Adding functionality to Bitcoin is one of the biggest opportunities in crypto right now, and DeFi projects on the Stacks blockchain seem to be the most likely to capitalize on this opportunity, with an overview of some of the more promising projects below.
With Bitcoin ETFs, Bitcoin halving, early crypto bull runs, and exciting innovations like Ordinals emerging, it's hard not to be optimistic about the Bitcoin economy. Although Bitcoin extremists may be trying to tell you otherwise, for Bitcoin to be a globally significant asset, a thriving layer of financial applications must be built on and around it.
The leader and pioneer in the Bitcoin economy is Stacks. Stacks is Bitcoin's layer-2 blockchain network that connects to the Bitcoin blockchain, but it's a standalone protocol that brings Ethereum-like smart contract flexibility to Bitcoin. This makes it possible to build applications such as DeFi and NFTs, with the ultimate goal of making Bitcoin more than just an asset to buy and store. We have high expectations for the future of the Stacks ecosystem, as providing a financial layer for Bitcoin is a huge void in the market. Here are some of the top projects for working on this on Stacks that you should know before anyone else.
The top DeFi project in the Stacks ecosystem
1. Alex
If you're looking for a one-stop platform that covers all things Bitcoin DeFi-related, then don't hesitate to choose Alex. Alex is a leading project on Stacks, offering a full suite of DeFi products, including a decentralized exchange for swapping Stacks tokens, liquidity pools that offer rewards, a launchpad for Stacks and Ordinals projects, and a bridge to connect the Stacks blockchain with other chains such as Ethereum, Binance Smart Chain, and the upcoming launch of Bitcoin.
All of them are linked to the project's native token, $ALEX. Holders can stake tokens to earn yields, use them to participate in governance, or use them to purchase startup platform projects. The impressive Alex team worked tirelessly to build and launch products during the bear market of 2022-2023 and today already has a slew of outstanding DeFi products that meet many of the needs of Stacks users, including the BRC-20 token index and various bridges that now belong to a separate entity, XLink, which is still governed by $ALEX holders. If Stacks continues to grow in terms of users and liquidity, then Alex is likely to continue to perform well.
2. StackingDAO
StackingDAO is a relatively new project that brings capital efficiency to $STX holders. It achieves this through an innovation that is relatively new in the crypto space called Liquid Staking. In this way, instead of locking up the assets in the staking contract, holders can continue to use their assets in DeFi while enjoying staking rewards. With StackingDAO, this means that you stake your STX tokens into their protocol and receive stSTX in return, which continues to earn significant Bitcoin yields while you can still use those stSTX in other Stacks DeFi dapps.
Currently, the project is testing the network, attracting users to participate in a private beta phase, as well as conducting code audits, and there is no information yet on whether the project will launch its own token. However, most liquid staking protocols on other blockchains like Lido, Stride, and Benqi have their own native tokens, governance features, and some even have a dividend mechanism. As the market clearly tells us, people are still keen on Bitcoin, and Stack is unique in that you can earn BTC by staking STX. Being able to use staked STX in other DeFi protocols while still earning BTC is a product that is simply too valuable to ignore.
3. Arkadiko
Arkadiko is an established protocol in the Stacks ecosystem that offers a unique approach to decentralized finance. It allows STX holders to pledge their assets to mint USDΔ, a stablecoin soft-pegged to the US dollar. This innovative mechanism enables users to create self-repaying loans, taking advantage of the proceeds generated by PoX (Proof of Transfer) and STX-collateralized vaults.
In addition to offering stablecoins, Arkadiko facilitates token swaps in an environment that does not require trust and authority, allowing users to deposit tokens into the liquidity pools of their decentralized exchanges and earn rewards, including DIKO tokens. Arkadiko operates as a decentralized autonomous organization (DAO) governed by its native token, $DIKO, which also supports staking to generate yield. Despite the volatility of the market (the USDΔ stablecoin has lost its anchor pricing and has not yet recovered, which is something that every user must seriously consider when making loans), the dedication of the Arkadiko team and the deep integration of the protocol within the ecosystem indicate that it is poised for good growth, especially with a stable stablecoin.
4. Watch
Velar Protocol is a multi-faceted DeFi platform on the Stacks blockchain that aims to unleash the full potential of Bitcoin in decentralized finance. The platform includes a Uniswap-inspired decentralized exchange (DEX), trading platform, and IDO launchpad, with plans to introduce governance, cross-chain bridges, and a perpetual derivatives exchange in future updates.
Velar is currently in beta and has developed a multi-phase roadmap that includes Velar v1: Dharma, v2: Artha, v3: Kama, and v4: Moksha, showing a gradual evolution of features and capabilities that will be introduced from the testnet to the main network one by one. The Velar token ($VELAR) is the core of the protocol's economic system, and its distribution includes 35% for community rewards, 20% for fiscal reserves, 20% for founders and teams, and 5% for advisors. With strong project support and the first perpetual contract to be launched on Stacks, Velar is one of the projects to keep an eye on.
5. Zest
Zest Protocol is committed to solving a key problem in the Bitcoin economy: the inefficient use of Bitcoin, which is largely idle in cold storage, hindering economic growth. As an on-chain open-source lending platform built on the Bitcoin blockchain, Zest Protocol leverages smart contracts to improve transparency and auditability. It contains two different types of pools: the earning pool, where users can earn Bitcoin yields, and the Lending pool, which is used to borrow and borrow based on their Bitcoin holdings. This design allows Bitcoin holders to securely access liquidity without selling their assets, reducing the need for trust in centralized finance (CeFi) platforms or custodians.
As one of the best Bitcoin lending platforms voted by Blockworks in 2023, Zest Protocol's journey began with a testnet launch in 2022. The team's collaboration with Hiro Systems and significant contributions to the launch of sBTC and Stacks Nakamoto underscore their commitment to innovation. With a successful smart contract audit, the Zest team is now ready for the market launch. They are actively working with Bitcoin liquidity providers, borrowers, and preparing for a closed launch. Interactions with institutional players and large Bitcoin holders at various events around the globe underscore their efforts to expand Zest Protocol's reach in the DeFi space.
6. Uwu Protocol
Uwu Protocol is an innovative Stacks project that revolves around two main components: Uwu Cash and Uwu Share (xUWU). Uwu Cash is an over-collateralized stablecoin that is "soft pegged" to $1 and is backed by $1.50 worth of STX tokens, ensuring its stability and partial resistance to volatility. Uwu Share (xUWU), on the other hand, is a utility token that captures and distributes 100% of the protocol fees to its holders every two weeks. This distribution takes place through a fee claim smart contract that enables holders to claim their fees during each cycle, and unclaimed fees will roll over to the next cycle.
UWU is currently in beta and early users are welcome to test the protocol. While there are other crypto-asset-backed stablecoin projects on Stacks, Uwu's 100% revenue-sharing mechanism could be a strong competitive advantage. However, the protocol also comes with its own risks, as its stablecoin is backed by highly volatile STX assets, which can move up to 30% in a single day. This could lead to a large number of liquidations for Uwu users when the price of STX drops rapidly, or potentially lead to the unpegging of the project's stablecoin. Nonetheless, the protocol offers a valuable product for users who hold STX for a long time, and assets with revenue-sharing mechanisms are always an interesting aspect in the crypto space.
7. Hermetica
Hermetica is a unique and complex project that aims to generate additional yield for Bitcoin holders while they maintain custody of digital assets. It provides a platform where users can earn, trade, and increase their Bitcoin holdings while maintaining full control over their assets.
At the heart of Hermetica's appeal is its Hermetica Earn vault, which employs an innovative European reverse knock-out (ERKO) option strategy. This strategy creates a yield mechanism by setting specific price barriers for Bitcoin so that within those barriers, a payment occurs if Bitcoin's closing price is within these barriers. This strategy ensures profitability when the price of Bitcoin moves within a range of 1% to 20% above and below the predetermined strike price. The strategy is designed with an emphasis on capital protection and limits the maximum risk per trade to 1% per month, effectively managing downside risk. This approach has proven successful, with post-test data showing an average annualized return of 6.5% over a six-year period.
8. Bitflow Finance
Billed as a "decentralized exchange for Bitcoin holders," Bitflow Finance is a protocol that aims to bring together liquidity and exchange in the Bitcoin economy. It provides a secure and transparent platform for users to trade Bitcoin and stablecoins from various Bitcoin layer 2s such as Stacks and Rootstock without escrow risk, enabling users to trade BTC derivatives like sBTC and xBTC in a decentralized manner. In addition, Bitflow supports Bitcoin-based stablecoin trading, optimizing liquidity to reduce slippage and fees.
Users can deposit Bitcoin and stablecoins to get real gains. The platform also allows for the provision of one-way liquidity. Bitflow is open-source, including its smart contracts and frontend, ensuring transparency and community participation. It is backed by the Stacks Foundation and the Bitcoin Frontier Fund and is currently in beta. We can't wait for the public launch of this project.
Summing up the thoughts
If you're reading this, you're an early adopter of the Stacks ecosystem. Although the price of $STX and $ALEX is performing well, this activity still usually happens on centralized exchanges, and the most interesting thing happens on-chain. Admittedly, the user experience of Stacks is not very user-friendly at the moment, and transactions take 20-30 minutes to process. This is expected to change with the upcoming Nakamoto upgrade, when transaction processing speed will be reduced to 5 seconds. In addition, sBTC will also unlock Bitcoin on Stacks without relying on centralized parties, providing a significant opportunity to attract a portion of the hundreds of billions of dollars in Bitcoin market cap.
Stacks is currently the market leader in the Bitcoin layer 2 space, and the DeFi projects described in this article have great potential. We hope this overview has helped you kickstart your DeFi journey on Stacks and the Bitcoin economy. As Stacks and its ecosystem projects enter a new phase, you'll have more opportunities to do more on Bitcoin!