Understanding BRC-20 Tokens

You may have heard of tokens like “pepe” and “ordi” making the rounds around crypto Twitter, but what exactly are they and why are people throwing money at them left and right?

What is BRC-20?

The BRC-20 token standard was created by the Twitter user @domodata on March 8th, 2023 as an experimental fungible token. It was made possible through the “Taproot” upgrade in November of 2021, which essentially made it easier and faster to verify transactions on the Bitcoin network. It uses Ordinal inscriptions of JSON data to mint and transfer tokens and deploy token contracts. With this comes a wave of speculative token trading similar to the altcoin boom that we saw with Ethereum based “shitcoins” in the past few years.

Ordinals (created by Casey Rodarmor) are similar to NFT-like “digital artifacts” that carry data in the form of text, JPEGs, PDFs, and audio/video formats - all on the Bitcoin network. BRC-20 takes this one step further by allowing you to issue tokens. Wallet providers like Unisat have stepped up to the plate to allow these to be easily traded. One of the first BRC-20 tokens, “ordi”, which had a capped supply of 21 million tokens with a 1000 token limit per mint, sold out in less than 18 hours, with an additional 1.5m mints pending that didn’t make the cut-off.

BRC-20 vs. ERC-20

While they sound similar, there are some key differences between BRC-20 and ERC-20 tokens. BRC-20 tokens are issued on the Bitcoin blockchain, unlike ERC-20’s which are issued on Ethereum. This means that they operate under a proof-of-work security mechanism rather than proof-of-stake, which Ethereum uses. BRC-20’s are a lot more limited in what they can do, for instance, they do not support smart contracts, so they can’t be deployed on traditional DEX’s, borrowing or lending protocols, etc. They also cannot be burned or frozen, include decimals, or have approval/delegation functions like traditional ERC-20 tokens.

The Future of BRC-20

While this isn’t the first time developers have attempted to create a token standard on Bitcoin (ex. Colored Coins protocol), BRC-20’s are garnering a lot of attention by those that want to experiment with what is possible with fungible tokens on Bitcoin. The recent spike in Ordinals trading volume has probably influenced this to some degree, with more than 1.5million ordinal inscriptions to date. While there are still many concerns regarding BRC-20’s considering it is still very much in it’s experimental phase, they take up far less space than traditional Ordinals, and mining pools are benefiting from the fees generated. However, there are those who believe that more useless clutter can lead to issues with block space and congestion.

Overall, the technology is still very new and speculative, and even the founder preaches the need to exercise extreme caution as it’s only in its infancy. He famously advised users not to spend a lot of money on issuing the tokens, which he considers worthless. Time will tell what kind of use cases emerge from BRC-20, but for now, the meme coins seem to be taking the spotlight.

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