Have you heard of the “Bitcoin Script Problem”? Simply put, it’s rooted in Bitcoin’s limited programmability. This limitation is why we don’t see the same DeFi applications on Bitcoin that are flourishing on other chains. However, a fully functioning decentralized economy requires users to swap, lend, and earn yields on their assets.

This limited programmability led to the emergence of blockchains like Ethereum, which offer more Web3 features 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 billions of dollars in losses.

We need a solution that leverages Bitcoin beyond its foundational layer. This article explains why Web3 needs Bitcoin and introduces sBTC—a non-custodial, pegged Bitcoin mechanism that can become a key pillar in decentralized finance.

Why Bitcoin for Web3?

The Bitcoin blockchain, with 15 years of use and no breaches or hacks, maintains over $1.2 trillion in network value—four times Ethereum’s. Web3 needs the decentralization, security, and durability that only Bitcoin can provide.

Decentralization

Bitcoin’s governance rests with its holders, miners, node operators, and other network participants, encoded in its protocol’s rules. This decentralization is evident when the Bitcoin community resists changes to the protocol.

In contrast, Ethereum’s governance is relatively centralized, with influential entities, including a charismatic co-founder, holding sway over the blockchain and monetary policy. This centralization allows for experimental flexibility, such as reversing settled transactions, but also undermines the security and durability essential for establishing trust in a public economic system.

Security

Ethereum recently shifted from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism to enhance scalability. However, PoS presents several core security risks.

In PoS, token holders also validate the chain, concentrating decision-making power and financial rewards among the wealthiest participants and relying on internal, rather than external, metrics of wealth. This structure risks further centralization as major holders are incentivized to act in their favor, with the long-term consequences still unknown.

By contrast, Bitcoin’s PoW mechanism relies on external resources to verify blocks and rewards honest validators. It offers a secure, tamper-resistant, and decentralized settlement layer, valuable for a broad range of applications.

Durability

Bitcoin’s storied history and resistance to change make it stable and reliable. Ethereum’s experimental nature and frequent rule changes compromise its reliability. The intertwined nature of Ethereum’s settlement and smart contract functionality poses security challenges, while Bitcoin’s minimalist, pure settlement layer is seen as untouchable, fostering stability.

Bitcoin was designed to be the foundational layer for high-value settlements. Now is the time to add layers that enable the robust, expressive smart contracts required for DeFi applications.

Stacks Bitcoin Layers

The “Layer” provides scalable Web3 solutions.

We have already witnessed how Ethereum layers have brought about an entire ecosystem of decentralized applications, attracting more capital and market value. Introducing layers for Bitcoin will similarly drive innovation and sustained growth.

Currently, the leading Web3 project on Bitcoin is Stacks, launched in January 2021. Stacks extends Bitcoin’s functionality by leveraging its security as an anchoring base layer without altering Bitcoin itself to enable smart contract functionality and support the development of decentralized finance (DeFi) and other Bitcoin-powered Web3 applications.

Proof of Transfer (PoX)

By using a unique consensus mechanism known as 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 includes a built-in BTC price oracle: Stacks miners spend BTC to mine STX. This expenditure is a reliable on-chain proxy for the BTC-to-STX price.

This enables advanced smart contracts powered by Bitcoin’s security, capital, and network capabilities—without making any modifications to Bitcoin itself.

Clear Language

Stacks utilizes the Clarity smart contract language, which is decidable and human-readable. Unlike Ethereum’s Turing-complete language, Clarity provides developers with a secure method to build complex smart contracts on Bitcoin. Ethereum’s Turing-complete language cannot be formally verified and may lead to undetected vulnerabilities.

Speed

Once the Nakamoto upgrade is completed, Stacks will receive a speed upgrade (with block confirmation times reduced to as low as 5 seconds) to help scale Bitcoin. A potential unlock will be lightning-fast payments on the Stacks layer, benefiting from Bitcoin’s finality. Additional layers built on top of Stacks, called “subnets,” can further enhance speed and scalability, enabling lightning-fast payments with Bitcoin’s finality.

sBTC: The Web3 Holy Grail for Bitcoin

Despite significant progress made by Stacks, it has yet to achieve a fully trustless mechanism for transferring BTC in and out of smart contracts. For nearly a decade, this has been the elusive “Holy Grail” problem for Bitcoin.

sBTC is an uncollateralized, Bitcoin-backed asset with 100% Bitcoin finality. It will soon be available on the Stacks Bitcoin layer, enabling smart contracts on Bitcoin. This development sets the stage for DeFi, NFTs, and DAOs fully running on Bitcoin, with Stacks serving as the invisible smart contract layer.

How Does sBTC Work?

sBTC operates through a synthetic asset model built on Stacks. To obtain sBTC, users must exchange their BTC for sBTC via smart contracts on the Stacks network, without relying on centralized entities.

This is made possible by the PoX consensus mechanism, which is connected to Bitcoin and facilitates the novel, trustless peg design of sBTC. Additionally, since sBTC is a 1:1 Bitcoin-backed asset, sBTC holders can represent their BTC holdings on the Stacks network as sBTC.

This synthetic representation allows users to engage in DeFi activities such as lending or trading, while retaining ownership and yield from their underlying Bitcoin. Furthermore, there are no fees for converting between BTC and sBTC, aside from Bitcoin transaction fees.

For those seeking full programmability, sBTC is the closest to native BTC in terms of functionality. It offers all the benefits of Wrapped Bitcoin (wBTC) without its drawbacks. There’s no need to trust a custodian to back the wrapped tokens with a 1:1 ratio to real Bitcoin, as is the case with wBTC.

Here is a a quick breakdown of the pegging mechanism: security, decentralization, and usability

Pegging In

First, users convert native BTC into sBTC 1:1 on Stacks by sending their BTC to a native Bitcoin wallet. This wallet is controlled by a decentralized group called “stackers,” who lock STX tokens in Stacks’ PoX consensus mechanism. Through BTC rewards, stackers are economically incentivized to facilitate the peg-in/peg-out process, thus managing the locking of capital and rewards earned from their participation.

These rewards provide strong economic incentives for stackers to engage in the peg-in/peg-out process without additional pegging fees. sBTC is then minted on the Stacks layer, still backed by Bitcoin (as Stacks adheres to Bitcoin’s finality).

Source: sBTC White Paper

Pegging Out

To peg out and redeem native BTC, users must send a request to the stackers, who will process the request in the same manner as a BTC transaction.

Then, over 70% of the stackers must collectively sign to burn the 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 White Paper

sBTC Upholds the Spirit of Bitcoin

The spirit of Bitcoin has always been about 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 and includes contributions from computer scientists at Princeton University, developers of the Stacks layer, and anonymous contributors.

In 2022, the failures of centralized entities such as FTX, Genesis, and Voyager resulted in over $2 trillion in user losses. These failures underscore the importance of reiterating Bitcoin’s core principle: creating a truly decentralized and transparent system.

sBTC is built on these foundational principles and addresses the “Bitcoin write problem,” ushering in a new era for 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 allows Bitcoin holders to retain ownership of their BTC and benefit from Bitcoin’s security, while also gaining access to the growing Bitcoin DeFi ecosystem.

Will Stackers Misbehave?

sBTC is trust-minimized and incentive-compatible, with these attributes mirroring the security of Bitcoin itself. The stacker group receives BTC rewards for processing sBTC transactions.

Additionally, the threshold wallet is based on a 70% threshold. This means that over 70% of stackers would have to collude in an economically unreasonable manner to attempt an attack. As long as at least 30% of stackers remain honest, no malicious pegging will occur.

Furthermore, there is a recovery mode where BTC rewards are used to fulfill the pegging request. As a result, native BTC will never be “stuck.” The process is also entirely transparent, allowing anyone to see the amount of BTC 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 50%. If this ratio is reached, pegging services will be suspended until the ratio is restored. This ensures that incentive compatibility is maintained, even if the price of STX drops significantly relative to BTC.

What is the Stacks Nakamoto Upgrade?

The Stacks Nakamoto Upgrade is a hard fork of the Stacks Bitcoin layer. It is designed to unleash Bitcoin’s full potential by increasing block creation speed, addressing Maximum Extractable Value (MEV) vulnerabilities, and improving the transaction finality of 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, ensuring transactions are irreversible. Additionally, stackers monitor miner behavior and ultimately decide whether to include blocks in the chain.
• MEV Protection: The upgrade ensures rewards are distributed fairly and protects against MEV manipulation. MEV profits from reordering unconfirmed transactions.

With this update, Stacks becomes 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 that enable trustless transfer of BTC to sBTC on Stacks through a pegging mechanism managed by a decentralized group of sBTC signers. This clears the path for the launch of sBTC.

sBTC signers are stackers who lock the BTC sent to them into a multi-signature wallet, mint sBTC on Stacks, and send it to the user.

The upgrade also enhances the transaction speed on the Stacks network, reducing settlement times from minutes to seconds. This allows for faster and more efficient deployment of sBTC on DeFi protocols on Stacks.

Moreover, the upgrade introduces an improved PoX consensus model that ties Stacks’ history to Bitcoin’s. Thus, it ensures that the state of the Stacks network is recorded with each new Bitcoin block. This makes it impossible to alter the network’s history without changing Bitcoin’s.

Additionally, stackers can oversee miner behavior and decide whether to add blocks to the chain, further enhancing the security of the Stacks network.

By providing faster and more versatile infrastructure, the Nakamoto upgrade offers sBTC all Stacks needed to support popular Bitcoin-based DeFi and Web3 applications.

What’s Next for sBTC?

The introduction of sBTC will emphasize that Bitcoin is more than just a store of value. Built as a decentralized and secure digital asset, sBTC expands the functionality of BTC.

Beyond launching on Stacks, sBTC will also be deployed on the Aptos Network and Solana, This will further enhance Bitcoin’s role in the ever-evolving cross-chain DeFi ecosystem.

With sBTC, builders can fully unlock Bitcoin’s potential as a programmable asset, paving the way for the creation of Bitcoin-backed DeFi, NFTs, and more.

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