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What are BRC-20 Tokens on Bitcoin?

4.6
| by
Joel Agbo
-

What Is the BRC-20 Token Standard?

The BRC-20 token standard is an experimental token standard that uses ordinal inscriptions to enable the minting and transfer of fungible tokens on the Bitcoin blockchain. The BRC-20 token standard is similar to the ERC-20 token standard on Ethereum and EVM blockchain networks.


Key Takeaways

  • Against the original design of the Bitcoin blockchain, BRC-20 runs parallel with the Bitcoin coin on the Bitcoin network, just like smart contract tokens on the Ethereum blockchain.

  • BRC-20 tokens are created by attaching a JSON to satoshis through Bitcoin ordinals. The JSON code bit defines every characteristic of the BRC-20 token including the minting, and distribution, the bitcoin network decodes this information once they are deployed.

  • BRC-20 tokens are minted and spent like normal tokens. A Bitcoin ordinal wallet is required to mint BRC-20 tokens, and there is a limit for each mint.

  • The BRC-20 token standard has seen a rise to prominence with the market capitalization reaching over $600 million and thousands of BRC-20 tokens minted already. Notable BRC-20 tokens include the Ordinal token (ORDI) and OXBT.


What is BRC-20

The BRC-20 token market sits at an excess of $600 million and has seen over $200 million in daily trading volume at the time of writing. These figures are contributed by over 14,000 BRC-20 tokens. Like the Ethereum blockchain, Bitcoin enthusiasts can now create, mint, and transact tokens (other than bitcoin) on the Bitcoin blockchain. 

BRC-20 token standard tokens are a technological progression on the Bitcoin blockchain, and let’s take a look at what they are and why they’re shaking things up. 

What are BRC-20 Tokens?

BRC-20 tokens started out as an experiment to create fungible tokens on the Bitcoin network. 

BRC-20 tokens are created through JSON inscriptions on satoshis through Bitcoin ordinals. They resemble smart contract tokens with the JSON defining the core features of the BRC-20 token. However, unlike smart contracts where conditions can be changed, inscriptions are immutable as they are inscribed directly to a satoshi, and thus cannot be modified by any counterparty. 

In addition to benefiting from Bitcoin’s popularity and prestige, BRC-20 tokens inherit the security and the decentralization of the Bitcoin network and can be sent between peers, just like any other cryptocurrency. 

While BRC-20 tokens function like ordinary crypto tokens, they are powered by an almost different back-end technology and are created in a completely different way. BRC-20 tokens are minted by the Bitcoin community, where each ordinal wallet can freely mint BRC-20 tokens once they are deployed. There is usually a limit and total mints cannot exceed the total supply.

How Are BRC-20 Tokens Created?

Satoshis are the smallest unit of currency on the Bitcoin network, where a hundred million satoshis make up one Bitcoin. Every satoshi on the Bitcoin network is numbered in the order of issuance and is transferred in this order. This numbering system is known as ordinals. Ordinals identify satoshis as single units and are able to tag them with specific data. Previously, ordinals only tagged satoshis with order numbers.

A loophole in the 2021 Bitcoin Taproot upgrade opened up the possibility of attaching even more data to each satoshi using the ordinals protocol. Ordinals turn satoshis into bearers of public data. However, satoshis with extra public data can still be spent like the normal ones.

Since then, Bitcoin developers have been exploring use cases of this new ability, giving rise to ordinals NFTs and BRC-20 tokens.

Ordinal NFTs are non-fungible and are created by attaching a digital asset file such as images to a satoshi. BRC-20 tokens are fungible and are created in a different way.

While ordinal NFTs attach digital assets to satoshis, the BRC-20 token standard attaches a JSON (Javascript Object Notation) code to satoshis using the ordinals protocols. The JSON contains pieces of executable code bits that can be deployed on the Bitcoin network. These define every aspect of the token including the supply, minting limit, and the token’s Identity. 

On successful deployment, any Bitcoin ordinals wallet can connect to the network and mint the token, which can be spent like any other cryptocurrency. ORDI is the first fungible token created using the BRC-20 standard on the Bitcoin blockchain. It currently trades at $17.89 with a market cap of over $350 million at the time of writing.

What Can BRC-20 Tokens Be Used For?

As stated earlier, BRC-20 tokens can be spent freely like any other cryptocurrency. While more use cases for BRC-20 tokens are still being explored, here’s what you can currently do with BRC-20 tokens.

P2P Transfers

The most basic thing you could do with your BRC-20 token is to transfer it to your peers as a representation of value. BRC-20 tokens utilize the Bitcoin network and can be moved between wallets on the network regardless of the location of each wallet. Just like Bitcoin, BRC-20 tokens are a decentralized form of digital cash that can be spent between peers. BRC-20 tokens inherit the efficiency level of the Bitcoin network and transaction fees are charged in bitcoin.

Do note though that you need to inscribe the tokens before they can be sent to peer wallets, where each inscription carries an additional cost.

Pending future integrations, BRC-20 tokens can potentially be used for making payments on commercial platforms and service providers seeking to adopt more flexible payment solutions.

Decentralized Finance

DeFi on the Bitcoin blockchain is still in the early stages and far from reaching the heights of the DeFi space on EVM networks and Ethereum. However, BRC-20 tokens could be the start of a decentralized financial system on the Bitcoin blockchain. Unlike bitcoin which is relatively rigid, BRC-20 tokens are flexible and can be integrated into DeFi protocols.

The use cases for BRC-20 standard tokens as on DeFi protocols built on the Bitcoin network are numerous. BRC-20 tokens can be integrated into decentralized exchanges, lending protocols, and yield farming systems if this goal is achieved.

As a start, Ordinalswallet.com has already developed a platform for the decentralized minting and trading of BRC-20 tokens and ordinals NFTs. Platforms like these are bound to proliferate as BRC-20 tokens become more relevant.

Another possible use case is the development of a BRC-20 bitcoin peg and bridge to properly introduce bitcoin into DeFi systems and also connect other blockchains to the Bitcoin network, respectively.

Tokenization

Tether utilized the asset creation system on Omnichain and EVM networks to create a decentralized and virtual representation of the US dollar and other fiat currencies. The same system has been used to create crypto assets pegged to other real commodities like gold and real estate. BRC-20 tokens can serve the same purpose and with more developments in this space, and it might emerge as a favorite candidate for the tokenization of real assets due to its structure.

Via the JSON code, one can define the properties of a BRC-20 token according to what they wish to tokenize, the supply, and minting limits as well. The decentralized issuance process in BRC-20 tokens cannot be easily achieved using smart contracts, which gives BRC-20 tokens an edge as a tool for tokenization.

Continuous Experiments on the Bitcoin Blockchain

The BRC-20 token standard and BRC-20 tokens open up the Bitcoin blockchain to a large extent. Both are still experimental but give a hint of what more could be achieved on the Bitcoin blockchain. A good way to utilize the tokens and the technology is to involve them in more futuristic developments and growth of the Bitcoin network and its ecosystem. BRC-20 tokens by this will continue to evolve and become more significant in the crypto space. If the development of BRC-20 tokens continues at the current pace, it is likely that more use cases will emerge in the future.

Impact of BRC-20 Tokens

For what began as an ‘experiment,’ BRC-20 tokens have exploded in popularity. Not only have over 14,000 tokens been created using this technology, these tokens have surpassed a cumulative market capitalization of $600 million and are still going strong at the time of writing. It has enjoyed a good reception from cryptocurrency enthusiasts; this is largely thanks to the reputation and popularity of the Bitcoin network on which they run.

However, behind the fame and financial viability, BRC-20 transactions have added more stress to the Bitcoin blockchain. Bitcoin network’s 7TPs speed has since been overwhelmed by tons of transactions related to BRC-20 and ordinal NFTs. On 8 May 2023, the Bitcoin network reportedly had over 300,000 transactions in the queue as transaction fees rose to 2 year record highs of over $30 as seen in the chart below. 

BTC average transaction fee with BRC 20

Source: Bitcoin Avg. Transaction Fee historical chart

How to Buy BRC-20 Tokens

There are two major ways to purchase BRC-20 tokens. BRC-20 tokens can be purchased on centralized exchanges where they are listed or on ordinals exchanges. Purchasing on centralized exchanges follows the normal procedure. To purchase BRC-20 tokens on an ordinals exchange, an ordinals wallet is required.

Step 1: Visit ordinalswallet.com to create your wallet, and be sure to store your wallet passphrase properly.

Step 2: Click BRC-20 from the top menu to see BRC-20 tokens listed on the platform.

Step 3: Click on the BRC-20 token to see available sale requests. Click ‘Buy Now’ to purchase the token directly from your wallet. 

Buy BRC20 with Ordinal Wallet

Keep in mind that you must have a sufficient amount of bitcoin in your wallet to make a purchase. Do note that as ordinals and BRC-20 tokens are still in their early stages, remember to do your own research before entering any transactions. 

BRC-20 Tokens vs. ERC-20 Tokens

The ‘BRC-20’ name is a reference to the ERC-20 token standard used on the Ethereum network and other EVM networks. This has drawn some comparison between BRC-20 tokens and ERC-20 tokens. While they share the similarity of running on a parent blockchain network, they differ in so many ways.

An obvious difference is that BRC-20 tokens run on the Bitcoin network while ERC-20 tokens are traditional to the Ethereum network but the ERC-20 standard is also used to create smart contract tokens on other EVM networks.

ERC-20 tokens are created through a proper smart contract code written in a language understood by the EV Machine such as Solidity. The smart contract code is deployed on the state machine to create the tokens. In contrast, BRC-20 tokens are created through ordinal inscriptions on satoshis using JSON. 

BRC-20 tokens are also completely parallel to the bitcoin coin. That is, activities on the BRC-20 protocol don’t affect bitcoin. Bitcoin will be unaffected if BRC-20 tokens or the protocol malfunctions. BRC-20 transactions can be accepted on the Bitcoin network and rejected on the BRC-20 protocol. For instance, if an ordinals wallet with 20 ORDI tries to make a transfer of 40 ORDI, this transaction will be accepted on the Bitcoin network (as it is seen as a normal transaction) but rejected on the BRC-20 protocol since the wallet doesn’t have enough ORDI balance. This is not the same for ERC-20 tokens, as the ERC-20 protocol is in resonance with the Ethereum network.

BRC-20 tokens are issued in a community-oriented fashion. With a limit placed on the mints, multiple ordinals wallets can engage in the minting process of the BRC-20 token. This makes for a more inclusive token generation and a more decentralized distribution mechanism. On the other hand, ERC-20 tokens distribution can be managed by a single entity, giving room for manipulation and centralization.

Can BRC-20 Tokens Be Stored on the MetaMask Wallet?

BRC-20 tokens cannot be stored on MetaMask. The MetaMask wallet is developed specially for Ethereum, ERC standard tokens, and native tokens of other EVM networks. BRC-20 tokens do not identify with any of these and hence cannot be stored on the MetaMask wallet at the time of writing.

However, should MetaMask develop support for the Bitcoin network and Bitcoin ordinals in the future, BRC-20 tokens could be held in MetaMask wallets.

Final Thoughts

Satoshi Nakamoto created the Bitcoin blockchain for p2p transactions; five years into its creation, the utility became even clearer and the Bitcoin revolution has been on a roll since this time. But the Bitcoin blockchain differs from other younger blockchain projects that offer more than the regular end-to-end transfer of value on a decentralized network, and there is comparatively less development activities on the Bitcoin network as opposed to other Layer 1s. This has led to critics labeling the Bitcoin blockchain as ‘technologically archaic’ and redundant. 

Almost seven years later, the Bitcoin blockchain is becoming more active and developers are exploring the advancements that could be brought to the network. These include BRC-20 tokens, ordinal NFTs, and the lightning network. 

Nevertheless, it is important to note that this technology is an ongoing experiment in its earliest stage of development, with this in mind, it is recommended that investors dipping their feet into the BRC-20 ecosystem apply risk management strategies as much as possible. As the technology continues to develop, there are possibilities of changes that might be less beneficial for users and have security-relevant shortcomings. Also, note that the contents of this article are only educational and not financial advice, you are advised to do your own research.

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Joel Agbo
Joel Agbo
Joel is deeply interested in the technologies behind cryptocurrencies and blockchain networks. In his over 7 years of involvement in the space, he helps startups build a stronger internet presence through written content. Follow the author on Twitter @agboifesinachi

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