Article source: stacks
While the Bitcoin halving has passed, the Nakamoto upgrade (STX's exclusive Bitcoin L2 upgrade) is coming. We believe the market has not fully appreciated the importance of the STX Satoshi upgrade and that the STX will be repriced. Also, we expect sBTC (a permissionless and trustless Bitcoin wrapper on STX) to play a key role in acquiring TVL on STX.
Our bullish assumptions on STX are:
1. Faster transaction speeds make dApps possible
The upgraded stx main chain can be completed in about 10 seconds per transaction, becoming faster and unlocking DeFi applications
2, STX halved
Removed $73 million per year selling pressure
3, sBTC's Growing TVL (Base Case: $1b)
Built by Stacks, sBTC's trustless design (peers with trust-based design) should release BTC liquidity onto Stacks DeFi
4, Best-in-class
Compared to its peers, Stacks is the most adopted Bitcoin L2 smart contract
5. Half downwind
Bitcoin halving = 1.5 years of strong BTC price action. The uptrend of STX tends to outperform BTC
Advantage #1 Satoshi Upgrade: Faster + Lower Emissions
Nakamoto Upgrade: More than 100x improvement. The upgrade is a hard fork that decouples Stacks block production from Bitcoin block time, enabling faster transaction confirmations and introducing a new mechanism for Stacks miners to produce blocks independently. The block confirmation time is expected to drop from >10 minutes to about 10 seconds, an increase of more than 100 times. The upgrade is already underway (at Bitcoin block 840,360 or launched on April 22, 2024) and is expected to be fully completed by July '24 (2 months later than originally predicted in May '24).
(The trading volume exceeded 800,000 for 4 consecutive months.) We expect this growth to continue beyond the Nakamoto upgrade. Source: Signal21)
The Satoshi Nakamoto upgrade makes DeFi possible. Even before the upgrade, the activity of a number of new Stacks DeFi protocols (StackingDAO, Bitflow, zest, etc.) has been seen on Stacks has increased rapidly, especially StackingDao, which has only been staking for half a year, and has more than 30,000 real staking users, staking more than 50 million STX, explosive growth. After the upgrade, the blocking time will be greatly reduced, and in addition, we expect UI/UX improvements to further boost network activity. This should lay the groundwork for new applications that were not possible before. These mainly include DeFi primitives that rely on liquidation and arbitrage to function.
STX halved. With the upgrade, emissions will be reduced from 1,000 STX per Bitcoin block to 500 STX per BTC block. Given that each BTC block takes about 10 minutes, we expect this to reduce STX emissions/selling pressure by 76,000 STX per day, i.e., more than $200,000 per day ($73 million per year). In our view, this has received relatively little attention as technology upgrades (sBTC and Satoshi Nakamoto) have received more attention.
Advantage #2 |sBTC: $10 billion TVL opportunity
sBTC: The first trustless solution for packaged BTC. sBTC is the first trustless solution to bridge BTC from the Bitcoin main layer to another chain. Currently, the Stacks core team is working on sBTC in conjunction with the Nakamoto upgrade and will launch it in August '24 (i.e., 1 month after the upgrade is completed).
(Shows how Peg-In and Peg-Outs (bridging in and out of the stack) can play out in a post-sBTC world.) Source: sBTC whitepaper)
The most decentralized BTC wrapper. sBTC relies solely on a decentralized network of validators (which can be joined completely permissionless). It is designed with a set of economic rules that incentivize validators to hold the peg to avoid collateral cuts. This is in contrast to existing solutions such as Ethereum's wBTC, R-BTC on Rootstock, and L-BTC on Liquid, which are operated by a centralized custodian or a group of trusted entities (multisig) with embedded trust assumptions.
Distrust is important. We've talked to Bitcoin whales and learned that they want to earn yield on Bitcoin, but often find it difficult to trust a custodial Bitcoin wrapper. Common barriers to using wBTC include: 1. Centralized minting and burning of entities; 2. Custody risk; 3. KYC requirements. In our opinion, this is the reason why only 55-60% of the Bitcoin supply has been active in the last 3 years. This number is low considering that BTC fluctuates between $15-$75,000 during this period, but this is changing.
sBTC will erode wBTC's share. We believe that sBTC has the potential to unlock liquidity in Bitcoin, especially whales, for DeFi with permissionless and open participation. wBTC currently has an MCap of around $10b, and we think sBTC has the potential to reach these levels due to its more decentralized nature.
(wBTC Market Cap – Source: CoinGecko)
Advantage #3 | STX is a top-notch BTC L2 game
Addressing competition issues. We've seen several Bitcoin L2s emerge recently and think it's prudent to address the differentiating issue of Stacks.
Compared to the older L2, Stacks is at the top of the pack. Older L2s like the Lightning Network, Stacks, Rootstock, and Liquid have been around since 2017. Stacks is ahead of other older Bitcoin L2s for a variety of reasons:
Compared to the Lightning Network and Liquid: Stacks has smart contracts. Neither the Lightning Network nor the Liquid Network support smart contract execution and are primarily used to facilitate Bitcoin transfers. Therefore, we do not consider these two networks to be competitors.
Compared to Rootstock: More adoption, more decentralization. Rootstock is most similar to Stacks in that it supports the execution of smart contracts through the Rootstock Virtual Machine (RVM), allowing users to migrate Ethereum contracts to the Bitcoin network. That said, Stacks beats Rootstock on almost all relevant user metrics and is more decentralized. Rootstock's BTC bridging solution, RBTC via Powpeg, relies on custodians to maintain an equal 1:1 peg. While Stacks has implemented a similar architecture at the time of writing, with the sBTC upgrade, Stacks will move to a permissionless bridging system, which will be another incremental advantage over competitors like Rootstock.
The new entrant has a smart contract, but not yet Lindy. Recently, we've seen the emergence of several Bitcoin L2s, including Botanix, Merlin, Build-on-Bitcoin (BOB), and Chainway. While these solutions extend the use cases of BTC by introducing an EVM-compatible execution layer, we believe Stacks is still leading the way because:
Higher degree of trustlessness: At the launch of sBTC, Stacks will remain the only L2 with a permissionless bridge (and the one that Bitcoin whales will trust), thus unlocking maximum BTC liquidity
Competitor fragmentation: As a new batch of solutions implements EVM-based solutions, these chains will compete for liquidity among various other EVM chains. We expect Stacks to gain a more sticky Bitcoin liquidity user base.
Competitor postponement: Most solutions, such as Botanix, have pushed back their mainnet launch date several times and are currently expected to be in Q3. BOB has set a mainnet date for the end of Q2. Before we see competing solutions launch on mainnet, we believe that most other solutions have non-differentiated offerings in the competitive EVM market.
Advantage #4 |Bitcoin Halving: The stack is a beta yield
Bitcoin halved for the fourth time. Empirically, Bitcoin halving is a bullish event, with BTC rising strongly for 1-1.5 years in the last 3 halvings. On 4/19/24, Bitcoin underwent its fourth halving, with the block reward dropping from 6.25 BTC to 3.125 BTC, theoretically reducing the emissions/selling pressure by about $30 million per day at current prices.
We consider Stacks to be a high beta for Bitcoin. As Bitcoin rises, Stacks tends to outperform Bitcoin. If the post-Bitcoin halving price action holds, we expect Stacks to outperform the broader market. In addition, the network is on the cusp of the largest network upgrade ever, providing a technology/foundation convergence.
(STX and BTC trend comparison)
Valuation|Basic situation: an increase of 5 times to 15 times
For the above reasons (Nakamoto + sBTC + best-in-class BTC L2 + BTC post-halving beta), we believe that STX will be the highly used Bitcoin L2. A conservative estimate is that the STX will increase 5x from its current price to $16 billion in FDV. This means reasonable assumptions that:
If Stacks' SBTC TVL reaches 10% of the wBTC TVL ($10b), it will have a TVL of about $1 billion
Arbitrum, Optimism, Solana, Aptos, and Avalanche are trading at an average price of around 16x FDV/TVL, and applying the same ratio to STX predicts that TVL means $16 billion in FDV
The more optimistic scenario is as follows:
If the TVL of Stacks' SBTC can reach 50% of the wBTC TVL ($10b), it will reach $5 billion.
If a 10x FDV/TVL multiple is used, then it could mean that Stx's FDV is more than $50 billion, which is 15 times the current one.
conclusion
A turning point for Bitcoin DeFi. The Satoshi Nakamoto upgrade marks a key turning point for Stacks, reducing block confirmation times and halving STX emissions, which directly addresses scalability and inflation. The introduction of sBTC will change Bitcoin's role in DeFi by providing a decentralized, trustless bridge to shift liquidity preferences away from centralized Bitcoin wrappers such as wBTC. Given these enhancements and the context of Bitcoin's recent halving (historically, halving has preceded significant market appreciation), Stacks is strategically positioned to gain greater market share and user adoption.
We are very bullish on BTC layer 2, and we currently see that the daily trading volume of DEXs based on the solana chain has begun to surpass the daily trading volume of DEXs on the Ethereum chain, and we believe that in the near future, the daily trading volume of DEXs based on Stacks will surpass the first two. From now until the end of 2025, it will be the stage when BTC Layer2 shines, by releasing the liquidity of BTC, so as to generate more new and attractive models, which will lead to a new round of bull market, and the era of BTC layer2 has just begun.