What Is Stacks (STX) and How Does It Work?

• Stacks is an open-source layer-1 blockchain that launched in 2021. It links each block to Bitcoin using a system called Proof of Transfer. This setup allows developers to create smart contracts, DeFi apps, and NFTs while relying on Bitcoin’s security.

• STX is the main token used on the Stacks network. People use it to pay transaction fees, earn stacking rewards, and take part in the network’s governance.

Stacks miners send Bitcoin to predefined addresses. Each BTC spend secures the corresponding Stacks block and records its hash on the Bitcoin chain for immutable settlement. Smart contracts run in the Clarity language, which is readable on-chain, enabling predictable execution.

What makes Stacks unique?

• PoX links Stacks economic security to Bitcoin proof‑of‑work without altering Bitcoin code

• Clarity contracts are deterministic and avoid hidden execution paths

• Two-week stacking cycles distribute Bitcoin rewards to STX holders who lock tokens

• Upcoming sBTC two‑way peg aims to move Bitcoin into Stacks apps without custodians

Network value flows from Bitcoin-level security, BTC yield paid to stackers, and a growing list of decentralized apps that use STX for gas and collateral.

Stacks key features

• Proof of Transfer consensus with BTC expenditures

• Clarity smart contracts audited on-chain

• Stacking that pays about 6% annual BTC yield as of July 2025

• sBTC development for trust‑minimized Bitcoin liquidity

• Active DApp catalog that includes lending, perpetual trading, and NFT marketplaces

Pros

• Security anchored to Bitcoin

• BTC income for STX holders through stacking

• Clear regulatory history via SEC-qualified Reg A offering

• Predictable Clarity language reduces contract risk

Cons

• Ten-minute Bitcoin blocks limit throughput

• Ecosystem size is smaller than EVM networks

• Success depends on safe rollout of sBTC bridge

• STX is considered a security in New York State, which restricts some platforms

STX pays gas fees to run contracts, is locked for stacking to secure the chain and earn BTC, and provides governance voting on protocol upgrades and treasury grants.

• Hard cap 1,818 million STX

• Approximately 1,460 million are in circulation in July 2025

• Mining issuance halves every four years in sync with Bitcoin halvings

• 70 million STX set aside for developer grants and ecosystem incentives

1. Create an account on Coinbase, Kraken, or Binance and complete identity verification.

2. Deposit USD, BTC, or USDT.

3. Enter a market or limit order for STX.

4. Withdraw STX to Hiro Wallet, Leather, or a Ledger hardware device for added security.

Yes, Stacks is potentially one way to earn passive income with crypto. You can earn passive income by stacking your STX. Lock at least 100,000 STX yourself or join an exchange or pooling service; pooling lets smaller holders combine balances without creating a separate taxable event. Locked tokens support PoX consensus, and you receive BTC twice per two‑week cycle.

Current rewards average about 6% annualized (as of July 2025). Each BTC payout is ordinary income on the day it hits your wallet, while the later sale or swap of that BTC is a separate capital‑gains event.

• Buying STX is not taxable in the US

• Selling or swapping STX creates a capital gain or loss based on holding period

• BTC earned from stacking is ordinary income on the date received; record the USD value and later apply capital‑gains rules when you dispose of that BTC

• Transaction fees paid in STX increase cost basis for investors and are deductible for qualifying crypto businesses

• Keep detailed records of stacking cycles, reward deposits, and STX cost basis. At TokenTax, we help you by automating this process