Throughout history, Bitcoin has been regarded as both an online currency and a way of storing value. By contrast to other blockchain systems (e.g., Ethereum), Bitcoin was never created to serve as a platform for large ecosystems of tokens/ decentralized applications. At the beginning of 2023, however, this changed when the BRC-20 token standard was released. Recently, a new type of fungible token has been introduced into the market – the BRC-20 Token. The BRC-20 Token uses Ordinals Protocol to be created and traded on the Bitcoin blockchain. The launch of BRC-20 Token has created excitement amongst cryptocurrency investors because many see this to be a game-changing utility for Bitcoin. The BRC-20 Token remains an experimental investment, however, it continues to be a item of interest for investors and blockchain enthusiasts alike that are looking for insight into what lies ahead for Bitcoin.
What Are BRC-20 Tokens?
In March 2023, Domo introduced a new token standard, the BRC20, which enables developers to create and share assets through the blockchain of bitcoin in an interoperable format.
Ethereum’s most popular fungible token standard, ERC-20, used Smart Contracts to mint and transfer fungible tokens. BRC-20 does not rely on Smart Contracts; instead, it stores location-based token transactions in a method not on the chain (off-chain).
To create fungible tokens, BRC-20 uses a unique JSON inscription (metadata) on each satoshi (the smallest Bitcoin denomination). By doing this, the BRC-20 implementation does not affect the current, past, or future protocol of Bitcoin. In effect, the BRC-20 token standard provides an innovative means by which to add further functionality to Bitcoin’s ecosystem beyond simple monetary transactions.
How Ordinals Make BRC-20 Possible
BRC-20 tokens use the Ordinals protocol as their base. Ordinals enable each satoshi (the smallest unit of a bitcoin) to have more than just an address — they can now have extra information attached like text or images. This allowed for NFT-like features to now exist on bitcoin and added an entirely new method of saving data on the blockchain.
BRC-20 tokens extend this idea of using text-based inscriptions rather than images or artwork (like the ordinals NFTs). Instead of using an image to define what the token is, the BRC-20 token uses the text contained in an inscription to define its properties and log things like when it was deployed/minted and how many times it has been transferred.
In other words, the BRC-20 ecosystem would not be possible without the ability to write (inscribe) data into satoshis using the ordinals protocol as a foundation.
How BRC-20 Tokens Work
When a developer creates a token, they do so by using an inscription in JSON format.Token information is found on the inscription (name, total quantity of token and how it was created). Once created (by the developer) users can mint their tokens created by following developer rules.
Inscriptions allow users to transfer their minted tokens via transactions recorded on the Bitcoin blockchain. All Ethereum transactions track balances with smart contracts. Since BRC-20 token management relies on inscription data on the Bitcoin blockchain, external software and indexers are needed to analyse and understand the inscriptions to identify who owns the BRC-20 Tokens. While the BRC-20 Token system is not nearly as sophisticated as the Ethereum Smart Contract system, it is still possible to create a system of BRC-20 Tokens on Bitcoin and not require major changes to the Bitcoin Protocol.
BRC-20 vs ERC-20
Even though the BRC-20 protocol is an adaptation of Ethereum’s ERC-20 standard, it has many differences compared to the ERC-20 standard. ERC-20 provides a way to establish relationships between two theoretical token systems through the use of smart contracts to create tokens, facilitate the transfer of tokens, and allow for the creation of decentralized applications (dApps) using these tokens.
Unlike ERC-20 tokens, BRC-20 tokens are more of a bare bones structure because they lack smart contract capabilities and, therefore, their balances must be tracked using third-party indexers. BRC-20 Tokens are currently less sophisticated than Ethereum-based tokens. Nonetheless, as a new method of creating tokens directly on the Bitcoin blockchain, BRC-20 provides an important alternative to creating tokens using external additional layers or sidechains.
Advantages of BRC-20 Tokens
The BRC-20 token standard opens up a whole new world of use cases for Bitcoin beyond simple payments or long-term storage. Developers can create digital assets using this standard, while still utilizing the security and decentralized nature of Bitcoin. Because Bitcoin has the largest network of miners—that is, those who validate transactions and add them to the blockchain—it is widely accepted as the most secure blockchain network. Therefore, BRC-20 tokens may also benefit from the enhanced security due to being built on top of a very large and secure blockchain.
The BRC-20 token standard has also stimulated a resurgence of innovation within the Bitcoin ecosystem. There are many developers today who have worked on other blockchains but are now looking to create tokens on the Bitcoin network. This has generated a great deal of new activity around the Bitcoin blockchain, and shows that Bitcoin can do much more than simply conduct financial transactions.
Challenges and Criticisms
While there is much excitement around BRC-20, there are some limitations in addition to various criticisms about how the standard can contribute to higher transactional fees and slower processing times due to network congestion. Currently, as users continue to create and transfer inscriptions, the Bitcoin blockchain continues to become more congested. In addition to higher transaction costs and longer transaction times resulting from congestion, there are many challenges associated with BRC-20’s use of non-native indexing as a means of establishing its value while lacking the same level of flexibility that other competing token standards offer through the use of native smart contracts. Lastly, it has been noted that much of the current enthusiasm surrounding BRC-20 is being fueled predominantly by speculation rather than concrete use cases. In order for BRC-20 to build a sustainable base of users that are willing to continue supporting their products over time, developers will need to prove that these tokens can provide true, authentic, functional value to their holders through actual use cases.
Popular BRC-20 Tokens
Since the establishment of the BRC-20 standard, numerous tokens under this designation have been introduced. The most well-known of these is ORDI (the first BRC-20 token) but there are other examples like SATS and RATS that have attracted attention from both traders and investors.
These rapidly growing assets exemplify the level of interest in Bitcoin-based tokens (the BRC-20 standard), although because of the high degree of speculation involved, the prices for many of these tokens can be very volatile. People looking to invest into a BRC-20 project should carry out their due diligence prior to making an investment.
