What Are BRC-20 Tokens

BRC-20 tokens are a novel cryptocurrency traded on the Bitcoin Blockchain, drawing inspiration from Ethereum's ERC-20 standard. They utilize a unique protocol called Ordinals, enabling data inscription on Satoshis, Bitcoin's smallest unit.

The anonymous blockchain developer Domo launched it on March 9, 2023. BRC-20 tokens have seen massive growth, reaching a $1.3 billion market cap as of November 2023. They've become a well-known standard on the Binance Smart Chain, significantly impacting Bitcoin transactions and contributing to network congestion.

This rise in BRC-20 adoption has intrigued the blockchain community and marked a crypto breakthrough. This article explains BRC-20 tokens, exploring their nature, functionality, and the reasons behind their widespread acclaim.

Understanding BRC-20 Token Standards

The BRC-20 token standard is an experimental fungible token standard native to the Bitcoin blockchain. It represents a unique token standard type that utilizes Ordinals, a recent innovation within the Bitcoin community. The BRC-20 standard enables the minting and transferring of fungible tokens through the Ordinals protocol on the Bitcoin blockchain.

How BRC-20 Tokens Are Created

To comprehend the creation of BRC-20 tokens, we must understand key components that enable this process, namely Satoshi — the smallest unit of Bitcoin — and ordinals.

A Bitcoin comprises 100 million satoshis, the smallest currency unit on the Bitcoin network. Each satoshi is transferred based on its issuance order, denoted by its ordinal number. The term "ordinals" is coined for this numbering scheme. Ordinals recognize satoshis as individual units and allow them to be annotated with specific information. Traditionally, ordinals exclusively assigned order numbers to satoshis.

A bug in the 2021 Bitcoin Taproot update enabled the attachment of additional data to each Satoshi through the ordinals protocol. Ordinals transform Satoshis into public data carriers, with those containing more publicly available data still suitable for regular use. This development prompted Bitcoin developers to explore applications, resulting in the birth of BRC-20 tokens.

Fungible BRC-20 tokens are generated by applying a JSON (Javascript Object Notation) code to Satoshis using ordinal protocols. The JSON includes executable code fragments for the Bitcoin network and specifies the token's identity, minting limit, and supply, among other details.

Once deployment is finalized, any Bitcoin Ordinals wallet can mint the token and establish a network connection, allowing it to function like any other cryptocurrency. The first fungible token on the Bitcoin blockchain, created with the BRC-20 standard, is ORDI, with a market valuation exceeding $350 million. After the first BRC-20 token was released, Bitcoin wallets immediately extended support. Subsequently, more BRC-20 tokens, predominantly meme tokens, were introduced.

As of May 2023, specific BRC-20 tokens had increased in value, leading to substantial market capitalizations. The increased demand for these tokens caused increased transaction costs, which led to significant network congestion on Bitcoin.

How BRC-20 Tokens Work

Understanding Bitcoin Ordinals is crucial for learning about BRC-20 tokens. Through the Ordinals protocol, developers can 'inscribe' additional data on top of a satoshi by employing a system for numbering the satoshis. Token contracts, token minting, and token transfers in BRC-20 tokens involve using Ordinal inscriptions with JSON (JavaScript Object Notation) data.

The BRC-20 token standard currently allows the creation of a BRC-20 token using the deploy function, minting a specified number of BRC-20 tokens through the mint function, and transferring a designated number of BRC-20 tokens using the transfer function. Despite being a relatively new standard, deploying, minting, and transferring BRC-20 tokens is complex. Challenges include limited tools and support services, adding to the complexity of working with BRC-20 tokens.

Use Cases of BRC-20 Tokens

BRC-20 tokens are versatile with several use cases. Here are some practical applications:

• Decentralized Finance (DeFi): These tokens seamlessly integrate into yield farming, decentralized exchanges, and various lending protocols. BRC-20 tokens could pave the way for a decentralized financial system on the Bitcoin Blockchain. Unlike Bitcoin, BRC-20 tokens are flexible and can be easily adapted into DeFi protocols, expanding their utility.
• Peer-to-Peer Transfers: Using the Bitcoin network, BRC-20 tokens can be transferred among individuals for value exchange. They can move between wallets on the network regardless of location, providing a decentralized digital asset exchange. Transaction fees are charged in Bitcoin, which is as fast and reliable as the Bitcoin network.

Pros of BRC-20 Tokens

The BRC-20 token standard offers numerous advantages. Here are some key benefits:

• Simplicity: Unlike other token standards heavily reliant on smart contracts, BRC-20 tokens operate through a simple tokenization mechanism. This simplicity allows users to mint and transfer BRC-20 tokens without requiring any special technical expertise.
• Security: BRC-20 token standards exhibit exceptional security, leveraging the decentralized nature of the Bitcoin blockchain, the Proof of Work Consensus Mechanism, and algorithmic technologies to ensure their integrity.
• High Compatibility: This allows the BRC-20 token standard to be compatible with the Bitcoin network by using the network’s existing infrastructure, including wallets and exchanges supporting the network. This compatibility facilitates rapid acceptance within the Bitcoin community. Bitcoin ordinals and BRC-20 tokens easily integrate with the Bitcoin blockchain, capitalizing on the network’s robustness and widespread acceptance, contributing to the framework's success.

Cons of BRC-20 Tokens

While the BRC-20 token standard offers numerous advantages and potential applications, it has limitations. Here are a few:

• Absence of smart contract functionality: Unlike other token standards, such as the ERC-20 standard, the BRC-20 standard lacks support for smart contracts. Smart contracts, which are blockchain-based code fragments, enhance the functionality of hosting chains by improving aspects like asset management, automation, transparency, and security. Consequently, the BRC-20 standard's potential in future domains may be constrained by its inability to support smart contracts.
• Dependency on the Bitcoin blockchain: The BRC-20 standard is vulnerable to the network's inherent limitations because it relies on the Bitcoin blockchain. Drawbacks include slow transaction rates and limited scalability. These issues become more pronounced as the BRC-20 blockchain's utility grows and congestion worsens. The increased network fees and transaction processing times on the Bitcoin blockchain may lead to less efficient and economical BRC-20 token transfers.
• Limited Efficacy: Compared to the ERC-20 protocol, the current capabilities of the BRC-20 protocol are somewhat restricted. Users' options are confined to token deployment, minting, and transfer. The BRC-20 standard is unsuitable for tokenizing nonfungible assets or implementing sophisticated token features like conditional transfers or tokenized ownership rights. Its primary focus is on the tokenization of fungible assets.

BRC-20 VS ERC-20

The Ethereum protocol, represented by ERC-20 (Ethereum Request for Comment 20), serves as the model for BRC-20, or Bitcoin Request for Comment 20. Despite sharing similar names, these two tokens exhibit notable differences:

• Network Platforms: While ERC-20 is a standard on the Ethereum network, BRC-20 tokens operate on the Bitcoin network.
• Smart Contract Functionality: BRC-20 coins, unlike ERC-20 tokens, do not employ smart contracts, making them less functional. In contrast, ERC-20 tokens enable various services, including lending and borrowing, through interactions with different protocols and applications.
• Token Standard Status: ERC-20 is a well-established token standard with many developed and in-use tokens. In contrast, BRC-20 is still in the proposal stage and has yet to become an accepted standard. As a result, ERC-20 tokens can be readily exchanged on various platforms.
• Development and Recognition: ERC-20 tokens were introduced in 2015 and officially recognized in 2017, having undergone extensive testing and proven operational stability. In contrast, there is a degree of uncertainty surrounding the future of BRC-20 tokens as they are still in the early stages of development.

The Effect of BRC-20 Tokens on the Blockchain Network

Creating and sending BRC-20 tokens is more challenging and consumes more blockchain space than straightforward peer-to-peer transactions. This is because a BRC-20 token placed on an ordinal inscription (a specific way of embedding BRC-20 tokens within the Bitcoin network) can be up to 4MB. In contrast, a traditional Bitcoin transaction might be measured in kilobytes.

However, the increased complexity of BRC-20 transactions and the concurrent rise in ordinal NFT transactions have imposed additional strain on the Bitcoin network. This strain is evidenced by reports indicating that, on May 8, 2023, the Bitcoin network had over 300,000 transactions pending, causing transaction costs to soar to two-year highs, exceeding $30. The overload has impacted the network's processing speed, influencing overall transaction processing and higher costs.

Five Notable BRC-20 Tokens

The BRC-20 tracking website, ordiscan.com, currently records a remarkable peak of more than 38 million BRC-20 inscriptions (entries or records).

Since its inception, more than 33 million BRC-20 transactions have occurred on the Bitcoin network, resulting in transaction fees totaling more than 1,300 BTC as of November 2023. The thriving BRC-20 ecosystem reflects the increased interest in BRC-20 coins. Here is a list of five BRC-20 tokens performing well on the network:

• MEME: MEME is a memecoin BRC-20 token serving a humorous or cultural purpose. It needs more functional utility beyond entertainment.
• PIZA: This is a BRC-20 token regarded as a "memecoin with no real value or expected financial return but purely for entertainment purposes." It originated from the historic purchase of two Papa John's pizzas in 2010 using 10,000 Bitcoins.
• ORDI: Developed as a crucial component of the Ordinals Protocol, ORDI is one of the original BRC-20 tokens. It facilitates trading in the Ordinals' decentralized digital asset market.
• SATS: SATS is a BRC-20 token designed to simplify microtransactions and allow the blockchain to display smaller Bitcoin units.
• BANK: BANK is a BRC-20 token that aims to leverage the Bitcoin blockchain to provide decentralized financial services, including lending, borrowing, and yield farming.

Conclusion 

The industry's unrelenting progress in blockchain technology, coupled with its growing user base and community, may enhance the utility of the BRC-20 token standard. The future of BRC-20 tokens is subject to the ups and downs of the blockchain industry and the dynamics of the token economy, akin to any technology undergoing evolution. The current frenzy is expected to drive further growth in the usage of the BRC-20 standard.

However, BRC-20 tokens don't have the same track record as their equivalents supported by protocols like the ERC-20 token standard. BRC-20 tokens aren't currently considered investment-ready because the standard is still experimental. Although these tokens are promising and show potential in the context of blockchain-based digital assets, it is important to exercise caution, given their changing status.