In The Weeds #14
Why we're researching Stacks, the BRC-721E token standard, and Immutable zkEVM
Welcome to Decentral Park’s new research sub-newsletter: In The Weeds.
This weekly instalment will focus solely on key technical developments and themes within Web3, keeping you ahead of the game on upcoming trends.
Let’s get stuck into this week’s key highlights.
1: Stacks
What is it? To round off the theme in recent weeks of covering innovation atop the Bitcoin Network, it seems fitting to dive into Stacks, arguably the only network offering anything close to DeFi within the Bitcoin ecosystem.
Stacks is an open-source, layer-1 blockchain network that leverages the security and capital of the Bitcoin Network to offer smart contracts and decentralised applications. It can connect to the Bitcoin blockchain through its consensus mechanism, Proof-of-Transfer (PoX).
PoX is an extension of Proof-of-Burn, in which miners compete by burning (destroying) a Proof-of-Work (PoW) cryptocurrency as a proxy for computing resources. In PoX, instead of burning the token, miners transfer the committed PoW token to other participants within the network. In Stacks’ case, these other participants are stakers (known as stackers), who are staking the native Stacks token, STX, in exchange for staking rewards paid in the BTC transferred from miners.
By utilising BTC within the Stacks consensus mechanism, Stacks is anchored on the Bitcoin blockchain. The result is that Stacks leverages Bitcoin’s high levels of decentralisation and security, without additional environmental impact.
In practice, this mechanism is close to a modular blockchain dynamic, in which Bitcoin is Stacks’ secure settlement layer, to which Stacks adds complex dApps and smart contracts at the execution layer. Stacks dApps can interact with the Bitcoin state, so apps built on Stacks can utilise Bitcoin as their native currency.
To date, there are 96 dApps built on the Stacks network, ranging from DEX protocols and stablecoins to digital identity and NFT protocols.
Why is it important? To date, Stacks is the only functioning DeFi ecosystem associated with the Bitcoin network, this includes DeFi ecosystems built on the Bitcoin network, of which there are none, and those that leverage the Bitcoin network as a consensus layer. As such, Stacks currently has little to no competition when it comes to Bitcoin-related DeFi.
Smart contracts and dApps are particularly interesting on Bitcoin, as they allow for a native network of yield-generating protocols. To date, only 0.807% of Bitcoin supply has been bridged to alternative networks in the form of wBTC, indicating the shallow appetite of BTC holders to take risks with their assets by locking them in bridging contracts.
These concerns are mitigated when Bitcoin is used as a native asset within a network, and smart contracts and dApps are secured (albeit indirectly) via the Bitcoin Network. As the Stacks ecosystem grows in both capabilities (dApp offerings) and awareness, it could potentially command high levels of TVL as BTC holders seek native yield.
More than this, the PoX consensus mechanism has the potential to supplement Bitcoin miner transaction revenue. This has been a hot topic in recent weeks with a spike in BRC-20/Ordinals transaction fees.
Where does it go from here? While Stacks is interesting as the only Bitcoin-associated DeFi ecosystem, there’s an elephant in the room that needs to be addressed… Stacks hasn’t gained much traction since its inception in December 2021. It currently holds merely $26.59m in TVL (for context, this is 1014x smaller than the Ethereum L1 DeFi ecosystem) and transactions/active users are non-existent relative to Ethereum, L2s and alternative L1s such as Solana.
To this extent, in its current form, Stacks is almost a walking-dead sidechain… I believe this has been driven by two primary factors, the first being the inability to write to the Bitcoin Network, and the second being the choice of programming language. An inability to write to the Bitcoin Network means users see this as a compromise to Bitcoin DeFi, as opposed to truly native Bitcoin DeFi. The language, Clarity, is a complex language largely unused by smart contract developers.
An upcoming Stacks upgrade, the introduction of sBTC and the Nakamoto release will introduce the ability to write to the Bitcoin Network, vastly improving the offering of Stacks as a network. I believe this could be a material catalyst for the usage of the network, particularly with the recent uptick in Bitcoin innovation fuelling a desire for Bitcoin-native DeFi.
In terms of the issues with the Clarity language, I believe a greater effort on the DevRel front is required, to simplify the development efforts on Stacks by either encouraging the development of high-quality compilers or increasing the accessibility of high-quality Clarity development resources.
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2: BRC-721E Token Standard
What is it? We touched on Bitcoin’s BRC-20 standard a few weeks ago, but there’s a new standard innovation on the block, the BRC-721E token standard. This is a simple protocol which allows Ethereum-based ERC-721 NFTs to migrate to Bitcoin on their schedule, without inscribing an entire collection beforehand.
The new standard was developed by Bitcoin Milady’s, a Bitcoin copy of the Milady’s NFT collection on Ethereum, in collaboration with Ordinals Market, an Ordinals NFT marketplace, and Xverse, a Bitcoin native wallet solution.
You can think of this as a bridging function for Ethereum-based NFTs to the Bitcoin Network, in which owners of Ethereum-based ERC-721 NFTs burn their NFTs on the Ethereum chain before generating them on the Bitcoin Network.
BRC-721E encodes the relevant data directly into the burn transaction, which nominates a Bitcoin address to receive an inscription. To this extent, the burn transaction acts as an onchain inscription request. Indexers will then gather the relevant data on both chains, allowing the transfer of metadata to the Bitcoin Network which points to the underlying NFT.
BRC-721E inscriptions are estimated to be approximately 100 bytes, driven by the offchain hosting of the jpg file associated with the NFT. This means that it’s significantly cheaper than inscribing the image itself while enhancing the quality of the image.
Why is it important? BRC-721E as a token standard represents the next step of innovation from the BRC-20 standard. Should Bitcoin wish to develop beyond its secure SoV functionality, which is a hot topic within the Bitcoin community, experimentation and innovation down this path of thinking are crucial.
More than this though, BRC-721E specifically has the potential to accelerate the expansion of the Bitcoin-based NFT ecosystem. It enables the ecosystem to tap into the already developed Ethereum-based NFT ecosystem, with its many users and OG projects.
To this end, BRC-721E has the potential to remove the need for Bitcoin’s NFT ecosystem to develop from the ground up.
Where does it go from here? To date, there have only been 626 NFTs bridged from Ethereum to Bitcoin, which is somewhat underwhelming. Though it’s important to note that BRC-20s took several months post-launch to gain traction as they did in May of this year.
I believe two factors are holding BRC-721E back from full adoption, which if solved, could result in BRC-721s becoming the new craze for the Bitcoin Network, driving transaction fees to another material spike.
The first issue is that not all of the NFT data is stored onchain. As mentioned, the image is stored offchain to reduce the size of transactions required. While this may be considered a positive from a cost perspective, there has been pushback from the Ordinals community, given that ordinal inscriptions are fully onchain, including the images. Should BRC-721, or a derivative of this standard, move to a fully onchain model, I believe the Ordinals community will get behind it.
Secondly, there is currently no ability to bridge in the opposite direction. This may be complicated given the burning function, though the speed at which these innovations are being produced suggests it’s not long before a multi-sided bridge is developed for NFTs between Ethereum and the Bitcoin network. Should this functionality be implemented I believe we will see the NFT ecosystem on the Bitcoin Network add multiples to its TVL and activity.
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3: Immutable zkEVM
What is it? Web3 gaming has been a hot topic this past year, accelerated by blockchain-native focus, such as Solana honing in on their ability to cater to the gaming industry, and non-blockchain-native events, such as the recent Apple Vision Pro announcement peaking metaverse interest.
Arguably, however, no ecosystem has hitched its wagon to the gaming industry as much as Polygon, which has accelerated this focus by partnering with Immutable. Immutable, a company backed by the likes of Galaxy Digital and Coinbase, has a mission to advance the next generation of web3 gaming.
As demand for true digital asset ownership and web3 gaming grows, the need for scalable efficient infrastructure grows with it, which is precisely what the partnership between Polygon and IMX brings. This comes in the form of Immutable zkEVM, a customised zero-knowledge, EVM-compatible rollup powered by Polygon technology, integrated with full Immutable platform support.
What this means is that Immutable has developed a gaming-specific rollup, upon which developers can deploy games, and where users can own digital assets, play games, and transact with other users. The rollup is designed to make web3 game development faster, easier and less risky.
This is supplemented by Immutable zkEVM’s APIs and SDKs which enable developers to leverage existing code libraries, advisory services and partnership networks. These libraries are open-source, specific to Ethereum smart contracts and enable traditional web2 developers to easily take their first steps into the web3 gaming world.
Why is it important? Immutable zkEVM will allow both large game developers and independent developers to deploy games to their chains. This is particularly interesting given the partnerships that both Polygon (i.e. Nike, Meta etc.) and Immutable (i.e. Gods Unchained) possess. What this partnership signifies is the strongest onboarding route for web3 gaming seen to date, a route that has been previously highlighted in ‘In the Weeds’ as one that will vastly accelerate the adoption of web3 and digital assets.
I am particularly excited about the development of Immutable zkEVM given its potential to become an L3 hub for web3-specific gaming L3 rollups, which I’m referring to as ‘game chains’. For this mental model, it’s best to think of Immutable zkEVM as the OPStack of gaming, you can read about OPStack in a previous edition of ‘In the Weeds’ here. Upon this Immutable zkEVM rollup, I believe we will see the development of game chains, i.e. game-specific L3 rollups. The potential for growth here, particularly considering the partnerships and reputations both Polygon and Immutable have accumulated since inception, is outstanding.
Where does it go from here? Immutable has stated that their partnership with Polygon allows players to look forward to a wave of AAA web3 games that push the boundaries of what’s currently possible in the gaming industry. This is the most exciting thing to look forward to, top-tier games that expand upon the current industry with participation from the highest quality game developers.
Likely before this occurs though, we will see the migration of existing Ethereum-based games to Immutable zkEVM. This is driven by the EVM-compatible nature of the solution, meaning no modifications will be required for games to migrate to this low-fee, high-flexibility solution.
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