Overview
BRC-20 tokens represent an experimental and flawed token standard aimed at establishing fungible tokens on the Bitcoin blockchain. Drawing inspiration from Ethereum’s ERC-20 tokens, BRC-20 tokens utilize the Bitcoin Ordinals protocol to inscribe data onto separate satoshis, enabling their transferability and marketability.
Foundation of BRC-20 Tokens
The BRC-20 token standard was first unveiled by an anonymous developer known as Domo in March 2023. This progression followed closely the introduction of the Bitcoin Ordinals protocol by Casey Rodarmor in January 2023, which allowed individuals to inscribe data onto distinct satoshis, paving the way for the development of NFTs on the Bitcoin blockchain. The inaugural BRC-20 token issued was “ordi,” which quickly became popular and led to the emergence of numerous other BRC-20 tokens.
BRC-20 tokens were introduced with the intention of bringing the versatility of fungible tokens to the Bitcoin network, akin to the way ERC-20 tokens expanded the Ethereum ecosystem. Nonetheless, BRC-20 tokens vary significantly from their Ethereum equivalents concerning functionality and application.
Functioning of BRC-20 Tokens
BRC-20 tokens utilize the Ordinals protocol to inscribe JSON data onto satoshis. This data delineates the token’s characteristics and operations, including deployment, minting, and transfer. Unlike ERC-20 tokens on Ethereum, BRC-20 tokens forgo smart contracts, resulting in more restricted functionality. However, this simplicity facilitates easier asset tokenization on the Bitcoin network.
Deployment and Minting: The procedure initiates by deploying a token through the inscription of its attributes onto a satoshi. Once deployed, tokens can be minted in predetermined amounts and moved between users via Bitcoin transactions. The JSON data comprises information such as the token’s name, maximum supply, and minting criteria.
Token Exchange: The exchange of BRC-20 tokens requires the creation of a new inscription detailing the transfer specifications. This inscription is subsequently included in a Bitcoin transaction, ensuring the transfer is unchangeable and can be verified on the blockchain.
Advantages and Disadvantages
Advantages:
- Simplicity: The lack of smart contracts streamlines the creation and transfer of tokens, making it accessible to a wider array of users.
- Security: Utilizing Bitcoin’s strong security features provides a high degree of trust and immutability.
Disadvantages:
- Absence of Smart Contracts: The lack of smart contracts limits the functionality and potential applications of BRC-20 tokens.
- Network Dependence: BRC-20 tokens are affected by Bitcoin’s prioritization of security and decentralization over transaction speed, potentially leading to elevated fees during periods of high demand.
- Network Overload: The popularity and inadequate design of these tokens resulted in escalating transaction fees and network overload, especially during the time of launch when promotion and interest peaked. As popularity diminished, so did the congestion.
- Restricted Interoperability: Specifically designed for the Bitcoin network, BRC-20 tokens cannot interact with alternative blockchain ecosystems.
Practical Uses and Illustrations
Decentralized Application Tokens: A developer can create a new token for a decentralized application (dApp). By inscribing the token’s specifics into a Bitcoin transaction using the Ordinals protocol, the developer manages the token directly on the Bitcoin blockchain without the need for additional layers or complicated smart contracts. This token can subsequently be used within the dApp for various roles, such as access control, rewards, or governance.
Tokenized Assets: Should a company seek to tokenize its assets, like shares or real estate, on the Bitcoin blockchain, it can inscribe tokens representing these assets through BRC-20 tokens, facilitating secure and transparent ownership transfer. This can simplify the processes of buying, selling, or transferring ownership of assets while leveraging Bitcoin’s robust security.
Loyalty Points System: A business might establish a loyalty points program utilizing BRC-20 tokens. By producing and managing loyalty points as tokens, customers can accrue, transfer, and redeem points directly on the Bitcoin blockchain, ensuring transparency and security, lessening the risk of fraud, and boosting customer faith.
Community Tokens: A community gathered may decide to create its own token to aid various activities and rewards within the community. By utilizing BRC-20 tokens, the group can inscribe tokens for members to use in participating in events, voting on community actions, or recognizing contributions. This cultivates a sense of ownership and involvement among community members.
BRC-20 tokens are frequently promoted as solutions for a spectrum of applications as indicated above, from decentralized apps to tokenized assets. However, in practice, they are often subjected to speculative trading and gambling. Despite utilizing Bitcoin’s secure network, their primary use has rapidly shifted to creating and trading meme tokens and low-value digital assets. This mirrors a larger trend within the crypto landscape, where the potential to resolve real-world issues is frequently overshadowed by a focus on short-term profits and speculative investments. The genuine worth of Bitcoin lies in its security, decentralization, and function as sound currency, which is often neglected in the haste to exploit the latest token phenomena.
Runes Protocol: A Recent and More Efficient Alternative
The Runes protocol, introduced by Casey Rodarmor, offers a more efficient and scalable substitute for BRC-20 tokens. By applying Bitcoin’s UTXO model and the OP_RETURN opcode, Runes manage to bypass the formation of unspendable UTXOs, consequently minimizing network congestion and improving overall performance. Unlike BRC-20, which depends on JSON inscriptions that can strain the network, Runes present a streamlined process for token development and transfer, seamlessly integrating with the Lightning Network and accommodating various wallet types. This renders Runes a superior option for developers seeking to create and manage tokens on the Bitcoin blockchain with enhanced efficiency and adaptability.