What is STX ?

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Stacks is a layer-1 blockchain that allows for the execution of smart contracts. In contrast to commonly known smart-contract blockchains like Ethereum, Cardano, Solana, or Avalanche, Stacks is associated with the Bitcoin ecosystem because it aims to enhance Bitcoin’s capabilities by building on top of it.

While this goal might be similar to that of Bitcoin sidechains or second-layer solutions, being a layer-1 blockchain itself, Stacks has a unique way of achieving this. The project has its own nodes, its own network, its own miners as well as its own coin. Contrary to different Bitcoin sidechains, Stack’s coin (STX) is not pegged to on-chain BTC. The connection to Bitcoin is established as follows: The Stacks blockchain uses the Bitcoin base-layer blockchain as reliable storage and broadcast medium, meaning that everything that happens on Stacks (the transaction history compiled in Stacks blocks) is recorded on Bitcoin itself.

In more technical terms one could say: Stacks’ entire state settles on Bitcoin. In order to create any Stacks block, a Bitcoin transaction has to be initiated on the Bitcoin blockchain itself. This transaction records the hash of a respective Stacks block and makes sure that the Stacks block is unambiguously anchored within a block on the Bitcoin blockchain. This way, Stacks’ entire transaction, and state history is unequivocally represented on the Bitcoin base layer.

Various projects nowadays claim that they are building on top of Bitcoin and they all seem to be doing it differently. The key concept behind Stacks and its relation to Bitcoin is its unique consensus mechanism called Proof-of-Transfer (PoX). Via this consensus mechanism, Stacks is tethered to Bitcoin by settling all Stacks transactions on Bitcoin.

Proof-of-Transfer is an adaptation of Proof-of-Burn (PoB), which was originally proposed as a consensus mechanism for the Stacks blockchain. With Proof-of-Burn, miners that participate in the consensus algorithm burn a cryptocurrency of an already established blockchain (by sending it to a burn address). It is their way of proving that they have incurred costs for proposing new blocks. With Proof-of-Transfer, this mechanism is slightly amended: The cryptocurrency used is not burned (i.e., destroyed) but distributed to a set of participants that help secure the new chain.

So, in Stacks’ case, miners that want to mine Stacks’ native coin (STX) and participate in consensus need to send a Bitcoin transaction (containing Bitcoin units) to predefined Bitcoin addresses. Only by transferring Bitcoin to a predetermined randomized list of Bitcoin addresses can blocks be produced within the Stacks blockchain. Whichever miners get to produce a block is ultimately decided by sortition. However, the probability of being chosen increases with the amount of bitcoin a miner transfers to the list of Bitcoin addresses.

In a sense, Stacks’ consensus mechanism is mimicking Bitcoin’s Proof-of-Work mechanism. But instead of using energy to produce new blocks, Stacks miners use bitcoin — which they need to buy at the market rate — to maintain the Stacks blockchain. Since this approach incurs costs for Stacks miners, they are compensated accordingly. Compensation is also similar to Bitcoin as it is provided in the form of block rewards and transactions fees from the Stacks network. The compensation is issued by the protocol in STX, Stacks’ native blockchain coin. The block rewards are as follows:

  • 1,000 STX per block are released in the first 4 years of mining after the mainnet launch

  • 500 STX per block are released during the following 4 years

  • 250 STX per block are released during the following 4 years

  • 125 STX per block are released from then on indefinitely

Since Stacks block rewards also halve every four years for three consecutive periods, these Stacks’ “halvings” are synchronized with Bitcoin halvings.

Without Proof-of-Transfer, the question is: Where do the Bitcoin units go that miners need to send in order to participate in Stacks’ block production? The receivers are Stacks stakers. This means: As an STX holder, one can register for a rewards cycle by broadcasting a signed message that locks up one’s STX coins for a defined lockup period. At the same time, a Stacks staker needs to provide his Bitcoin address to receive funds from block-proposing miners.

Temporarily locking up STX for bitcoin rewards to support the Stacks blockchain’s network security and consensus sounds an awful lot like ordinary staking that is common with a consensus mechanism called Proof-of-Stake. As we have seen though, Stacks’ consensus mechanism is not Proof-of-Stake at all. This is also why within the Stacks ecosystem users generally use the term “stacking” instead of “staking” when talking about the process of locking up one’s STX coins to participate in network security. Stacking happens over reward cycles with a fixed length. In each reward cycle, a set of Bitcoin addresses from stacking participants receives bitcoin rewards.