Stacks (“STX”) is a decentralized network that supports smart contract programmability. It is a Layer 2 (“L2”) to Bitcoin because transaction finality and security of Stacks is tied to the Bitcoin network.

Thesis Summary

• Using Bitcoin as a base layer for a smart contract platform has the potential to create a lot of value

  • DeFi summer was a major unlock for ETH and remains the primary area of PMF

  • There is clearly demand for BTC-collateralized yield based on the growth of CeFi (BlockFi, Celsius) last cycle

• Stacks is the best positioned to capture the opportunity to be Bitcoin’s smart contract layer

  • There is no competitor that is live, outside of payments (Lightning Network, which has many issues of its own)

  • There are many BTC L2 competitors being funded, but none will have a functional product for at least the next 6-12 months

• Why now?

  • Bitcoin’s mindshare is at a peak because of a unique confluence of multiple factors

    • Ordinal and Rune inscription activity driving increased attention to innovation on Bitcoin

    • Bitcoin spot ETF launch this past January

    • April halving, now only weeks away

    • Price action - Bitcoin has led the crypto market in 2023 and 2024 YTD

  • The Bitcoin community is culturally open to L2s now

    • Bitcoin needs transaction fees to scale in order to pay for security long-term, a security problem that becomes increasingly pertinent with each halving

    • Stacks and other L2s are the only viable way forward other than creating tail emissions (which would be a death knell)

  • STX fundamentals are strong and set to accelerate with the Nakamoto upgrade (full rollout roughly May 9th)

    • Transactions and user trends are up and to the right over last few months

    • Nakamoto upgrade enables >100x faster transaction speeds, making this an actual usable product (current UX is bad, straight up)

    • If people are already tripping over themselves trying to use the chain in its current state today - imagine what happens when the chain actually becomes performant?

• Valuation and upside potential

  • $4.5bn circ. market cap is roughly ~250x Mkt Cap / Fees (T28D Ann.)

    • Discount to L1/L2 peer median ~750x Market Cap / Fees and ETH L2s at 170x-490x

  • ~170-240% near-term upside to $7-9 post Nakamoto upgrade (in May)

    • Fundamental case: $7 PT or $10bn FDV

      • Transactions should conservatively 5x post Nakamoto (100x increase in throughput)

      • $80mm fees x 125x (ARB multiple, low-end of all peers) = $10bn FDV

    • Relative valuation case: $8.60 PT implies 1.0% of BTC market cap vs current 40bps

  • 10x bull case upside based on peer AVP

    • OP and ARB are each ~3% of ETH market cap

    • If STX can capture as much value of its base layer BTC as OP and ARB have of their ETH base layer, it would be >900% upside

      • Mega bull case is >25x upside: STX is the ONLY L2, so in theory it could be the sum of all ETH L2s or >8% of base layer market cap

• Two key misunderstanding:

  • TAM: Bitcoin historically hasn’t been anything except store of value

    • Counter: The advent of Ordinals and continued STX activity proves that may not be true

  • Tech: Stacks is basically an unusable chain today

    • Counter: the Nakamoto release makes it on par with other modern blockchains (effectively a “mainnet” launch moment)

• Key risks / concerns

  • Technology: there is still some implementation risk around Nakamoto and SBTC

  • Competition: there are other live “Bitcoin L2s” (e.g. MerlinChain, CoreDAO), and even though all of them are vaporware they can take attention and liquidity away from STX; there are many real venture-backed Bitcoin L2s coming to market over next 6-12mths

  • Relative valuation framework is compelling, but it’s possible convergence happens with ETH L2s re-rating lower rather than Bitcoin L2s rerating higher

Exhibit: Stacks KPIs

Exhibit: Peer Comps

Exhibit: Stacks Relative Valuation