How Nakamoto Will Help Build Scalable DeFi Apps

How Nakamoto Will Help Build Scalable DeFi Apps

How Nakamoto Will Help Build Scalable DeFi Apps

Jun 5, 2024

General Wallet Use

5 min

The Bitcoin network has suffered from blockchain trilemma since its inception. While Bitcoin is the preferred blockchain for both security and decentralization, delayed block finality and slower transaction times made the Bitcoin ecosystem difficult to scale. 

However, developers have been working for a long time to make Bitcoin more scalable and offer smart contract functionality for building DeFi apps. This is especially true on Bitcoin L2 networks like Stacks, which is looking to further enhance Bitcoin's scalability through the upcoming Nakamoto upgrade.

Before elaborating on how the Nakamoto upgrade helps developers build scalable DeFi apps, let’s first look at the history of Bitcoin scalability.

A Brief History Of Introducing Scalability To Bitcoin

The Segregated Witness (SegWit) update in July 2017 was one of the first major steps towards making Bitcoin more scalable. It reduced transaction times and increased the block capacity from the 1 MB limit to approximately 4 MB.

The Taproot update in November 2021 was the next significant upgrade, introducing new protocols like Pay-to-Taproot (P2TR). Taproot removed caps on maximum per-transaction data and made transaction signing more efficient, increasing overall network speed.

However, Bitcoin layer 2s that operate on top of the layer 1 network have played the most important role in Bitcoin scalability. These L2s have expanded Bitcoin’s utility by facilitating off-chain transactions, enabling smart contract programmability, and increasing transaction throughput.

One of the foremost Bitcoin L2s, Stacks, launched in 2021, has provided an impetus to the Bitcoin economy by unlocking BTC productivity. 

Stacks & Bitcoin Scalability

The initial iteration of Stacks still needed significant improvements to make Bitcoin truly scalable.

First, Stacks had a slow block finality time because Stacks’ block production was directly linked to Bitcoin in a 1:1 ratio. Since it takes approximately 10 minutes to produce a Bitcoin block, Stacks transactions had a similar confirmation time.

Second, Stacks used microblocks to store unconfirmed transactions from the mempool before validating and writing them to the Bitcoin chain. Although microblocks theoretically improved transaction time, they couldn’t guarantee proper transaction data storage because new miners could remove confirmed transactions.

Third, Stacks was earlier prone to blockchain reorganization or reorgs because it was cheaper to reorganize the latest Stacks blocks. Reorgs occur when validators disagree on a chain’s accuracy and remove blocks, delaying transaction confirmation times.

Thus, Stacks’ earlier version had a high network latency that slowed apps down and affected scalability. However, the Stacks Nakamoto upgrade has addressed the problems and will empower developers to build scalable DeFi apps.

The Nakamoto Upgrade’s Contribution Towards Bitcoin Scalability

The Nakamoto upgrade will grow Bitcoin scalability through a tenure-based block production system that has reduced block production time to approximately 5 seconds. The new mechanism would delink Stacks and Bitcoin’s block production to improve transaction processing time.

In the tenure system, Stacks adopts a cryptography-based sortition procedure that algorithmically selects a new miner to validate transactions and create blocks. Each new Bitcoin block begins a fresh tenure, and a single miner can mine several Stacks blocks instead of just one block within the tenure.

Stackers approve each miner’s block to ensure its validity and mutually agree on the last signed block. Thus, Stackers and miners work together to achieve faster transaction speeds and block production, thereby increasing network scalability.

The other important part of the Nakamoto upgrade is writing Stacks transaction data on the Bitcoin chain with an indexed block hash. An indexed block hash is the first block hash of the previous Stacks miner they mined during their tenure.

Miners add the indexed block hash to the Bitcoin chain during the block commit transaction, offering complete Bitcoin finality. The block hash resolves miner connectivity problems and offers extra security to Stacks transactions.

Finally, Stacks uses a variation of the Assumed Total Commitment With Carryforward (ATC-C) strategy to mitigate the Miner Extractable Value (MEV) problem. The MEV is a manipulative way through which miners can alter transaction orders to make profits.

The Nakamoto upgrade ensures miners participate in the last ten blocks to qualify for cryptographic sortition and reduces extreme bidding behavior. Such methods reward genuine miners and fast-track the block confirmation time for a scalable network.

Scalable Apps Are The Key To Bitcoin DeFi

Bitcoin DeFi apps need to process a huge volume of transactions without compromising on speed and efficiency. These apps must handle user activity surges without affecting transaction confirmation times.

The Stacks Nakamoto upgrade enables developers to build scalable apps for the Bitcoin DeFi ecosystem. Post-Nakamoto Stacks offers a user experience comparable to present-day traditional finance apps.

Connect to DeFi apps built on Bitcoin with the Leather browser extension. Install Leather — the only wallet you will need to tap into the multilayered Bitcoin economy.