If you’re a Bitcoin fan, you’re probably aware that the Bitcoin blockchain has historically been dedicated to a single cryptocurrency. BTC has long been the only digital asset supported by the Bitcoin blockchain, but this is changing with the arrival of BRC-20 tokens.
What are BRC-20 tokens?
At first glance, the BRC-20 is a new class of tokens issued on the Bitcoin blockchain, which allow to represent digital assets or access rights to services. They are comparable to the ERC-20 tokens on the Ethereum blockchain, but are designed to be easier to use and issue. The value of BRC-20 tokens has seen remarkable growth, with their market capitalization reaching $140 million in just a few weeks. In this article, we will explore BRC-20 tokens and explain how to buy them.
Simply put, BRC-20 tokens are a token standard created in March 2023 by an anonymous user named “Domo” (@domodata on Twitter). In the crypto-currency ecosystem, token standards determine how a crypto-currency can be used and where it can be used. There are many crypto token standards for different blockchains, such as ERC-20 for Ethereum, BEP-20 for Binance Smart Chain, TRC-20 for TRON, and now BRC-20 for Bitcoin.
The BRC-20 token standard is based on the Bitcoin blockchain and is largely inspired by the popular ERC-20 standard of Ethereum.
But how do you get a token onto the Bitcoin blockchain?
To answer this question, let’s back up a bit and see what the Bitcoin blockchain is all about.
A Brief on the Bitcoin Blockchain
As we all know, blockchain is a peer-to-peer network technology that establishes a time-stamped record of transactions, organized as a blockchain, by consensus within a network without prior trust between actors. This technology was first described in the late 20th century and formalized with the creation of Bitcoin in 2009. There are three popular types of blockchain:
- the permissionless/public blockchain,
- the consortium blockchain,
- and the private permission blockchain.
Permissionless blockchain is used by popular crypto-currencies such as Bitcoin, Ethereum and Dash. Consortium blockchain is used by groups of decision makers to verify information sharing, while private permission blockchain is used to keep information unavailable to the public.
The famous Bitcoin blockchain
Simply put, the blockchain is used in Bitcoin to create a decentralized currency system, with no central server or central authority, that allows computers to agree with each other using the Bitcoin algorithm. Each computer with a copy of the blockchain is called a “node” in the network.
There are two general principles for understanding how the blockchain works:
- the public/private key concept
- and the hash functions.
Transactions are processed in a similar way to a classic banking transaction and contain the same information. Several transactions are grouped together in a block, which is verified by network nodes, some of which are called miners. Validation techniques differ between types of blockchain, but Bitcoin uses the “Proof-of-Work” principle for solving algorithmic problems that are proof of the miner’s effort and allow the blockchain to dispense with a central authority.
Let’s be much clearer:
When a user A transfers bitcoins to a user B, A signs a transaction with his private key and broadcasts it to the network. A’s signature is verified by the network and the funds are credited to B’s address. To prevent A from transferring the same funds to a user C, a public list of all previous transactions is maintained by the network of Bitcoin nodes. Before any transaction, it is therefore verified that the Bitcoins sent have not already been used.
What are tokens? Token Vs Crypto
Crypto tokens are digital “tokens” that represent an asset. They can be held for value, traded or staked to earn interest on your cryptocurrency portfolio. Tokens can also be used as a means of payment within some of the broader blockchain and DeFi protocol ecosystems.
Each token is unique thanks to blockchain technology and has a unique set of data that gives it special properties. As such, tokens are unforgeable and offer their owner a holding of their own.
But token or crypto, what is the difference?
Do you see the importance of blockchain in this topic? Indeed, tokens differ from coins mainly in their use of the blockchain. Coins have their own blockchain, while tokens use the blockchain of another cryptocurrency. For example, BTC is a coin that runs on its own blockchain, while Ethereum is a blockchain that allows the creation and hosting of tokens.
Tokens have unique data that gives them special properties and are often used to represent digital assets. Tokens use smart contracts to define their rules and are often hosted on the Ethereum blockchain because of its programmable smart contracts. Ethereum is the second most valuable cryptocurrency in the world after Bitcoin in large part due to this feature.
Yes, you read that right, BTC is a coin that runs on its own blockchain. But it seems things have recently changed, as Ethereum is a blockchain that allows for the creation and hosting of tokens, so is Bitcoin.
Which leads us to BRC-20 or also called Ordinals.
What are Bitcoin Ordinals?
Ordinals is a recent innovation on the Bitcoin blockchain. In other words, the Ordinals protocol allows data to be permanently and immutably stored on the Bitcoin blockchain. Casey Rodarmor, a former Bitcoin Core developer, developed this technology and announced its completion in January 2023. Entries on Ordinals use satoshis, the smallest units of Bitcoin, as media to store various data, such as images, text, audio clips, security tokens, stablecoins and smart contracts.
Entries are compared to NFTs, but they are considered complete and immutable “digital artifacts,” whereas NFTs can be sold for a fee and royalties and are subject to updates. Updates to the Bitcoin blockchain, SegWit in 2017 and Taproot in 2021, have increased the size of blocks and thus provide enough space to host the data listed on Ordinals.
BRC-20 Tokens and the Ordinals Protocol
In short, BRC-20 tokens allow users to exchange fungible assets using the Ordinals protocol. This launch of the Bitcoin Ordinals protocol has actually created a stir in the Bitcoin community due to its ability to support Bitcoin-based NFTs.
Although the Ethereum blockchain is known to support NFTs, the Bitcoin blockchain has never supported any other crypto-assets besides Bitcoin itself. However, many Bitcoin users want new ways to use the blockchain, and NFT capabilities could help meet that demand.
The Ordinals protocol uses satoshis, a small fraction of a BTC, to write data. Each BTC coin contains 100 million satoshis.
The Ordinals protocol thus allows additional data to be written to a satoshi before it is involved in a transaction, creating an Ordinal. The enrollment data contains a serial number that can be used to locate the Bitcoin-based NFT. It is important to note that Ordinals are not fungible.
BRC-20 tokens are fully fungible, making them useful as a complement to Ordinals.
BRC-20 Versus ERC-20
Although the BRC-20 standard for tokens has similarities to the popular ERC-20 standard, there are several differences that set them apart. Unlike ERC-20 tokens, which run on the first Ethereum blockchain, BRC-20 tokens cannot interact with smart contracts.
The BRC-20 standard relies on a way to store a script file in Bitcoin and use it to assign tokens to satoshis. These tokens can then be exchanged between users, turning the Bitcoin blockchain into a full-fledged exchange.
In brief :
- While the BRC-20 is based on Bitcoin, the ERC-20 is based on Ethereum. This implies that the consensus mechanisms for BRC-20 and ERC-20 tokens are different.
- ERC-20 token transactions are verified by validators that put ETH into play to secure the Ethereum network, as it uses the proof-of-stake mechanism. In contrast, Bitcoin uses the proof-of-work mechanism to verify transactions via miners.
- Another important difference between ERC-20 and BRC-20 is that the former uses smart contracts, while the latter does not. Ethereum is known for its ability to automatically execute transactions using smart contracts, which activate when predefined conditions are met.
- Instead of using smart contracts, BRC-20 tokens use registrations within the Ordinals protocol to function as fungible assets. This means that BRC-20 tokens cannot interact with smart contracts.
It is important to note that in order to mint or trade BRC-20 tokens, a Bitcoin wallet is required. Currently, ERC-20 tokens are probably the better option over BRC-20 tokens for a number of reasons, especially for people who value smart contracts and their functionality.
ORDI, PEPE, and MEME tokens are currently the top three tokens in the BRC-20 standard, and are meme coins, which is due to the excitement surrounding the creation of tokens on the Bitcoin blockchain. This shows that the BRC-20 market is still very immature and in its infancy.
To see all the projects available on the BRC-20 standard, visit brc-20.io.
A look at Pepe Coin!
The popularity of BRC-20 tokens has been attributed to the hype surrounding Pepe Coin (PEPE). Pepe Coin’s BRC-20 token has reached a trading volume of over half a million dollars in 24 hours as of this writing. The token is a memecoin, meaning it is based on a popular internet meme. In this case, it is Pepe the Frog.
Other BRC-20 tokens that have also gained prominence are MEME and MOON or Ordinal Monkey Club.
While it’s exciting to see BRC-20 tokens become a hot topic, it’s worth keeping in mind that this is still a brand new token standard, so it will take time to see if it can take hold firmly in the crypto-industry.
Indeed, Dogecoin and Pepe have similarities as both are cryptocurrencies based on popular internet memes. Although Pepe has no intrinsic value or utility, it has become a successful crypto- with a market capitalization of $900 million and has entered the top 100 cryptos.
Pepe’s success has been helped by the possibility of making a significant capital gain, such as the case of an investor who bought $250 worth of tokens and saw its value increase to $1.8 million. Since then, the crypto craze has grown.
Why are BRC-20 tokens causing panic?
Fun fact, Bitcoin miners are currently thrilled because the crypto-currency’s transaction fees have reached their highest level since April 2021. This increase is due to the large number of micro-transactions related to the creation, issuance and transfer of BRC-20 tokens. In addition, statistics show that the market capitalization of BRC-20 tokens has increased by 600% in the past week, with transaction volume even surpassing that of standard BTC transactions on the blockchain network. Did you know that the number of ordinal registrations on the Bitcoin network reached a record high of 58,179 on April 2, according to Dune Analytics. This increase is due to the launch of the new BRC-20 token standard.
But these tokens are causing panic in the crypto-sphere:
Each transaction to create, issue or transfer BRC-20 tokens currently costs 0.00000546 BTC, but some users are willing to pay 100 times that amount to ensure their transactions are completed quickly. This suggests that these users hope to make a profit by selling the acquired meme-coins. However, it is important to note that the BRC-20 standard is only a “fun experiment” according to its creator and that there are more efficient solutions, such as RGB or Taro, for anchoring tokens on Bitcoin.
While miners are benefiting from this new bubble, the increase in the number of unspent transaction outputs (UTXO set) is not sitting well with node operators. Moore’s Law has its limits, and growing too fast could drive nodes with insufficient RAM out of the network. However, solutions, such as Utreexo, are being investigated.
To recap, the BRC-20 is a token standard built on the Bitcoin blockchain through the Ordinals protocol, allowing the issuance and transfer of fungible tokens. It was created in March 2023 by on-chain analyst Domo, to store images, text, audio clips and more in small Bitcoin transactions.
BRC-20 tokens have grown in popularity and account for nearly 6% of Bitcoin activity. Compared to the popular ERC-20 standard, BRC-20 tokens cannot interact with smart contracts and rely on a way to store a script file in Bitcoin to assign tokens to satoshis.