As global adoption of Bitcoin continues, new concepts, protocols, and tokens are continually being introduced, each promising to bring fresh perspectives and functionalities to the ecosystem. One such recent development that has captured the attention of the Bitcoin community is the introduction of BRC-20 tokens.

This new token standard, while still in the experimental stage, has already stirred debates among Bitcoiners & has shown its potential to bring substantial change to the Bitcoin network. However, as with any innovation, it also brings new challenges and uncertainties.

In today's BitByte article, we will explore what BRC-20 tokens are, their origins, how they work, their potential benefits, limitations, and their future in the Bitcoin ecosystem. As we delve into these controversial tokens, we will help you understand their role and the impact they may have on Bitcoin.

What are BRC-20 Tokens and What Do They Do for Bitcoin?

Bitcoin's BRC-20 tokens, a recent innovation of the Ordinals Protocol, have been creating a buzz in the Bitcoin space. Despite their simplicity, they've managed to achieve a total market capitalization of over $1 billion. BRC-20 tokens have come into existence through an experimental token standard that has allowed the deployment, minting, and transfer of fungible tokens on the Bitcoin blockchain.

Ordinal of a dog inscribed onto a satoshi / Ordinals

The Origin of BRC-20 Tokens

The genesis of BRC-20 tokens can be traced back to the Ordinals Protocol, which was designed to tag and number satoshis, the smallest unit of Bitcoin. The protocol introduced a new era of Bitcoin NFTs by adding extra data to the satoshis, thereby making them unique.

On March 8, 2023, a Bitcoin NFT holder named Domo launched the experimental token standard, BRC-20, for Bitcoin. The idea was to use the Bitcoin base layer to create inscription-powered tokens, otherwise known as BRC-20 tokens. This involved inscribing some JSON data onto a satoshi, facilitating the minting of new BRC-20 tokens.

How BRC-20 Tokens Work

BRC-20 tokens are straightforward in their operation. Unlike ERC-20 tokens, which rely on smart contracts for their functionality, BRC-20 tokens use a text-based script file stored on a satoshi, which is then parsed by BRC-20 compatible wallets for deployment, minting, and transfer.

BRC-20 token mint function flow / Gitbook

There are three main aspects to BRC-20 tokens:

  1. Creating or deploying the token
  2. Minting or generating new tokens
  3. Transferring tokens based on buying and selling requirements

Every BRC-20 token adheres to these three aspects, driven by the JSON script. The difference in fungibility between a BRC-20 token and a standard non-fungible Ordinal is what makes BRC-20 tokens functional and potentially useful for trading.

The process of deploying, minting, and transferring a BRC-20 token is enabled through the use of an inscription in the form of a JSON script. Once the token is created and its traits assigned, the process of minting can begin. Every step of this process is an inscription and qualifies as a transaction, which has led to a significant increase in network transactions and, in some cases, network congestion.

BRC-20 token transfer function: Gitbook

BRC-20 Tokens and Bitcoin

The creation of BRC-20 tokens has generated a new demand for Bitcoin block space outside of its traditional monetary use case. However, it's important to note that Domo, the original creator of the BRC-20 token standard, considers it an experiment. Despite the novelty of this token standard, he has stated that the tokens will be worthless and should not be minted recklessly.

Ordinal Inscriptions reached 4 million in less than 5 months / Dune

As of mid-May 2023, there were over 14,000 BRC-20 tokens in existence, with a market capitalization exceeding $465 million. Some of the most popular tokens include faux versions of tokens like SHIB and PEPE, minted onto the Bitcoin network. The first BRC-20 token to be minted was ORDI, and there are several other tokens of interest as well.

It's also important to be aware that the creation of BRC-20 tokens carries considerable risks, especially in the early stages of the market, and needs more supporting infrastructure. As the founder has stated, this is an experiment, and potential risks should be rigorously scrutinized.

Ordinals Wallet

The Potential and Limitations of BRC-20 Tokens

While BRC-20 tokens present exciting new possibilities for the Bitcoin network, they also bring some unique challenges. Since these tokens do not have smart contract functionality like their counterparts on Ethereum (ERC-20) or Binance Smart Chain (BEP-20), they are relatively simplistic. This lack of smart contract functionality has significant implications for the versatility and complexity of applications that can be built using BRC-20 tokens. As of now, BRC-20 tokens primarily serve as a means of deploying, minting, and transferring fungible tokens on the Bitcoin blockchain.

One of the most significant impacts of the BRC-20 token standard is the congestion it has caused on the Bitcoin network. In the wake of the minting frenzy that followed the launch of BRC-20 tokens, the Bitcoin mempool experienced high congestion, and transaction fees on the network spiked significantly.

The BRC-20 standard has also introduced a shift in the type of inscriptions made on satoshis. Before BRC-20 tokens, people were inscribing satoshis with images, videos, and audio. With the introduction of the new token standard, there has been a shift toward text-specific inscriptions, which are more conducive to fungible tokens than non-fungible ones.

The Future of BRC-20 Tokens

The future of BRC-20 tokens is uncertain, but the development of these tokens is likely to continue, as well as the debates within the community regarding their usability and purpose within the Bitcoin ecosystem. As the BRC-20 ecosystem evolves, further token design innovation and infrastructure support are expected to be the next steps in this ongoing saga.

BRC-20 tokens demonstrate that there is clear organic demand for Bitcoin blockspace beyond traditional monetary uses. However, these tokens also carry substantial risk and require rigorous scrutiny, especially as they are still in the experimental stage.

At the end of the day, Bitcoin is a permissionless system and even if we do not like BRC-20 tokens and Ordinal inscriptions, once we start trying to decide who can and cannot use Bitcoin - this becomes a slippery slope away from Bitcoin's overall purpose.

Final Thoughts

BRC-20 tokens represent a new and controversial innovation in the world of Bitcoin. By enabling the deployment, minting, and transferring of fungible tokens on the Bitcoin blockchain, they have created new use cases and driven new demand. However, as an experimental standard, they also carry significant risks and challenges. Future developments in this area will be of great interest for Bitcoin.

What do you think? Yay or Nay BRC-20 Tokens and Ordinal Inscriptions?

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