Ever since Ordinals’ controversial debut, the Bitcoin network hasn’t been put to rest. The idea of inscribing on satoshis enabled the creation of NFTs on the Bitcoin blockchain. With the new experimental model, the BRC-20 standard allows Bitcoin to create fungible tokens. The new standard sparked major controversy in the community as Bitcoin maximalists called it out on being spam.
The BRC-20 standard might open new possibilities for Bitcoin beyond its peer-to-peer digital currency network, however, the network congestion it is causing is not promising. Let’s see how BRC-20 tokens work, their tokenomics, and their relation to the Ethereum standard ERC-20.
What Is BRC-20?
So, what exactly is the BRC-20 standard? Have there been a BRC-1 or BRC-2 before? Well, not exactly. The BRC-20, or Bitcoin Request for Comment 20 is modeled after the famous Ethereum standard ERC-20, or Ethereum Request for Comment 20.
The BRC-20 is the first standard of its kind since any upgrade relating to the Bitcoin network goes under the process of BIP or Bitcoin Improvement Proposals.
On March 8, 2023, Domo, an anonymous developer, and holder of the Bitcoin NFT project Ordinals Face, published the experimental standard that allows fungibility on the Bitcoin network. The BRC-20 standard allows the creation of creating fungible tokens using the Ordinals protocols. So, just like ERC-20? Well, again, not exactly.
Is It Related to ERC-20?
At first glance, the BRC-20 looks oddly familiar and reminiscent of the famous ERC-20 standard that powers Ethereum-based fungible tokens such as Tether (USDT) and Shiba Inu (SHIB). However, BRC-20 lacks the underlying smart contract functionality that Ethereum offers.
This means that BRC-20 tokens don’t have much functionality as ERC-20 tokens. The latter can interact with other blockchains and protocols thanks to their smart contract attribute.
In addition, technically speaking, BRC-20 follows a different consensus mechanism than ERC-20 since the Bitcoin blockchain follows a proof-of-work consensus while Ethereum runs on a proof-of-stake consensus. This can create technical issues for BRC-20 tokens that we’ll discuss later on.
What Do Ordinals Have to Do with It?
We’ve established now that the new Bitcoin protocol allows the creation of fungible tokens on the Bitcoin blockchain, what does that have to do with Bitcoin Ordinals?
The Ordinals protocol was first launched in January 2023 and introduced with it the “inscription” concept. Since the Bitcoin network doesn’t support smart contracts to allow the minting of non-fungible tokens, the Ordinals protocol allowed the inscription of satoshis (the smallest unit of Bitcoin) with digital data such as images or videos.
BRC-20 tokens are also inscriptions on satoshis, however, they are not Ordinals or NFTs. Domo inscribed JSON (JavaScript Object Notation) data onto satoshis making the tokens suitable for deploying, minting, and transferring.
So, What Are BRC-20 Tokens Exactly?
The difference between BRC-20 tokens and Ordinals is obviously that the former is fungible while the latter is non-fungible. The inscriptions used in Ordinals contain unique media data such as images, videos, and audio. You can consider them the NFTs of Bitcoin. BRC-20 tokens on the other hand are a text-based script file (JSON) that is stored on satoshis.
Dedicated BRC-20 wallets can understand this JSON file in order to conduct transactions, deploy, and mint BRC-20 tokens.
Here’s an example of a JSON file for the deployment of the first BRC-20 token “Ordi”.
For fun, let’s dissect the above.
- “p” stands for protocol, which in this case is the BRC-20.
- “op” stands for operation, in this case, is deployment.
- “tick” stands for ticker, here it is Ordi.
- “max” is for the token’s max supply which is 21,000,000.
- “lim” is the mint limit which here is set to 1000.
How Does It Work?
Now that we know what BRC-20 tokens actually are, let’s take a look at how they work. There are three aspects in which the BRC-20 standards are built upon:
- Token Deployment: Creating a new type of token.
- Minting: Generating new tokens from the new type.
- Transferring: Transferring the minted tokens per the buy and sell requirements.
So, following these steps on a BRC-20 marketplace such as UniSat, anyone can create and deploy their own BRC-20 tokens. Users can set the max supply and mint limit after the token’s creation and start minting.
If you notice that all functions f(x) that call a certain action is an inscription. This is because every step is an inscription and qualifies as a transaction, and therefore, it will become a hassle to verify each transaction. This is one of the reasons why BRC-20 tokens are causing network congestion.
Why is BRC-20 Causing Network Congestion?
Creating BRC-20 tokens is a complex process that requires more space on the blockchain. This goes back to the Ordinals Bitcoin block size fiasco. The Bitcoin block was meant to store up to 1 MB of transactions. Although seemingly a small amount, the 1 MB Bitcoin block can store around 2000 transactions.
However, a block containing ordinals – on which the BRC-20 tokens are based – can become 4 MB in storage. This is because the metadata of Ordinals and BRC-20 tokens is stored on-chain as opposed to Ethereum-based tokens that store their metadata off-chain.
This is a huge number within the Bitcoin network. Larger Bitcoin blocks will typically bid higher fees in order to take part in the validation process. That leads miners to prioritize the Bitcoin blocks that include ordinal inscriptions over regular BTC transactions.
So, Bitcoin’s network congestion went like this:
- Increased interest in BRC-20 tokens.
- Interest bred a huge spike in transaction volume.
- High transaction volume resulted in high transaction prices.
Bitcoin’s network congestion is evident in the long and crowded mempool. A mempool, short for memory pool, is where transactions wait to be added in the next verification process. The larger the mempool the longer the transaction has to wait to be verified.
And guess what, the mempool has never been this full since April 2021 when 200,000 transactions waited in the mempool. However, with the boom of BRC-20 tokens, the mempool is witnessing a jaw-dropping number of 450,000 transactions waiting to be verified.
Community Controversy
So, what does the community think? Are people rushing to deploy and mint BRC-20 tokens out of FOMO, or are they questioning the sustainability of this new experimental standard? It is experimental. Domo, the original creator of the BRC-20 standard said himself that this whole standard is an experiment and he “strongly discourages any financial decisions to be made on the basis of its design”.
gm. I'm glad that some people like the experiment. Some additional notes.
1. These will be worthless. Please do not waste money mass minting.
2. Due to how some inscription tools are set up, the 'balance' may be minted to the intermediary address used in https://t.co/mja39YGIow…— domo (@domodata) March 9, 2023
However, although the creator urged people not to mass-mint these new experimental tokens, the new standard received mixed reactions.
Some praised the new protocol claiming that it is a good strategy for miners to earn more from processing transactions than from mining new BTC. This goes in line with Bitcoin’s halving, where it would come a certain time when miners won’t profit anymore from mining new BTC coins.
MicroStrategy’s Michael Saylor claimed in an interview that “What happened with ordinals and NFTs is we crossed this chasm from what was a bearish scenario to a bullish scenario. If I were a miner I would be ecstatic.”
And it is true, BRC-20 tokens might have some benefits for the Bitcoin network. Considering they are tokens derived from the most secure blockchain ever, they might open several new possibilities for the Bitcoin blockchain beyond its P2P digital currency system.
However, the bad outweighs the good.
Are BRC-20 Tokens Such a Bad Idea?
The opposing views regarding the BRC-20 tokens stem from two facts: First, the new fungible tokens are causing network congestion and increasing fees. Second, the introduction of fungible tokens along with Ordinal NFTs is not in line with Satoshi Nakamoto’s mission of a P2P money transfer system.
Luke Dashjr, a Bitcoin core developer since 2011, even went as far as calling Ordinals and BRC-20 tokens spam that need to be filtered out from the Bitcoin network.
Bitcoin devs are trying to cancel ordinals pic.twitter.com/FOYCIKTcIS
— Frank (@frankdegods) May 9, 2023
BRC-20 tokens do have many disadvantages such as:
- Not in line with Bitcoin’s ecosystem, ethos, and decentralization since it depends on secondary marketplaces and CEX (centralized exchanges).
- It’s not easy to manage BRC-20 tokens since they require whole different sets of tools and dedicated wallets.
- They are easily mass-produced.
- Each step in the BRC-20 tokens requires an inscription, which can clog up the network and overcrowd mempools.
- If BRC-20 tokens are widely traded, they can cause the Bitcoin network to be an unregistered securities space.
BRC-20 Tokenomics
Are people taking the disadvantages of BRC-20 tokens into consideration? Well, since there are around 24,677 BRC-20 tokens already circulating with a total volume of $207,446,993, people are most likely mass-minting these experimental tokens.
Is Bitcoin Itself Even Sustainable?
The Bitcoin network is already suffering from major scalability issues that are yet to be fully addressed. Adding weight to an already struggling system might be a bad strategy. However, as a concept, it might have some potential that might elevate the Bitcoin blockchain to a new level.
However, some claim that if the Bitcoin network can’t handle this “temporary” congestion, how can it handle millions of people after mass adoption? Here’s where Bitcoin maximalists might want to shift their anger at fixing the temporary incompetence of the Bitcoin blockchain and focus on working in the long run by finding sustainable solutions for the scalability issues.