BRC-20: a year to Rise and Die?

The ever-evolving landscape of cryptocurrencies has witnessed a groundbreaking development in the form of BRC-20 tokens, bringing a paradigm shift to the Bitcoin blockchain. Drawing inspiration from Ethereum’s ERC-20 standard, BRC-20 introduces an experimental token framework that promises to revolutionize the way we perceive and utilize Bitcoin. In this article, we will delve into the origins, mechanics, controversies, and potential impact of BRC-20, providing you with an in-depth understanding of this emerging phenomenon.

The Genesis of BRC-20

Bitcoin, the pioneer of blockchain technology, has traditionally been synonymous with decentralized, peer-to-peer money transfers and a secure store of value. However, with the advent of the Taproot upgrade in November 2021, the Bitcoin network opened its doors to new possibilities, including the groundbreaking Ordinals protocol. This protocol allowed for the inscription of information onto individual Satoshis, the smallest units of Bitcoin. Keep up with Blockchain vocabulary via our Glossary.

In January 2023, a visionary developer named Domo brought the Bitcoin Ordinals protocol to life, paving the way for the exploration of new territories on the Bitcoin blockchain. The introduction of NFTs (non-fungible tokens) was just the beginning, as it sparked a wave of innovations leading to the birth of BRC-20 tokens.

Understanding BRC-20 Tokens

BRC-20 tokens represent an experimental standard for fungible tokens on the Bitcoin blockchain. Unlike traditional Bitcoin transactions, BRC-20 tokens utilize ordinal inscriptions, attaching a serial number to Satoshis. This process, named after the Ordinals protocol, allows for the association of additional data with Bitcoin transactions.

In simple terms, BRC-20 tokens are akin to ERC-20 tokens on Ethereum, enabling the creation of fungible digital assets. Fungible tokens are identical and interchangeable, mirroring the characteristics of physical assets like coins. The introduction of BRC-20 tokens expands the utility of the Bitcoin network beyond its conventional role as a decentralized value storage system.

The Journey of BRC-20 Tokens

The history of BRC-20 tokens can be traced back to March 2023 when Domo launched the standard as an experiment. The Bitcoin Ordinals protocol laid the groundwork, and Domo’s innovation initiated a movement that saw the creation of various tokens on the Bitcoin blockchain. Notable examples include ORDI, the first-ever BRC-20 token, and WOJAK, a memecoin inspired by internet culture.

These tokens, while often created for educational or entertainment purposes, have captured the attention of the crypto community. The experimentation with BRC-20 tokens has given rise to debates within the Bitcoin community, questioning the true purpose and potential of Bitcoin beyond its original vision.

How BRC-20 Tokens Work?

To comprehend the functionality of BRC-20 tokens, it’s crucial to grasp the underlying technology — the Ordinals protocol. Satoshis are assigned serial numbers based on their order of mining, and BRC-20 tokens leverage this ordinal inscription to embed JSON data. This data empowers BRC-20 tokens with limited but significant capabilities — deploying, minting, and transferring tokens on the Bitcoin network.

However, BRC-20 tokens face certain limitations compared to their Ethereum counterparts, represented by ERC-20 tokens. The absence of a virtual machine like Ethereum’s EVM restricts BRC-20 tokens from executing complex smart contracts or easily interoperating with other blockchain networks. This part is very important to understand, if we have to sum-up in very easy words, BRC-20 is only expressing “This satoshi represents this”, you cannot run contracts like on ERC-20 tokens. Also, the proof-of-work mechanism in Bitcoin, while ensuring security, leads to slower transaction processing and higher energy consumption.

Pros and Cons of BRC-20 Tokens

As with any innovative technology, BRC-20 tokens come with their own set of advantages and challenges.

Pros:

New Capabilities on Bitcoin Network: BRC-20 tokens introduce new use cases, especially in the realm of decentralized finance (DeFi), expanding the utility of the Bitcoin network.

Full On-Chain Functionality: BRC-20 tokens operate entirely on the Bitcoin blockchain, enhancing immutability without the need for additional file systems.

Security: Leveraging Bitcoin’s proof-of-work consensus mechanism ensures a high level of security and immutability.

Cons:

Energy Consumption: The proof-of-work mechanism makes deploying, minting, and transferring BRC-20 tokens energy-intensive, contributing to higher transaction fees.

Limited Functionality: Compared to tokens on other chains, BRC-20 tokens currently offer limited functionality, restricting their use cases.

Experimental Nature: BRC-20 tokens are experimental, representing high-risk assets with uncertainties regarding their future development and adoption.

At D’CENT Wallet, we emphasize the paramount importance of employing hardware wallets and adopting a self-custody approach when navigating the crypto landscape. Our hardware wallets, act as robust guardians of private keys, isolating them from potential online and offline threats and fortifying security. Opting for self-custody with D’CENT ensures users have complete control and ownership of their assets, eliminating reliance on third-party exchanges and embodying the principles of decentralization. In a landscape where security is non-negotiable, D’CENT Wallet stands as a steadfast ally for individuals seeking resilient protection for their cryptocurrency holdings.

How can BRC-20 be used?

DeFi applications: BRC-20 tokens can be used for lending, borrowing, and other DeFi applications on the Bitcoin network.

Tokenized assets: BRC-20 tokens can be used to represent real-world assets such as stocks, bonds, and commodities.

Collectibles and NFTs: BRC-20 tokens can be used to create limited-edition collectibles and non-fungible tokens (NFTs).

Community tokens: BRC-20 tokens can be used to create tokens for online communities and projects.

BRC-20: Barely Born, Already Killed?

While the BRC-20 standard introduced a novel way to interact with the Bitcoin network by creating fungible tokens directly on the blockchain, its future remains uncertain. A recent bug fix in the Bitcoin Core software (version 27) could potentially render BRC-20 tokens and Bitcoin Ordinals, the technology that facilitates their creation, obsolete.

The update 27 is currently pending validation to be released on Bitcoin Core software.

Potential Obstacles for BRC-20

The bug fix in question addresses a vulnerability exploited by Ordinals and BRC-20 to embed data on Satoshis. This vulnerability allowed users to bypass data size limits within transactions, leading to increased network congestion and potentially impacting other users.

With the fix in place, creating new Bitcoin Ordinals and BRC-20 tokens might become impossible, effectively halting their further development. However, existing tokens and inscriptions will continue to reside on the blockchain as immutable records.