If you've been a consistent reader of mine during the past couple of years, you likely know that I am a huge fan of Stacks (STX 1.17%). The Bitcoin (BTC 2.70%) compatible Layer 2 has been on a tear during the past year or so and it is the top-performing cryptocurrency in my portfolio.
Since my first investment in Stacks in May 2023, when it was worth about $0.60, it has climbed to an all-time high of $3.80. With some additional investments along the way, my Stacks position is up a commendable 307% as of March 30. Yet, while I'm sitting on comfortable gains, I have no plans to sell anytime soon. Here's why I think Stacks is just getting started.
Image source: Getty Images.
Bitcoin's perfect sidekick
It's no secret that Bitcoin lacks some of the functionality common among many other cryptocurrencies today. Without smart contracts, Bitcoin can only be used as a store of value or as a means of payment. In other words, it isn't programmable and can't be leveraged in the burgeoning decentralized finance (DeFi) economy.
But with Stacks, this all changes. Known as a Layer-2 blockchain, Stacks processes transactions in bundles on its own blockchain and then finalizes those bundled transactions on Bitcoin's blockchain. What this means is that Stacks is essentially as secure as Bitcoin, and security is a key feature of Bitcoin.
Furthermore, Stacks possesses smart contract functionality, allowing developers and users to participate in the burgeoning DeFi economy. Chock-full of innovative use cases such as non-fungible tokens (NFTs), stablecoins, yield farming, and much more, DeFi is a valuable and popular sector and one that Bitcoin can now be leveraged in via Stacks.
CRYPTO: STX
Key Data Points
Stacks is getting an upgrade
As it currently stands, Stacks uses Bitcoin as the foundation of its financial ecosystem. In a roundabout fashion you could get away with saying Stacks allows Bitcoin to enter the DeFi economy, but this wouldn't be completely true.
Although Stacks's layered infrastructure is undoubtedly novel, there is still a clear separation between the two blockchains; users can't directly utilize Bitcoin within decentralized applications and must use the STX crypto to pay for transactions. But that will change soon.
In late April, Stacks will receive an upgrade known as the Nakamoto Release. This upgrade will make some technical changes that will enable Stacks to settle transactions in less than 10 seconds as well as strengthen the security between Stacks and Bitcoin. Most importantly though, it will pave the way for introducing a new asset, sBTC.
To obtain sBTC, users must lock up their Bitcoin holdings in a smart contract, and then they are compensated with an equal amount of sBTC. Since sBTC tracks Bitcoin's price, there is no slippage.
With their new sBTC, users can participate in the various DeFi activities built on Stacks. Once complete, they can take their sBTC and redeem it for their original Bitcoin holdings.
Similar processes exist on the market today, but nearly all introduce some level of counterparty risk. The sBTC peg-in and peg-out process is done via smart contracts and the crypto miners secure the Stacks blockchain, making sBTC the first decentralized collateralized Bitcoin asset.
In many ways, the Nakamoto Release and sBTC are the keys to finally unlocking Bitcoin's $1.25 trillion worth of dormant capital in a secure fashion. It's difficult to put into words how just lucrative and paradigm-shifting the Nakamoto Release will be.
Quantifying Stacks' potential
To speculate a bit and dive into why I don't plan on selling, let's walk through a comparison of another blockchain, Ethereum. Over the years, Ethereum has risen to become the de facto standard of DeFi. Similar to Bitcoin, it has a few functional limitations, so Layer-2 blockchains have joined in to help facilitate faster and cheaper transactions. Today, Ethereum's Layer-2 ecosystem is collectively worth about $30 billion.
Herein lies the potential for Stacks. With its market cap worth about $5 billion, Stacks is on the front lines of expanding Bitcoin's use cases so that it can be utilized in similar ways to Ethereum today. Yet Bitcoin is worth nearly three times as much as Ethereum.
The potential of Stacks is difficult to quantify, but we are likely only in the beginning stages of the Bitcoin-DeFi era. Given its relationship with Bitcoin and the innovative functionality Stacks brings to the world's original and most valuable cryptocurrency, I don't plan on selling anytime soon.
