On the 14th of December 2022, Muneeb Ali, the co-founder of Stacks, announced on Twitter the release of papers detailing a new trustless two-way peg for BTC layer 1 that allows the use of BTC in DeFi and Web apps.
NEW: we’re releasing two papers that enable trustless movement of BTC in/out of Bitcoin layers; unlocking the full potential of Bitcoin in DeFi & web apps.
A trustless two-way Bitcoin peg has been a holy grail problem for a decade.
— muneeb.btc (@muneeb) December 14, 2022
The papers are by three different groups and have no named authors. The project aims to create a trustless two-way peg that allows smart contracts to communicate with layer 1 of Bitcoin’s blockchain without wrapping the assets.
Previously, the slow nature of BTC, seen as a scalability problem, is shown in this paper as a positive. There’s also no fork risk associated with this project. This means that as the components of the BTC layer 1 change, the components of the Stacks two-way peg changes consistently with the BTC fork without the need for any intervention.
How would the Stacks two-way peg work?
It uses a smart contract that would lock the BTC assets on the Layer 1 chain 1:1 and release an equivalent sBTC on the stack layer, allowing the user to conduct needed transactions. Upon the conclusion, and the user wants to retrieve his BTC, the contract takes the amount of sBTC that the user aims to unlock and burns it forever, releasing the BTC on the layer1 chain.
This means that the user is not afraid of changes in value. The project is open-sourced and decentralized, it has an on-chain oracle, and it utilizes the security mechanisms of the Layer 1 chain. It is censorship resistant and commercially viable.
The Stacks layer operates using a proof of transfer protocol that leverages the Proof of work used by BTC and provides appropriate economic incentives for participants of the chain. Thus, faithfully maintaining the peg is the more profitable course of action.
A trustless peg like Stacks allows BTC holders to fully utilize their assets without the risk of transferring them to centralized establishments. It can also be deployed on decentralized applications similar to wrapped BTC on Ethereum.
Bitcoin is the best-decentralized chain optimized with simplicity at the base layer. These features allow other projects to build side chains and harness the high security and millions of assets to build projects like RSK and Stacks.
The proposed Stacks project opens the avenue for millions of dollars worth of wrapped BTC to come back to its native chain whiles providing the same level of utility.