Key developments have brought our initial STX thesis into further focus. We will elaborate later, but at a high-level, demand for Bitcoin block-space has solidified, increasing the demand for the product STX is building. We believe Stacks is building a place to explore more elaborate BTC-denominated utility, with the intention of converting to a true Bitcoin L2 once this is technically enabled. The Stacks developer team is on track to undergo the Nakamoto upgrade before the Bitcoin halving in April. Despite these positive developments, attention on STX has declined as several other more immediate catalysts have played out elsewhere in the space. The thesis has strengthened but attention has waned just before several key milestones are set to play out in succession, leaving us with a unique opportunity.
On the Bitcoin front, demand for blockspace has remained strong, Bitcoin network average gas fee has spiked 50x this year (vs Ethereum at 2x). Ordinals have continued to develop, further displaying the desire to do more with Bitcoin than just hold it. Additionally, BTC dominance has risen as Bitcoin has strengthened its position as a global macro asset and demand for alternative SOV’s has increased. Demand has been mainly driven by BTC’s more consistent price performance as an SOV as well as broader regulatory clarity due to an expected US spot BTC ETF approval. The combination of forces has increased the demand for the product STX is building: a performant, flexible and secure BTC-denominated environment to explore more complex BTC applications. The longer-term vision is to eventually convert to a true Bitcoin L2 when it becomes technically possible.
Transaction Count on Bitcoin Network
Revival of BRC-20 & Ordinals Transaction
Growing Bitcoin Dominance
Meanwhile STX has largely been overlooked for the last several months as continuing development toward Nakomoto has absorbed all the Stacks developer resources. The STX developer team has completed Mockamoto, a key milestone to bring Nakamoto node and RPC endpoints online. This puts the team on pace to launch Nakamoto Mainnet by April as they look to time it in unison with the Bitcoin halving. In our view this upgrade will be the most important of several compelling catalysts. Right now, STX is somewhat cumbersome to use as block times mirror BTC L1 and there is no support for bridged BTC due to security issues. After the upgrade STX will be dramatically faster with 5 second block times (vs current block time of ~10–30 minutes) and will also support sBTC, a secure and efficient version of wrapped Bitcoin that is natively integrated with Stacks consensus. The STX ecosystem has remained resilient with several strong and expanding teams building in the space despite the current technical limitations. We are very excited to see what develops once the network is meaningfully upgraded with Nakomoto, together with sBTC. Stacks switches to being secured by 100% of BTC hash power after this upgrade, bringing it closer to a Bitcoin L2.
Overview of Stacks Ecosystem
Several additional upcoming events will direct attention to STX. Firstly, we expect Bitcoin spot ETF approval in January, which will generate Bitcoin-centric attention as well as advertisements by many of the largest financial institutions in the world. This will most directly impact BTC but is likely to also spill over into other Bitcoin laterals like STX. Secondly, Stacks is expanding their footprint globally with a recent partnership with Spartan Capital in Singapore and DeSpread in South Korea. They will run a marketing campaign to raise awareness for Bitcoin L2s in the first quarter of ’24 with a focus in South Korea, Singapore, Hong Kong and Dubai. Thirdly, STX will announce several key milestones toward the Nakomoto upgrade in March that should start to gain traction in the coming weeks with the second Nakamoto testnet is expected to be launched by January. Lastly, new Bitcoin L1 tools like BitVM can enable a trust-minimized way to transfer between Bitcoin L1 and L2, bringing Stacks even closer to the vision of true Bitcoin L2. Earlier, such support at Bitcoin L1 required changes to Bitcoin L1 (hard to do) but with BitVM no changes to Bitcoin L1 are needed.
Nakamoto Key Milestones
The relative valuation of STX vs BTC as well as STX vs other L1/L2 ecosystems are now at compelling levels. By April, Stacks will likely have finally completed the Nakomoto upgrade allowing it to offer the first fully performing BTC-denominated ecosystem. Simultaneously we will be approaching the BTC halving while Stacks ecosystem will be in the middle of their Bitcoin L2 awareness campaign. This should provide a favorable environment for STX to narrow its valuation discount relative to these other assets. STX currently trades at 0.15% the FDV of BTC while Ethereum L2’s trade at an aggregate of 10% of ETH’s FDV. A discount is sensible, but the size of the current discount is illustrative of the potential upside for STX as it improves its capabilities with the Nakamoto upgrade and progresses toward becoming a true BTC L2.
STX Relative Value Charts
Imagining what sort of applications STX will enable is complex. However, there are several that we are excited about. Before delving into specific examples, there are a couple key points to note here. Most of these applications are currently possible in some other format but have yet to gain strong adoption. We believe they will have more success once available on STX for several reasons. The first is community; STX is a strongly BTC-centric community, and these users are already in the mindset of experimenting with BTC, or they would not be STX users in the first place. This contrasts with something like wBTC that exists on ETH but within an ETH-centric community. The second is incentive; Stacks ecosystem entities are planning to put up compelling initial incentives to attract BTC to their applications. One such proposal is looking at an automated BTC yield on all BTC that bridges to STX and will be large enough to provide a 2–3% yield on an initial $100M of TVL. Third, with the Nakamoto upgrade Stacks not only settles existing block transactions on Bitcoin but will upgrade to 100% BTC reorg resistance. Stacks plans to eventually convert to a true L2 when possible, providing an added incentive for those in the BTC community to explore applications within the STX ecosystem.
After Nakamoto, once fast blocks and sBTC are enabled, STX will be able to provide a performant BTC denominated NFT marketplace. This could be used for more efficient ordinal trading or its own unique L2 NFT collections. Further, the sBTC peg can be extended to lock ordinals on L1 and use them on Stacks L2 instead, which would provide a faster, cheaper, and more programmable way to trade ordinals. Additionally, there is room to explore more traditional DeFi applications with sBTC such as lending (e.g., Zest team is already building this in advance on STX). A sBTC denominated swaps market for other sub tokens will also be enabled and ALEX has built the foundation for this already. Each of these different applications can be explored all while generating an automatic yield. It is not hard to envision this offering gaining a foothold and providing an ecosystem for novel utility.
