trading volume of STX on Upbit, South Korea's leading cryptocurrency exchange. The data, taken on January 11th 2024 shows that a substantial 40% of STX's trading volume originates from Upbit, and STX's trading volume is trailing just behind other significant crypto assets like Arbitrum and Solana.

Source: https://coinmarketcap.com/currencies/stacks/

Additionally, the prominence of Stacks in South Korea is further highlighted by the coverage from Mk.co.kr (매일경제), one of the largest news website in the country.

A recent report they published spotlighted the performance of the Bitcoin Ecosystem, including Stacks and ALEX, reflecting the growing interest and awareness of these platforms in Korea.

Source : mk.co.kr

Furthermore, in the same report, an expert from NH Investment & Securities, a major asset management firm in Korea, speculated that due to the Bitcoin ETF and other significant macroeconomic events, Bitcoin's value could rise in 2024. This adds enthusiasm to the current Koreans' interest in Bitcoin.

When the bull run starts, Koreans will look for ways to maximize their performance to ensure they can afford an 아파트 (apartment) in Seoul, and holding Bitcoin might not suffice for them. They will be looking for higher beta opportunities, which could be found in the Bitcoin Ecosystem, including Stacks.

Finally, the interest in the Stacks ecosystem in Korea, which is already growing rapidly, is expected to receive an additional boost from a marketing campaign planned by DeSpread, a Korean Web3 consulting firm. This campaign is likely to be launched in Q1 2024.

As awareness of the Bitcoin ecosystem increases across Asia, this could significantly boost interest in Stacks, particularly in regions beyond its current stronghold in South Korea. With the planned marketing campaigns in Singapore and Hong Kong by Spartan Group and in Japan by DeSpread, Stacks has the potential to have a strong influence throughout the Asia-Pacific region.

Risks

Despite Stacks being a great innovative solution, it carries several risks that I would like to highlight:

• The Risk of Innovation: The new technologies introduced in the Nakamoto upgrade have yet to be market-tested, and issues may arise.

• Clarity: I agree you don't need to use the dominant programming language to create a great ecosystem; Solana and Cosmos proved it, and possibly Sui. But many chains are still suffering from launching their own language. Clarity has excellent qualities, but it can currently create friction in onboarding new developers. So let's see how it goes; Wasm is going live with Nakamoto and Subnets might also emerge as a solution in the upcoming future.

• The Influence of Bitcoin's Volatility on the UX: As the bonds between Stacks and Bitcoin strengthens, Bitcoin L1's volatility and high fees will increasingly affect the UX of Stacks.

• Upcoming forms of MEV: The Nakamoto Upgrade effectively addresses current forms of MEV encountered by Stacks. Yet, with Stacks' rising popularity, new MEV forms may surface, affecting UX. It's important to understand that MEV is an inherent aspect of blockchain tech and cannot be entirely eliminated. However, the effectiveness of teams in managing and mitigating MEV is critical. So far, Stacks has shown a proactive stance in handling MEV challenges.

• Token Value Dependence: Stacks' security, like other blockchains, relies on its token's value. A significant drop in value can compromise Stacks' fast blocks, which could impact its Layer 2 and sBTC. However, once Bitcoin blocks are confirmed, Stacks follows Bitcoin Finality regardless of STX price action.

Competition

The competition among Bitcoin Layer 2s and Programmable Bitcoin is set to intensify significantly in 2024.

Spartan Research conducted a thorough comparison of various Bitcoin scaling solutions. I highly recommend reviewing their report. Here's a visual from it that compares the four major Bitcoin Layer 2 solutions known as the "Big Four".

Source: Spartan Research

I've compiled a non-exhaustive list of the Bitcoin Scaling Solutions (which mainly consists of new and experimental initiatives) into three categories. The first, "Bitcoin Scaling Solutions," includes solutions focused on enhancing Bitcoin's scalability, with or without smart contracts. The second, "Decentralized Programmable Bitcoin," comprises scaling solutions offering a programmable version of Bitcoin. Lastly, "Network of Scaling Solutions" refers to platforms enabling the development of Bitcoin scaling solutions using their technology.

• Competitors to Watch Closely: Among those scaling solutions, which include mostly sidechains and zk-rollups, I believe Stacks' closest competitor is Rootstock. However, I would also like to highlight a very promising type of competitor to Stacks: rollups secured by staked BTC, including Babylon. With the rise of RollApps, these platforms will democratize Bitcoin-secured rollups. I don't think users would distinguish these solutions from other Bitcoin sidechains and rollups currently being built. We are still early, though. The bridging of BTC, the alignment of BTC yield with the risk level carried, and the interoperability between these future rollups remains to be solved. I will closely monitor the staked BTC tech, starting with the mainnet of Botanix in Q1 2024, and the collaboration between Babylon and AltLayer.

• Security first, Stacks’ Edge: Most of the Bitcoin Layer 2 solutions, which are in competition with Stacks, are either sidechains (transactions are not fully secured by Bitcoin) or rollups (mostly relying on a centralized sequencer). In comparison, Stacks post-Nakamoto might be the most secure Bitcoin L2.
  Its consensus algorithm and the strategic role of its token both enhance security, giving Stacks a significant advantage. The network effect further strengthens Stacks' security: as it grows, it becomes more secure, making it hard to dethrone. Additionally, holding STX tokens becomes increasingly appealing due to their utility and value accrual.

• Dominant Market Position: Prior to Stacks, several Bitcoin Scaling solutions emerged but failed to achieve the level of adoption that Stacks has secured. Stacks is currently leading in technology innovation, market adoption, and liquidity.

• Established Role in the Bitcoin Ecosystem: Stacks' implication in the Bitcoin Ecosystem is further cemented by the involvement of key Bitcoin ecosystem players like Hiro Systems, Trust Machines, and Bitcoin Frontier Fund. These entities, initiated by Stacks, position it as a central figure within the Bitcoin community.

In conclusion, while my analysis acknowledges the risks, including the rapidly evolving competitive landscape, I remain optimistic about Stacks' potential, as it maintains a sufficient lead with solid value propositions that are well-suited to uphold its leadership position in the market.

Now that I have set the stage on how I came to consider Stacks, here is my investment thesis.

My Investment Thesis

I believe Stacks will maintain its position as a leading Bitcoin Layer 2 in terms of market capitalization for 2024 and potentially into 2025. Here's why:

First, Stacks is already a leading scaling solution for Ordinals, but its significance is set to increase further by becoming faster, cheaper, and more secure. Indeed, pre-Nakamoto, we have witnessed a significant surge in transactions, including over 1 million STX-20 transactions in less than a month. Cosmo Jiang from Pantera said it best: “Imagine what happens post-Nakamoto when Stacks processes blocks ~200x faster”.

Source: Cosmo Jiang

Moreover, by being a player in unlocking currently $800b of BTC through sBTC, Stacks is well-positioned to capitalize on the anticipated substantial demand within the Bitcoin DeFi sector, quoting Paul Veradittakit from Pantera: "WBTC today having a market cap and TVL of around $7B, there is an enormous demand for Bitcoin in DeFi. Ethereum has about 10% of its market cap in TVL. As Bitcoin DeFi infrastructure matures, we could potentially see Bitcoin DeFi TVL rise from the current $300M (<0.05% of market cap) to ~1-2% of Bitcoin market cap."
The demand for Bitcoin in DeFi, as evidenced by wBTC, suggests the potential of a programmable version of BTC inheriting security from the Bitcoin blockchain.
sBTC, as a native, programmable version of Bitcoin, adds a new dimension to various use cases. Considering that, Stacks could capture a significant market share in Bitcoin DeFi.

Additionally, looking at the current innovations in Stacks, we can start to imagine the potential future innovations, which I believe will be related to Stacks' network of L3s (subnets) secured by Bitcoin. As more brilliant minds join this ecosystem, Stacks could evolve with new innovations into a network of interconnected L3s secured by Bitcoin. This development would enhance liquidity across the ecosystem and beyond, using sBTC as its backbone.

Notably, $STX is among the few tokens to have a robust value accrual. Indeed, it serves as the bedrock of both Stacks security and sBTC.

Furthermore, institutional liquidity will increasingly flow into Stacks: As institutions shift their focus to Bitcoin, we are approaching a pivotal moment marked by substantial capital investments in Bitcoin ETFs. This movement is gaining momentum, particularly in the US and China (with Hong Kong as a proxy).

Source: Bitwise

The growing interest from institutions is likely to drive BTC to new highs, and it is expected to have a ripple effect on Stacks for several reasons:

1. Stacks acts as a higher beta for Bitcoin, which could be very promising in a bull market, as the Bitcoin Ecosystem assets could show better correlation with Bitcoin than other digital assets.

   

   Source : Pantera

   Altcoins have historically outperformed Bitcoin during bull market cycles. As Bitcoin's Layer 2 solutions gain popularity, this trend will become more apparent, and the shift might happen sooner than expected.

   

   Source: Franklin Templeton

2. Stacks enables Bitcoin to be productive. Many institutions hold BTC but currently have limited options. This comes to an end; lending platforms on Stacks will offer ways to make BTC productive through sBTC. Entities like Zest and ALEX are working on it.

3. Some key participants are already leaning in this direction :

   1. VanEck, with $76.4 billion AUM, is showing interest into Stacks by predicting that STX will rise to a top-30 market cap coin.

   2. 21Shares is the world's largest issuer of Crypto ETPs and collaborator with ARK for the $ARKB Bitcoin ETF. 21Shares offers $ASTX, an ETP fully backed by STX.

   3. Figment, a leading staking provider serving over 250 institutional clients, has partnered with Stacks, positioning them to attract more institutions. This could lead to institutions stacking STX for Bitcoin-native yield.

   4. Copper.co, an institutional-grade custodian with clients like BH Digital, 21shares, and Fasanara Capital, is supporting Stacks as a custodian and will offer Bitcoin-native yield to its clients through stacking.

4. The APAC region is possibly dominating this bull run. After all, it's the Dragon's year, and right now, Asians are deep into the Bitcoin Ecosystem, which rightly positioned Stacks for the upcoming upcycle.

Source: @GCRClassic

Now, let's get into some numbers to see where Stacks could position itself for the next bull run.

FDV Projections

Source: Coingecko

Here are my projections and Portal Ventures projection for Stacks' Fully Diluted Valuation (FDV), based on Stacks' FDV of $2.9 billion as of January 18, 2024.

Before giving the details regarding my case scenarios, here are several assumptions I made to calculate these projections:

1. BTC reaches a $2T FDV (Fully Diluted Valuation).

2. I project that the Bitcoin L2 ecosystem's FDV could capture 8.8% of Bitcoin's FDV. This may seem high, but it's feasible, considering these networks could unlock and secure a fair portion of the $800 billion in Bitcoin liquidity. I agree with those doubting Bitcoin L2s reaching the same dollar valuation as Ethereum L2s. If Ethereum L2s' value increases x10, their ecosystem could exceed $500 billion. In contrast, I cap Bitcoin L2s FDV at a maximum of $175 billion, roughly 35% of Ethereum L2s FDV.

3. A conservative approach is applied, using a 0.5 coefficient for BTC L2s. This is based on the assumption that the liquidity transfer from Bitcoin to its L2 ecosystem will not be as significant as Ethereum's transfer to its L2s.

Source: CoinMarketCap

Bear Case Scenario

• Envisioned Context: Stacks is anticipated to rank among the top 3 Bitcoin L2 solutions amidst intense competition with advanced technology. It plays a substantial role in unlocking BTC liquidity through sBTC and captures shares of the Bitcoin DeFi market.

• Projected Valuation

  • If Bitcoin L2s capture 8.8% of BTC's FDV (Ethereum L2s trading at 17.5% of Ethereum's FDV), their total value would approximate $78.5 billion.

  • Assuming Stacks holds 15% of this market (mirroring Polygon's share in Ethereum L2's market), this translates to a $11.8 billion Stacks FDV.

  • During the next upcycle, Stacks' FDV is projected to be around $26.3 billion, potentially higher if we include sBTC value.

Base Case Scenario

• Envisioned Context: Stacks becomes the leading Bitcoin L2, onboarding institutional and retail investors. It plays a pivotal role in unlocking BTC liquidity through sBTC and captures a significant share of the Bitcoin DeFi market.

• Projected Valuation:

  • Comparing Stacks to Arbitrum, the leading Ethereum L2 in terms of FDV, and assuming Stacks trades at 3.3% of BTC's FDV (half of Arbitrum's percentage), this would value Stacks at $29.7 billion FDV.

  • During the next upcycle, Stacks FDV is estimated to reach $66.4 billion, potentially higher if we include sBTC value.

Bull Case Scenario

• Envisioned Context: Stacks maintains its position as the leading Bitcoin L2, supported by a diverse ecosystem offering various execution environments (EVM, Rust, zk technology, etc.). It has become the cornerstone of the Bitcoin DeFi market, particularly with sBTC, creating a significant gap between itself and its competitors.

• Projected Valuation:

  • If Bitcoin L2s attain 8.8% of BTC's FDV, their total value would be approximately $78.5 billion.

  • Assuming Stacks secures 50% of this market, this equates to a $39.2 billion FDV.

  • Stacks FDV could rise to approximately $87.7 billion in the next upcycle, potentially higher if we include sBTC value, up to $90 billion.

Conclusion

The Bitcoin ecosystem is anticipated to undergo significant growth, driven by the need to solve Bitcoin's economic security challenges and leverage Bitcoin's widespread image.

In this evolving landscape, Stacks stands out as a leading Bitcoin Layer 2 solution. Its expansive and decentralized community acts as a catalyst for continuous innovation, solidifying its strategic position.

Technologically, Stacks is at the forefront with its consensus algorithm, sBTC, and future subnets, indicating robust infrastructure for long-term viability. Its token economy is sophisticated which is rarely seen in Layer 2 solutions, enhancing both security and investor appeal.

Stacks is gaining traction among institutional investors and holds a strong foothold in the Asian market, a key region for Bitcoin ecosystem activities.

Ultimately, creating an ecosystem with groundbreaking technologies, including a new consensus algorithm, the fastest block production secured by Bitcoin, and a decentralized method for programmable BTC, carries risks.

While some of these risks might materialize, I am willing to bet that the Stacks community will address them effectively.

Consequently, I believe Stacks presents a coherent risk-reward profile, creating an opportunity that could be worth $90 billion.

Final words: I'm excited to follow the development of Stacks and the emergence of new players, most of whom should be ready by 2024, and see how they will contribute to the Bitcoin ecosystem.

Fin

For more content, you can follow me on Twitter @TangChan0x.

I want to thank all the people who helped me build out this memo🙏
Mitchell Cuevas from the Stacks Foundation
Muneeb Ali from Trust Machines
Kyle Ellicott from Bitcoin Frontier Fund
Yan Ma from Spartan Group
Cosmo Jiang from Pantera Capital
Mohamed Fouda from Alliance
GM Chung from Despread

Additional references

Figment: Stacks: First Look and Stacks x Figment

Portal Ventures: Bitcoin Thesis

North Rock Digital: STX Thesis | Thesis Updated

Paul Veradittakit from Pantera: Predictions for 2024

Sora Ventures: Bitcoin Utility Q3 2023

Grant Nissly: DeFi is coming to Bitcoin

Matty: Tweet 1, Tweet 2, Tweet 3

Messari: It’s Time to Stack(s) Bitcoin Up, State of Stacks Q2 2023

Four Pillars: 2024 Bitcoin Outlook

Mohamed Fouda (Alliance): The Bitcoin L2 Opportunity

The Ultimate Stacks Nakamoto Guide

Stacks : A Bitcoin Layer for Smart Contracts

Investopedia : Blockstacks

Hiro : Subnets

Stacks: Docs