Stacks Unlocked: The Nakamoto Upgrade

Introduction

Bitcoin, the pioneer of blockchains, continues to dominate the crypto space for multiple reasons, including a market cap of over $1 Trillion, unrivaled decentralization, and a vast user base. It has been the number one cryptocurrency from the start, benefiting from significant network effects and a strong brand image.

However, Bitcoin's scripting is nowhere near Ethereum's Turing Complete programming language. Thus, Bitcoin faces notable restrictions that limit the capabilities necessary to support smart contracts, and its Proof of Work consensus mechanism negates users' staking for rewards. Even though many projects might have desired to make Bitcoin fully programmable, its limited scripting language made working with smart contracts in a decentralized fashion difficult, if not impossible, before Stacks came along.

Nakamoto Upgrade is the next big thing for Stacks, which will be the focus of this article.

Introducing Stacks

The hype around Bitcoin Layer 2s and the potential for earning yield in that ecosystem has been building for some time. One of the most successful emerging solutions is Stacks. Stacks is the top Layer 2 on Bitcoin regarding TVL, developer activity, and other vital metrics.

Stacks does not alter Bitcoin's architecture but builds on it, enabling smart contracts and multiple DeFi features while preserving its secure foundation. It launched in 2018 and rewards "Stackers," who lock their STX tokens in the network. This article will not cover Stacks in detail, but you can learn about Stacks in our recent article, which covers its Proof of Transfer (PoX) consensus mechanism, the STX coin, stacking, sBTC, and more.

Stacks faces some limitations in its current version, however, and that's why it's launching its highly anticipated Nakamoto Upgrade.

What Is the Nakamoto Upgrade?

The Nakamoto Upgrade represents a transformative upgrade for Stacks. Its goal is to enhance its Bitcoin integration significantly. The upgrade is named after Bitcoin's creator, Satoshi Nakamoto. It connects Stacks deeply to the Bitcoin network with its founder's name.

For one thing, the Nakamoto Upgrade decouples Stacks block production from Bitcoin block times. Doing so allows for faster transaction processing and greater throughput, creating excellent network responsiveness while supporting a higher volume of transactions. In other words, by decoupling Stacks blocks from Bitcoin blocks, a Stacks miner can produce multiple blocks.

Before Nakamoto, Stacks transactions could only reach full confirmation at the same rate as Bitcoin blocks are produced, which takes approximately 10 minutes. With the Nakamoto release, transactions can settle between five to ten seconds.

So, the Nakamoto Release significantly increases the network's speed by streaming Stacks blocks between Bitcoin blocks instead of waiting out the 10-minute block times associated with Bitcoin. The upgrade amplifies Stacks' capabilities, allowing it to achieve faster block times and quicker Bitcoin finality. Additionally, Stacks transactions will offer 100% Bitcoin finality and become as irreversible as Bitcoin transactions.

Pre-Nakamoto miners were solely responsible for block production. But post-Nakamoto, the responsibility falls to miners and signers/validators like Luganodes.

Miners can propose multiple transactions within the usual 10-minute length of a Bitcoin block. The signers will validate these blocks as they are being proposed. At the end of 10 minutes, the next miner has to hash all the data written up to that point to the Bitcoin chain.

The Nakamoto Release also improves the network's security, efficiency, and UX. By leveraging Bitcoin's robust PoW consensus algorithm while upping transaction speed and reliability on the Stacks network, the release ensures fast and secure operations that are also user-friendly. Other benefits include improved yield for Stackers.

Stacking

"Stacking" refers to locking up STX tokens on the network. By doing so, Stackers help provide security and, in return, earn rewards in the form of Bitcoin yield. Stacking providers like Luganodes make it easy to participate. It's a great way to earn passive income whether you're an individual or institutional investor with significant holdings. Learn more by referring to this guide.

Let’s examine the Nakamoto Upgrade more closely to see how it improves the Stacks protocol.

The Challenges - Forks and Slow Block Times

Some of the challenges Stacks currently faces are potential blockchain forks and slow Bitcoin blocks, which can disrupt on-chain applications.

At present, Stacks can fork separately from Bitcoin. Furthermore, the economic power necessary to facilitate a 51% attack to overpower Stacks miners and rewrite the chain's history is separate from the energy needed to conduct a 51% attack on Bitcoin miners.

That means someone could create their canonical version of the Stacks chain because it's only tied to the Stack security budget, not necessarily the Bitcoin security budget.

Additionally, pre-Nakamoto Upgrade, whenever a block is produced on the Stacks chain, a hash of all of the data included in that Stacks block is written directly to the Bitcoin chain. Therefore, a perpetual history of Stacks transactions is written to the Bitcoin chain, which is why Stacks can be described as being "Bitcoin secured."

That’s fine, the problem, however, is that Stack's blocks are produced in lockstep with Bitcoin blocks. Since Stacks blocks have historically been anchored to Bitcoin blocks, slow block and transaction times are among the biggest problems for Stacks developers and users.

The Nakamoto Upgrade applies some vital changes to how Stacks works to address these challenges.

Upgrading to Fast Blocks

As mentioned, Nakamoto offers significantly faster block times by decoupling Stacks block production from Bitcoin block production. A miner may produce multiple blocks between two subsequent sortitions by separating block production from cryptographic sortitions.

The Stacks docs describe cryptographic sortition as "a process of randomly selecting one or more entities from a set using cryptography. This is a decentralized and verifiable way to select participants for a variety of tasks, such as consensus protocols, lotteries, and auctions."

With Nakamoto, new Stacks blocks are produced roughly every 5 seconds. So, a transaction to be mined within a block will now take seconds instead of 10 minutes. To dig deeper into how this works, let's look at tenure-based block production.

Each Bitcoin block introduces a new tenure, and one miner is cryptographically selected for that tenure. That miner will be responsible for producing all Stacks blocks. So, rather than a Stacks block getting tied to a single Bitcoin block, Bitcoin blocks are tied to a miner's tenure. During the tenure, they can mine several Stacks blocks, which settle in about five seconds.

Stackers also play a security role in this process. Pre-Nakamoto, Stackers were only responsible for locking their STX tokens to help secure the network. However, with this new release, Stackers are accountable for validating each block produced during a miner's tenure.

They agree on the last signed block as part of each tenure change. Stackers also require the next miner to build off of this signed block, preventing new Stack forks. With Nakamoto, Stacks automatically forks with Bitcoin, but not independently.

This design reinforces the validity of transaction data and the synchronization between the Stacks and Bitcoin blockchains. Additionally, it ties the Stackers' actions with the miners' to produce a partnership between the two while ensuring network consistency with fast and secure blocks.

Furthermore, this cooperative relationship between miners and Stackers creates the capability for 100% Bitcoin finality.

Nakamoto and 100% Bitcoin Finality

Finality refers to the point when transactions become irreversible. After a blockchain reaches finality, it is close to impossible for an agent to change its history. To do so would require extraordinary measures that are economically and computationally infeasible.

So, to say that Stacks blocks have 100% Bitcoin finality means that they are as difficult to reverse as Bitcoin transactions themselves, which is a huge boost to Stacks' security. After a transaction is confirmed, reversing it is as difficult as reversing a Bitcoin transaction because the Stacks blockchain no longer forks independently.

100% Bitcoin finality is critical to Stacks' design. It's what turns Stacks into a bonafide Bitcoin Layer-2 solution, allowing it to leverage all of Bitcoin's inherent security.

Bitcoin Miner MEV Resistance

This proposal changes the sortition algorithm to remove any advantages Bitcoin miners may accrue over Stacks miners. Bitcoin miners must spend comparable amounts of BTC to have a chance of earning STX tokens.

sBTC and Programmable Bitcoin

The upgrade following Nakamoto will introduce sBTC, a way to bridge one's BTC holdings to the Stacks blockchain. sBTC is a 1:1 Bitcoin-backed asset. Specifically, sBTC is a two-way peg system that addresses the challenge of trustless interoperability between Bitcoin and Layer-2s. It facilitates Bitcoin transfers onto the Stacks network. In this way, sBTC can used in Stacks' dApps and smart contracts without sacrificing the security that Bitcoin is famous for.

One of Nakamoto's most exciting features is its potential to unlock Bitcoin's programmability with sBTC. Enabling smart contracts to interact with Bitcoin through sBTC will be pivotal for unlocking the hundreds of billions of dollars stored in Bitcoin. This could open up possibilities for developing DeFi projects, NFTs, and other progressive applications that can benefit from leveraging Bitcoin's security and liquidity.

Stacks could direct the flow of Bitcoin capital into a wide range of innovative dApps, bringing unprecedented access to Bitcoin liquidity and spawning a flurry of investment and development across the broader crypto ecosystem.

To sum up, the Nakamoto Upgrade introduces vital features that enhance the utility, scalability, and staking capabilities of the Bitcoin blockchain, transforming it into a programmable layer.

Stacks Testnets

To roll out the Nakamoto Upgrade, Stacks utilizes two testnets: (1) Pre-launch Testnet and (2) Nakamoto Testnet.

The primary users of the Pre-launch Testnet were core developers and some application developers, who used it for audits and testing to fix bugs and tweak performance issues. The Pre-launch Testnet remained until the Nakamoto Testnet launch was completed.

Application developers and Signers primarily used the Nakamoto Testnet. This testnet will be the primary one going forward from the Pre-launch Testnet. Further, it will be maintained in perpetuity alongside the mainnet for developers or partners, starting with Stacks.

Nakamoto Release Process

The release will follow a two-step process, each implemented by a hard fork. By breaking down the Nakamoto Release into two forks, core developers can make any fixes or final adjustments before full activation. This is the same strategy used on the testnet.

Step 1 - Instantiation:

During Instantiation, most of the Nakamoto code is shipped. However, the Nakamoto rules remain inactive. This way, developers can test other aspects of the contract before they're dependent on the layers of complexity that come later with the testnet and mainnet. This phase also allows Signers to register without the network being dependent on them to sign blocks.

Step 2 - Activation:

During this phase, the Nakamoto rules become active. This advent enables the complete set of features to activate, including fast blocks, Bitcoin finality, and Signer-based functions.

These two forks aim to keep this "push button simple" to reduce complexity for all the node operators.

Nakamoto rules make this upgrade different from the previous version (Stacks 2.4). Block validation under Nakamoto requires Signers to sign the blocks to be confirmed as anchor blocks. During Step-1 Instantiation, the Nakamoto Rules remain inactive, so the network will still follow Stacks 2.4 block validation rules.

Once the mainnet reaches the activation phase, the network will switch to running the Nakamoto rules, and all features go live.

Rollout Timeline

1. Pre-Launch Testnet (Instantiated):
   Completed with Nakamoto rules inactive.
2. Pre-Launch Testnet (Activated):
   Reached its final state with Nakamoto rules active.
3. Nakamoto Testnet (Instantiated):
   Active and maintained for ongoing testing, with Signers performing "mock signing."
4. Nakamoto Testnet (Activated):
   Activated on August 19, 2024 with full Nakamoto consensus rules live.
5. Nakamoto Mainnet (Instantiated):
   Instantiationwas completed on April 22, 2024, allowing the onboarding of Signers while keeping Nakamoto rules inactive.
6. Nakamoto Mainnet (Activated): Activated today, August 28, 2024. This marks the final rollout, initiating a few stacking cycles to align all parties and fully enable all features. Starting Epoch 3.0, Nakamoto Rules will be fully enabled.

Mainnet Instantiation

On April 22, 2024, the first of two hard forks went live, marking the Instantiation phase of the Nakamoto Upgrade. This step brought most of the Nakamoto code online, but the Nakamoto rules remained inactive, allowing for thorough testing without the complexity of full activation. Signers could register during this phase without the network relying on them for block validation.

Nakamoto Activates Today

On August 28th, the final code for Nakamoto will be delivered to Signers, Miners, and Node Operators. This delivery includes all the necessary binaries for running the network:

• Steps A & B: Activation Window Opens & Binaries Delivered
  The final code and binaries are provided to all network participants, including Signers, Miners, and Node Operators.

Following this, the network will enter one full Stacking Cycle (Cycle 92, lasting two weeks) to allow Signers to make any necessary final adjustments to their setup:

• Step C: Cycle Handoff - Cycle 92 to Cycle 93
  During Cycle 92, Signers will have time to finalize their configurations. At the end of Cycle 92, core developers will monitor the successful handoff, ensuring a smooth transition between Stacking cycles.

If the handoff is successful during Cycle 93 at Block 861,500, the following step will occur:

• Step D: Determine Hard Fork Block
  Core developers will choose the final hard fork block where all Nakamoto rules will go live.

Finally, once the hard fork block is reached:

• Step E: Epoch 3.0 - Nakamoto Rules Start
  Epoch 3.0 will begin, and Nakamoto rules, including fast blocks and full Bitcoin finality, will be activated.

With the network fully operating under Nakamoto rules, transaction speeds will dramatically improve, and the groundwork will be laid for the upcoming introduction of sBTC. This activation represents a critical milestone in the evolution of the Stacks network, bringing enhanced security, stability, and functionality.

After Activation: sBTC Launch

The sBTC launch is expected approximately two months after today’s Nakamoto Activation, aligning with the end of Q3 2024. With the Nakamoto upgrade now fully live, the sBTC rollout will closely follow, marking another significant achievement for the Stacks ecosystem.

Summary

The Nakamoto Release will provide a significant milestone in the evolution of the Bitcoin and Stacks ecosystems by introducing new smart contract capabilities, unlocking generous amounts of capital, and facilitating a new batch of Bitcoin-based applications, amongst other things.

Beyond the Nakamoto Upgrade, Stacks seeks to enhance further its network's capabilities to usher in an ecosystem of new dApps and services. Future developments also include continuous optimizations to the sBTC mechanism to further integrate its functionality within the Stacks and Bitcoin ecosystems.

The success of the Nakamoto update will ultimately rest on its ability to enhance Bitcoin's functionality without compromising its core principles.

About Luganodes

Luganodes is a world-class, Swiss-operated, non-custodial blockchain infrastructure provider that has rapidly gained recognition in the industry for offering institutional-grade services. It was born out of the Lugano Plan B Program, an initiative driven by Tether and the City of Lugano. Luganodes maintains an exceptional 99.9% uptime with round-the-clock monitoring by SRE experts. With support for 45+ PoS networks, it ranks among the top validators on Polygon, Polkadot, Sui, and Tron. Luganodes prioritizes security and compliance, holding the distinction of being one of the first staking providers to adhere to all SOC 2 Type II, GDPR, and ISO 27001 standards as well as offering Chainproof insurance to institutional clients.