In March 2023, the world witnessed the introduction of BRC-20 tokens, which employ the Ordinals protocol and are stored on the Bitcoin base blockchain. The new innovation enabled users to create fungible digital assets on the Bitcoin blockchain. This was previously impossible because of the absence of smart contract functionality. So in this article, we will take a look at the BRC-20 tokens in-depth. But also understand how it differs from Ethereum-based ERC-20 tokens, the market outlook for BRC-20 tokens, the challenges it faces, and the alternatives to it.
What are BRC-20 Tokens?
The BRC-20 token standard is a new experimental fungible token built using the Ordinals protocol. And with it, inscriptions are stored on the Bitcoin base chain. Ordinal inscriptions of JSON data are used for deploying token contracts, minting tokens, and transferring tokens. It differs from a token standard like ERC-20 on EVM chains. Because does not create smart contracts that manage the token standard and its various rules. Instead, it's simply a way to store a script file in Bitcoin and use it to attribute tokens to satoshis and then allow them to be transferred between users.
The name BRC-20 is taken from Ethereum's ERC-20 token standard. But BRC-20 tokens are not the same as they cannot interact with smart contracts, unlike the EVM standard from which it derives its name. Despite the fact that BRC-20 tokens are still experimental, they present an intriguing use case for tokens on the Bitcoin blockchain. But also a problem at the same time as they clock up the Bitcoin blockchain. So the Bitcoin community once again comes to a difficult decision.
Storing BRC-20 Tokens
Because BRC-20 tokens are still quite new, only a few crypto wallets support them. But with the market cap of these types of tokens reaching over 1 Billion dollars, many exchanges and wallets have started to integrate them. And so bringing BRC-20 to the masses. The best BRC-20 wallets mostly focus on Bitcoin only. But some of them also have other blockchains' support.
In the future, we will probably see more and more wallets adopt BRC-20. And making it one of the more popular blockchain protocols. Which you can expect from tokens built on top of the biggest blockchain. So with more popularity of not only BRC-20 tokens but also Ordinals. We will see more adoption of Tapproot in Bitcoin wallets and also the Ordinals protocol. Which both bring more functionality to the Bitcoin blockchain and the overall ecosystem.
BRC-20 Tokens and the Ordinals Protocol
BRC-20 tokens are new in the era of experimentation with regard to fungible tokens on Bitcoin, much like Ordinal NFTs did for the use of Bitcoin as a development platform. The Ordinals protocol enables users to create digital assets in the form of text, images, or other data. And represent them on the Bitcoin blockchain as unique, non-fungible tokens. So in a similar way, BRC-20 tokens allow developers to create their own fungible tokens on the Bitcoin network. And opening up new possibilities for decentralized finance, tokenized assets, and other use cases. Both BRC-20 tokens and the Ordinals protocol are examples of the ongoing innovation happening on the Bitcoin network. But as developers continue to explore new ways to use this powerful technology the protocols and use-case might change.
BRC-20 Tokens vs. ERC-20 Tokens
BRC-20 tokens use the Ordinals protocol to inscribe data onto the Bitcoin network. This enables users to create digital assets in the form of text, images, audio, or video and inscribe them onto a satoshi. And once inscribed, the asset can be traded or swapped like any other token on the peer-to-peer Bitcoin network.
Bitcoin-based BRC-20 tokens may sound similar to Ethereum-based ERC-20 tokens, but they have several differences. For starters, BRC-20 tokens are issued on the Bitcoin network, whereas ERC-20 tokens are issued on the Ethereum blockchain. So this means that BRC-20 tokens are protected by Bitcoin's proof-of-work security mechanism, whereas ERC-20 tokens are protected by Ethereum's proof-of-stake security mechanism. To mint and exchange BRC-20 tokens, a Bitcoin wallet like UniSat Wallet is needed. But not just any BTC wallet, but one that also integrated taproot and ordinals.
Second, BRC-20 tokens have fewer bells and whistles than ERC-20 tokens. Bitcoin's basic layer is fundamentally limited in that it does not allow smart contracts. As a result, BRC-20 tokens cannot be used in other applications such as decentralized exchanges, borrowing and lending protocols, and so on.
In short, the whole function of ERC-20 and BRC-20 is completely different. However, it would not come as a surprise if Bitcoin developers come up with new protocols or methods to make token standards on Bitcoin more useable. So for now it can be a fun protocol to create meme coins with. But in the future, it could become more like an ecosystem that we see on other blockchains like Ethereum and BSC.
Other options for tokens on Bitcoin
For those that want to use tokens on top of Bitcoin, BRC-20 is not the only option. Because many protocols came before and will come after it. Protocols that allow for a similar feature. In the early days of Bitcoin, the colored coin protocol was already available to create tokens on top of Bitcoin. But because of the cost surrounding it, not many people really used it.
Nowadays there are also better alternatives to BRC-20 that give more functionality to Bitcoin. Because with a second layer, almost anything is possible. One of these layers, Stacks, does exactly that. Give more functionality to Bitcoin. But not by clocking up the main chain. So the Stacks layer allows for token and NFT creation and basically all other features that you will find on other EVM blockchains. But then build on Bitcoin.
One of the protocols that we will see in the future that could bring more use cases to Bitcoin could be Taro. The Taro protocol works on top of the lightning network and can bring tokens back to Bitcoin. But on top of a second layer. So this would mean that the tokens would not clock up the main blockchain and let users send them at the speed of light with a fraction of the cost.
Market Outlook for BRC-20 Tokens
While BRC-20 tokens have seen significant growth and interest, the number of BRC-20 tokens in circulation on Bitcoin is still far behind the number of ERC-20 tokens issued on Ethereum. Currently, there are about 3,400 BRC-20 tokens in circulation with a total market capitalization of around $17.5 million. This is compared to approximately 400 million ERC-20 tokens on Ethereum with a total market capitalization in the hundreds of billions of dollars.
It's important to note that Ethereum’s ERC-20 standard was proposed in 2015, while BRC-20 was introduced in 2023, making its current market performance not surprising. However, BRC-20 tokens are paving the way for new experimentation with fungible tokens on the Bitcoin network.
In the past, attempts to introduce fungible token issuance on Bitcoin, such as the Colored Coins protocol in 2012, failed to gain traction due to Bitcoin's high transaction fees and limited programmability. However, with the introduction of the Ordinals protocol and the ability to create BRC-20 tokens, the potential for fungible tokens on Bitcoin is expanding.
Challenges and Risks of BRC-20 Tokens
It's important to note that BRC-20 tokens are still in their experimental stage, and there are several challenges and risks associated with their use. As previously mentioned, the UniSat wallet, one of the most popular wallets for minting and storing BRC-20 tokens, was compromised on April 23, 2023, leading to significant losses for some users. The UniSat team is working to resolve the issue and return funds to affected users.
Additionally, the tooling surrounding BRC-20 tokens is still primitive. And there have been several identified issues and challenges in the past 30 days. As such, BRC-20 tokens should not be considered a standard for Bitcoin-based tokens, and users should exercise caution when using them. So you won’t risk your precious funds.
Furthermore, BRC-20 tokens are limited in their functionality compared to ERC-20 tokens on Ethereum. Because Bitcoin's basic layer does not allow smart contracts, BRC-20 tokens cannot be used in other applications such as decentralized exchanges, borrowing and lending protocols, and so on. This significantly limits the potential use cases for BRC-20 tokens compared to ERC-20 tokens.
Recent developments in the BRC-20 token market
On April 23, 2023, Unisat, one of the most prominent wallets for minting, storing, and transferring BRC-20 tokens, was compromised. This led to the theft of a significant amount of BRC-20 tokens, including the first token contract to be deployed, the "ORDI" token, with a maximum of 1,000 tokens per mint and a total of 21,000,000 tokens. Despite this setback, ordinal wallets such as Unisat were quick to deploy tooling for the BRC-20 standard. Within less than 18 hours, all 21,000,000 ORDI tokens were minted, with mints pending for an additional 1,500,000 ORDI tokens that exceeded the limit.
Since then, the market cap of BRC-20 tokens has surged as traders drive up the value of Bitcoin-based tokens. The value of ORDI, the first BRC-20 token, has skyrocketed after it was listed on major exchanges. The market cap of BRC-20 tokens is now fastly approaching $1 billion.
Meme Coins on Bitcoin
Because BRC-20 doesn't have much functionality yet the majority of tokens built with it are Meme coins. The meme coin market has exploded in recent years with coins like Dogecoin and SHIB making many millionaires. None of these tokens had any added value from the moment of their creation. But later some of them got a use case added.
So with a simplistic token protocol on Bitcoin like BRC-20, you could expect that most of the coins being created would follow the current hype of mem coins. And thus have absolutely no value at all. Besides people think it's funny that the price goes up. Just like with the meme coin trends seen on other blockchains, we will probably see a few winners that will stick around for some time. But over time it is to be expected that most of them will fall to the background and lose most of their value.
So if you like to play around with Meme coins on Bitcoin. Please be careful to not put in any money that you will need in the future.
How to mint BRC-20 tokens?
Step 1 - To start, access the BRC-20 section on the UniSat website and select a Bitcoin-based token that is currently being distributed.
Step 2 - You can participate in the minting process by specifying the number of tokens you wish to mint. Note that the more times you mint, the more tokens you will receive.
Step 3 - Specify the amount of gas fees you want to pay, keeping in mind that higher fees result in faster transactions. Which you need when a lot of people are using the blockchain.
Step 4 - Once the minting process is complete, you will have successfully minted your first BRC-20 tokens.
But, it is important to note that front-running can occur if another user increases their gas fees to overtake your transaction, and if the token distribution is 100% complete before you finish minting, you will lose your tokens and gas fees.
So now that you have your tokens, you can transact with them on Bitcoin. Or trade them on an exchange that accepts these tokens.
Conclusion
BRC-20 tokens are an exciting new development in the world of tokens based on the Bitcoin protocol. They enable users to create fungible digital assets on the Bitcoin blockchain, which could have a substantial impact on the Bitcoin NFT market. However, it's important to note that BRC-20 tokens are still experimental and face several challenges and risks.
While BRC-20 tokens may not be a standard for Bitcoin-based tokens, they are paving the way for new experimentation with fungible tokens on the Bitcoin network. As the technology and tooling surrounding BRC-20 tokens continue to develop, we may see new and exciting use cases for these tokens emerge. But for now, users should exercise caution and only use reputable wallets and marketplaces when dealing with BRC-20 tokens.
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