Have you heard of the "Bitcoin Write-In Problem"? It doesn't need to be too technical; at its core, it's due to the limited programmability of Bitcoin. This is why we haven't seen the same types of DeFi applications on Bitcoin as we have on other chains. However, for a decentralized economy to function properly, users need to be able to swap, lend, and earn yields from their held assets.
This limited programmability has led to the emergence of blockchains like Ethereum, which offer more web3 functionalities and custodial "wrapped Bitcoin" tokens to reflect the value of Bitcoin. However, compromises on security and reliance on centralized entities have resulted in countless hacks, bankruptcies, and losses amounting to billions of dollars.
A solution is needed to go beyond the base layer to leverage Bitcoin. In this article, we will explain why Web3 needs Bitcoin and introduce sBTC: a non-custodial pegged Bitcoin mechanism that will become a pillar of decentralized finance.
Why Choose Bitcoin for Web3?
The Bitcoin blockchain has never encountered any vulnerabilities or hacks in its 15 years of use and maintains a network value of over $1.2 trillion, four times that of Ethereum. Web3 requires decentralization, security, and durability that only Bitcoin can provide.
Decentralization
The governance of Bitcoin is in the hands of its holders, miners, node operators, and other network participants, with its rules encoded in its protocol. This decentralization is evident when the Bitcoin community resists modifications to the protocol.
In contrast, Ethereum's governance structure is more centralized, with a charismatic co-founder and influential entities that can make changes to the Ethereum blockchain and monetary policy. This includes rolling back already settled transactions. This flexibility allows for experimentation but undermines the security and durability of the blockchain, which are essential for building trust in a public economic system.
Security
Ethereum has transitioned from a Proof of Work (PoW) consensus mechanism to a Proof of Stake (PoS) mechanism to improve scalability. However, PoS has several fundamental issues that jeopardize security.
For example, token holders are also the validators of the chain. This leads to decision-making power and financial rewards being concentrated in the hands of the wealthiest currency holders, relying on wealth metrics determined internally rather than externally. Since the largest holders will make decisions that benefit themselves, this could lead to further centralization—the long-term effects of this situation are unclear.
In contrast, Bitcoin's Proof of Work mechanism relies on external resources to validate blocks and reward honest validators, providing a secure, tamper-proof, and decentralized settlement layer that is valuable for a range of applications.
Durability
Bitcoin has a long history and is difficult to change, making it stable and reliable. Ethereum's experimental spirit and frequent rule changes result in lower reliability. The interconnection of Ethereum's settlement and smart contract functionalities poses challenges to ensuring system security. In contrast, Bitcoin's minimal and pure settlement layer is considered sacred and inviolable, helping to ensure the stability of the system.
Bitcoin was designed to be the foundational layer for high-value settlement. It is now time to introduce more powerful and expressive smart contracts through additional layers to enable DeFi applications.
Stacks Bitcoin Layer
"Layers" can provide scalable web3 solutions.
We have seen Ethereum layers bring an entire ecosystem of decentralized applications and attract more capital and market value. Introducing layers for Bitcoin will also bring innovation and sustained growth.
Currently, the leading project in Bitcoin Web3 is the Stacks Bitcoin layer, launched in January 2021. Stacks extends Bitcoin's functionality, leveraging Bitcoin's security as an anchoring base layer without making any changes to Bitcoin itself, to provide smart contract capabilities that support the development of decentralized finance (DeFi) and other Bitcoin-driven Web3 applications.
Proof of Transfer (PoX)
Using a unique consensus mechanism called Proof of Transfer (PoX), Stacks can read the state of the Bitcoin chain and anchor its own blocks to Bitcoin's Proof of Work (PoW). When Bitcoin forks, the Stacks layer also forks, and it has a built-in BTC price oracle: Stacks miners spend BTC to mine STX, and this spending rate serves as an excellent on-chain proxy for the BTC to STX price.
Now, advanced smart contracts that leverage Bitcoin's security, capital, and network functionalities have become possible without making any changes to Bitcoin itself.
Clarity Language
Stacks uses the Clarity smart contract language, which is decidable and easy for humans to read. Unlike Ethereum's Turing-complete language, Clarity provides developers with a secure way to build complex smart contracts on Bitcoin. Ethereum's Turing-complete language cannot be formally verified and may lead to more undiscovered vulnerabilities.
Speed
Once the Nakamoto upgrade is complete, Stacks will receive a speed upgrade (with a block confirmation time of up to 5 seconds) to help scale Bitcoin. A potential unlock is lightning-fast payments on the Stacks layer, benefiting from Bitcoin's finality. Additional layers built on it, called "subnets," can further enhance speed and scalability, enabling lightning-fast payments with Bitcoin finality.
sBTC: The Holy Grail of Bitcoin for Web3
Despite the significant progress made by Stacks, it still cannot transfer BTC into and out of smart contracts in a completely trustless manner. This has been the "Holy Grail" problem that Bitcoin has struggled to solve for nearly a decade.
sBTC is a non-custodial form of pegged Bitcoin with 100% Bitcoin finality. sBTC will soon appear on the Stacks Bitcoin layer, enabling smart contracts on Bitcoin. Get ready for DeFi, NFTs, and DAOs that run entirely on Bitcoin, using Stacks as the invisible smart contract layer.
How Does sBTC Work?
sBTC operates by using a synthetic asset model on Stacks. To obtain sBTC, users must exchange their BTC for sBTC through a smart contract on the Stacks network without relying on centralized entities.
This is achieved through the PoX consensus mechanism, which connects to Bitcoin and facilitates the novel trustless pegging design of sBTC. Additionally, since sBTC is a 1:1 Bitcoin-backed asset, sBTC holders can represent their BTC holdings as sBTC on the Stacks network.
This synthetic representation allows users to participate in DeFi activities, such as lending or trading, while still retaining ownership and yield from their underlying Bitcoin. Furthermore, users do not incur any fees when converting between BTC and sBTC, aside from Bitcoin transaction fees.
If you need complete programmability, sBTC is the closest currency to native BTC. It has all the advantages of Wrapped Bitcoin (wBTC) without any of the drawbacks of wBTC. You no longer need to trust custodians to support wrapped tokens and real Bitcoin at a 1:1 ratio as you do with wBTC.
Here’s a quick breakdown of the pegging mechanism design, rooted in security, decentralization, and usability:
Pegging In
First, users convert native BTC to sBTC on Stacks 1:1 by sending BTC to a native Bitcoin wallet. This wallet is controlled by a decentralized open membership group called "stackers," who lock STX tokens in Stacks' PoX consensus mechanism. Through BTC rewards, stackers are economically incentivized to process the pegging/unpegging through the capital they have locked in staking and the rewards they earn.
These rewards provide them with strong economic incentives to participate in pegging/unpegging without introducing additional pegging fees. sBTC is then minted on the Stacks layer while still being protected by Bitcoin (as Stacks follows Bitcoin's finality).
Source: sBTC Whitepaper
Pegging Out
To unpeg and redeem native BTC, users need to send a request to the stackers, which is processed in the same way as a BTC transaction.
Then, over 70% of the stackers must collectively sign to destroy sBTC and programmatically send the corresponding native BTC back to the user's BTC address. This process may take up to 24 hours.
Source: sBTC Whitepaper
sBTC Upholds the Spirit of Bitcoin
The spirit of Bitcoin has always been to advocate for self-custody.
"Bitcoin is a purely peer-to-peer electronic cash system that allows online payments to be sent directly from one party to another without going through a financial institution." — Satoshi Nakamoto, 2008.
The sBTC whitepaper was written by the sBTC working group, which is open to the public, with contributions from computer scientists at Princeton University, developers of the Stacks layer, and anonymous contributors.
In 2022, the failures of centralized entities like FTX, Genesis, and Voyager caused users to incur losses exceeding $2 trillion. These failures underscore the importance of reaffirming the spirit of Bitcoin: to create a truly decentralized and transparent system.
sBTC is built on these foundational principles, addressing the "Bitcoin Write-In Problem" and ushering in a new era of Bitcoin applications that can rapidly accelerate the Bitcoin economy.
The design goal of sBTC is to be both decentralized and secure, especially when transferring BTC to another layer that supports smart contracts and decentralized applications (dApps).
This digital asset enables Bitcoin holders to maintain ownership of their BTC holdings and benefit from Bitcoin's security while also accessing the evolving Bitcoin DeFi ecosystem.
Will Stackers Exhibit Malicious Behavior?
sBTC is trust-minimized and incentive-compatible: these attributes align with the security of Bitcoin itself. The group of stackers will receive BTC rewards for processing sBTC transactions.
Additionally, the threshold wallet is based on a 70% threshold. This means that over 70% of stackers must collude in an economically unreasonable manner to attempt an attack. If at least 30% of stackers are honest, then malicious pegging will not occur.
Additionally, there is a recovery mode in which BTC rewards will be used to fulfill pegging requests. Therefore, native BTC will not be "stuck." Furthermore, the process is completely transparent, allowing anyone to see on-chain how much BTC is in the wallet and how much sBTC has been minted.
To ensure the system remains incentive-compatible, the maximum "active" ratio of circulating sBTC to the total locked STX is set at 50%. If the maximum ratio is reached, pegging services will not be provided until the ratio is restored. This means that even if the price of STX significantly drops relative to BTC, incentive compatibility will still be preserved.
What is the Stacks Nakamoto Upgrade?
The Stacks Nakamoto upgrade is a hard fork of the Stacks Bitcoin layer, aimed at unlocking the full potential of Bitcoin by increasing block creation speed, addressing maximum extractable value (MEV) vulnerabilities, and enhancing transaction finality on Stacks.
Faster block times: The Nakamoto upgrade separates Stacks block production from Bitcoin block arrival times, allowing Stacks blocks to be produced every 5 seconds.
Finality: The Stacks network anchors its chain history to Bitcoin's chain history to ensure transactions are irreversible. Additionally, stackers will monitor miner behavior on the network and ultimately decide whether to include blocks in the chain.
MEV protection: The upgrade ensures fair distribution of rewards and avoids manipulation of maximum extractable value (MEV). MEV refers to profits gained by reordering unconfirmed transactions.
With this update, Stacks will become a more efficient and scalable layer for DeFi and Web3 on Bitcoin.
How the Nakamoto Upgrade Paves the Way for sBTC
The Nakamoto upgrade introduces several features to Stacks, allowing for trustless transfers of BTC from Bitcoin to sBTC on Stacks through a pegging/unpegging mechanism managed by a group of decentralized participants known as sBTC signers, clearing the way for the launch of sBTC.
sBTC signers are stackers who lock the BTC sent to them by users in a multi-signature wallet, then mint sBTC on Stacks and send it to the users.
The Nakamoto upgrade also enhances transaction speeds on the Stacks network, reducing settlement times from minutes to seconds. This allows for faster and more efficient deployment of sBTC in DeFi protocols on Stacks.
Additionally, this upgrade introduces an improved PoX consensus model that links the history of Stacks with that of Bitcoin, ensuring that the state of the Stacks network is recorded with each new Bitcoin block, making it impossible to alter the network's history without changing Bitcoin's history.
Moreover, stackers can oversee miner behavior and decide whether to add blocks to the chain, thereby enhancing the security of the Stacks network.
By providing a fast and more versatile infrastructure, the Nakamoto upgrade equips Stacks with everything needed for sBTC, supporting popular DeFi and Web3 on the Bitcoin layer.
What’s Next for sBTC?
The introduction of sBTC will emphasize that Bitcoin is more than just a store of value. sBTC is built as a decentralized and secure digital asset that will expand the functionality of BTC.
In addition to launching on Stacks, sBTC will also be available on the Aptos Network and Solana, further enhancing Bitcoin's role in the evolving cross-chain DeFi ecosystem.
With sBTC, builders can fully leverage Bitcoin's potential as a fully programmable asset, paving the way for the creation of Bitcoin-supported DeFi, non-fungible tokens (NFTs), and more.
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