A blockchain is nothing if not secure. The network participants must ensure that fraudulent transactions do not get added to a block and the blockchain remains immutable. Now, the method of keeping the network secure depends on the consensus mechanism it uses.
Ethereum, for instance, uses the Proof-of-Stake (PoS) mechanism. In PoS, network participants have to take part in something called ‘staking.’ In simple terms, staking refers to users locking up their assets and receiving rewards for their effort to keep the blockchain secure.
Now, Stacks is not a typical PoS network. It uses a unique consensus mechanism called Proof-of-Transfer (PoX). Simply put, PoX is a variation of the proof-of-burn mechanism, where miners burn cryptocurrency to validate transactions. With PoX, however, things are a little different.
Keeping with its unique architecture, Stacks calls staking on the network, ‘Stacking.’ Before we dive deeper into how Stacking works and how it differs from other staking mechanisms, let’s briefly understand how staking usually works.
How Does Staking Usually Work?
Let’s take the example of Ethereum, a PoS blockchain. As an ETH holder, you could ‘stake’ or lock up your ETH, either directly, or through a staking pool. Staking pools combine the assets of several investors or ‘stakers.’ Staking means that you or your staking pool run a validator node. That means your or the staking pool’s job is to ensure that only valid transactions are added to the Ethereum network and ensure fraudulent transactions are discarded. Now, for your effort — running a node is not easy — you would receive rewards in the form of staked ETH (stETH).
It is important to note that staking is not an investment product that allows users to earn yield. Rather, it is a crucial mechanism that keeps the blockchain running safely. The rewards generated are essentially rewards that you receive for helping keep the network secure.
Now that you understand the basic concept of staking, let’s look at how it’s different from ‘Stacking.’
How is Stacking Different?
There are essentially two parts to understanding what makes Stacking unique. First is Stacks’ unique consensus mechanism and second is the resulting Stacking rewards system.
Decoding PoX
In PoX, you have three main network participants — the miners, the signers, and the stackers. The Nakamoto upgrade, however, has combined the role of stackers and signers, leaving only two main participants.
Stacks miners bid for a chance to mine a Stacks block, or in other words, write the next block. They bid using the base cryptocurrency, in this case, BTC. In a Proof-of-Burn consensus mechanism, the miners would have burned the BTC. But in PoX, the miners send the BTC to ‘stackers,’ who lock up or ‘stack’ STX, Stacks’ native token. In other words, the BTC, instead of being burned, is sent to the stackers.
The winning miner is selected using a weighted random function. This means that the higher the amount of BTC the miners transfer, the higher their likelihood of getting selected.
The winning miner or block leader commits a block to the Stacks blockchain and receives newly minted STX, transaction fees, and smart contract fees. As signers, stackers act as the watchdog. They ensure that the blocks are valid and process transactions from Stacks to the Bitcoin network.
As Muneeb Ali, CEO of Trust Machines and co-creator of Stacks, noted in a recent webinar:
“Miners and signers play crucial roles in maintaining the network’s integrity, with miners bidding in BTC and signers validating blocks and processing BTC withdrawals.”
Receiving BTC via Stacking
Now, the stackers, as mentioned above, are those that lock their STX for one of multiple cycles. Stackers can either directly stack their tokens, or by pooling their assets with other stackers. Now, here comes the twist that makes Stacking unique — the stackers earn rewards in BTC for contributing to the network.
Remember, with normal staking, the asset you lock and the rewards you receive are the same cryptocurrency. For instance, if you stake ETH, you earn more ETH as reward.
With Stacking, however, the stackers provide a BTC address where they can receive the bitcoin. Therefore, despite locking up STX, the stackers earn BTC as rewards — the same BTC that miners transfer in their bid to become a block leader. To put it simply, the BTC that miners use to bid goes to the wallets of the stackers.
As Ali iterated in the webinar, “You earn BTC by locking STX and performing work for the network, which is a unique proposition in the crypto industry.”
Opening New Opportunities For Users With Stacking
Stacks’ groundbreaking PoX consensus mechanism allows stackers to earn BTC by locking up STX. And this is what gives staking on Stacks its unique tincture.
There are two main benefits of the Stacking mechanism. Firstly, STX Stacking does not require expensive hardware or equipment. You can easily do it using the Leather wallet or other STX-compatible wallets.
Secondly, since the rewards are paid in BTC, stackers are likely to unload their BTC rewards rather than sell STX if they wish to liquidate their earnings. This means that the mining and Stacking process does not put any sell pressure on STX itself. In other words, the price of STX is not impacted by the Stacking process.
It bears repeating, however, that the point of Stacking is to secure the Stacks network, which enables faster and cheaper transactions. It’s not about earning rewards. However, with earnings given out in BTC, Stacking can be a way for STX holders to increase their BTC holdings.
