No native support for programmable applications

DeFi protocols don’t depend on centralized intermediaries; instead, they run on programmable smart contracts for executing financial transactions. However, the Bitcoin chain has limited programmability and doesn’t support smart contracts, so it’s difficult for developers to build direct on-chain applications.

Stacks solves the problem by providing smart contract programmability for complex financial transactions on the Bitcoin chain.

Stacks uses the Clarity programming language for its smart contracts that help developers build Bitcoin-compatible DeFi apps. The Clarity-based contracts can directly interact with Bitcoin’s on-chain data and seamlessly process BTC transactions.

Therefore, Stacks enables DeFi apps to simultaneously leverage the security of the decentralized Bitcoin network and unlock the value of BTC assets.

Slow transaction speeds

In traditional finance, customers are accustomed to almost instantaneous transaction settlements using banking services. If DeFi apps are to become mainstream, they must execute transactions faster.

Bitcoin DeFi suffers from slow transaction speeds that affect a user’s app experience. Moreover, transaction delays can negatively impact users when they trade on a crypto exchange, especially during high market volatility.

The Stacks network introduced microblocks to improve transaction speeds for Bitcoin DeFi apps. The microblocks receive transactions from the mempool and validate them before updating on the Bitcoin chain.

However, Stacks couldn’t guarantee proper transaction storage in the microblocks, and new miners could remove recently confirmed transactions. The Nakamoto upgrade aims to resolve the problem through an indexed block hash, the first block hash of the previous Stack miner.

With Nakamoto, miners can add the indexed block hash to the Bitcoin chain during the block commit transaction. Thus, the Nakamoto upgrade ensures faster DeFi transactions by facilitating smoother data synchronization between Stacks and Bitcoin.

Delayed block finality

Block finality refers to the process when Bitcoin DeFi transactions become finalized and irreversible on the Bitcoin blockchain. Changing transaction history after achieving Bitcoin finality is difficult as it requires huge computational power and economic resources.

For Bitcoin DeFi apps, quick block finality is necessary to ensure the transaction settlement is final and unchangeable. However, Bitcoin suffers from slow block confirmation time, which affects DeFi’s performance.

The original Stacks design faced a similar problem with a slow block time of around 10 minutes. Stacks was slow because its block production rate was fixed to the Bitcoin block production in a 1:1 ratio.

However, the Stacks Nakamoto upgrade reduces block production time to around 5 seconds by de-coupling the Stacks and Bitcoin’s block production. Post-Nakamoto Stacks achieves 100% Bitcoin finality much faster through tenure-based block production.

Each Bitcoin block begins a new tenure where a single miner can mine several Stacks blocks instead of just one block. The tenure-based mechanism speeds up block finality, thereby helping DeFi apps achieve faster transaction settlements on Bitcoin.

Lack of scalability

Most blockchains, including Bitcoin, suffer from the blockchain trilemma, where they can’t do justice to all three elements of blockchain security: decentralization, security, and scalability. For Bitcoin, the network remains highly secure and decentralized but lacks scalability.

A surge in user activity leads to network congestion and high network latency, resulting in slow transaction confirmation time. However, Bitcoin DeFi apps must handle a large volume of transactions without compromising on speed and efficiency.

Stacks address the scalability challenges by increasing transaction throughput and reducing processing time. The Nakamoto upgrade further bolsters Stacks with enhanced scalability to address Bitcoin DeFi’s rising demand.

No composability

DeFi apps must be composable for optimum fund usage and seamless asset transfers. Composability refers to the DeFi app’s characteristics by which digital assets can interact with multiple protocols for diverse use cases.

Since Bitcoin cannot do much beyond peer-to-peer transactions, DeFi operations become difficult. Thus, L2s like Stacks make DeFi apps composable so developers can build any protocol by leveraging the BTC assets.

The Stacks Nakamoto upgrade enhances Bitcoin DeFi’s composability by encouraging developers to develop apps using the human-readable Clarity programming language. These DeFi apps, like a lending protocol or an automated market maker, make BTC transactions easier across different apps.