What Are BRC-20 Tokens? A Deep Dive into the Bitcoin Memecoin Machine

2023/11/08 07:48:47

BRC-20 tokens represent a relatively new cryptocurrency type that can be both created and traded on the Bitcoin blockchain. Drawing inspiration from Ethereum's ERC-20 standard, BRC-20 tokens operate using a distinct protocol known as Ordinals, which enables the inscription of data on satoshis, Bitcoin's smallest unit, and seamlessly functions within the Bitcoin blockchain.

The BRC-20 market has experienced exponential growth since its introduction in March 2023, driven by an anonymous developer named Domo. To date, the aggregate market cap of BRC-20 tokens has surged to over $1.35 billion as of November 2023, firmly grasping the attention of the blockchain and cryptocurrency community.

BRC-20 transactions now constitute a substantial portion of Bitcoin transactions, contributing significantly to network congestion. In recent times, BRC-20 transactions have dominated the Bitcoin mempool, as evident from data on Dune Analytics.

Number of BRC-20 Inscriptions Deployed | Source: Dune Analytics

The launch of any new token standard in the blockchain ecosystem, however, is typically a hotbed of confusion, hastily-minted memecoins, and conflicting information. Join us in a KuCoin deep dive into BRC-20 as we dismantle the hype surrounding this new token standard and find out what BRC-20 tokens are, how BRC-20 tokens work, and what BRC-20 tokens actually do.

What Are BRC-20 Tokens?

BRC-20 tokens are a unique and revolutionary type of token standard that utilizes a recent innovation within the Bitcoin development community known as Ordinals. Ordinal Inscriptions are digital assets inscribed directly onto satoshis, the smallest unit of Bitcoin.

What Are Token Standards?

The regulations and functions governing a cryptocurrency token's behavior are referred to as token standards. To fully understand token standards, it’s necessary to understand the fundamentals of smart contract standards. Smart contract standards are guidelines that must be followed by a smart contract in order for it to perform as intended on a given blockchain network.

These standards help create new tokens, name registries, and package formats, among other things, by providing a set of guidelines for the smart contract to follow. With these standards, anyone with enough knowledge can create their own token.

Token standards are a subset of smart contract standards, specifically focused on creating, issuing, and deploying tokens on the blockchain network. Some of the most common token standards are ERC-20, ERC-721, ERC-777, and ERC-1155, which are frequently used in Ethereum-based smart contracts.

BRC-20 Tokens, Explained

Unlike traditional tokens stored on separate blockchains, BRC-20 tokens leverage the Taproot upgrade on the Bitcoin blockchain to inscribe their data. Taproot introduced the witness feature, which enables the storage of associated data within a Bitcoin transaction.

By leveraging Ordinals and Inscriptions, the BRC-20 token standard operates as an experimental fungible token on the Bitcoin base chain. It deploys, mints, and transfers tokens using JSON data inscribed as Ordinals.

The BRC-20 token standard was announced on March 8th, 2023, by Twitter user @domodata, demonstrating fungibility on Bitcoin with Ordinals. While it borrows its name from Ethereum's ERC-20 token standard, the BRC-20 token standard does not possess the same smart contract capabilities as the EVM standard.

Image source: Twitter

What Can BRC-20 Tokens Do?

Let developers create tokens based on the Bitcoin blockchain, similar to ERC-20 tokens on Ethereum.
Facilitate seamless trading between two tokens of the same type.
Enable token creators to mint and trade BRC-20 tokens directly from a Bitcoin wallet.

What Can't BRC-20 Tokens Do?

BRC-20 tokens cannot interact with smart contracts like Ethereum's ERC-20 tokens.
While Ordinals may facilitate the creation of NFTs on the Bitcoin blockchain, BRC-20 tokens are designed to be fungible and tradeable for other tokens of the same type.

Bitcoin’s BRC-20 vs. Ethereum’s ERC-20 Token Standard

Here are some key differences between BRC-20 and ERC-20 tokens:

BRC-20 vs. ERC-20: Underlying Blockchain

BRC-20 and ERC-20 are two distinct token standards with significant differences. BRC-20 tokens operate on the Bitcoin blockchain, while ERC-20 tokens operate on the Ethereum blockchain.

BRC-20 tokens are secured by Bitcoin's Proof of Work (PoW) consensus mechanism, while ERC-20 tokens are secured by Ethereum's Proof of Stake (PoS) consensus mechanism. Unlike ERC-20 tokens, BRC-20 tokens cannot interact directly with smart contracts. Instead, BRC-20 tokens leverage Inscriptions through the Ordinals protocol to function as fungible assets.

Smart Contract Functionality

Unlike conventional token standards on Ethereum Virtual Machine (EVM) chains, the BRC-20 token standard operates differently. It doesn't rely on smart contracts to enforce rules and regulations. Instead, it utilizes a script file within Bitcoin and assigns tokens to satoshis, enabling seamless transfers between users.

Although BRC-20 tokens are not currently equipped with smart contract functionality, they represent a move towards Bitcoin-based tokens operating on the Bitcoin network rather than being "NFTs on Bitcoin."

Support and Versatility

Regarding support and versatility, ERC-20 tokens are more widely acknowledged and utilized than BRC-20 tokens. This is primarily due to the technical limitations and experimental nature of the BRC-20 token standard. However, as the BRC-20 ecosystem continues to expand, BRC-20 tokens may develop additional features to emulate certain functionalities of ERC-20 tokens.

BRC-20 Projects: Top Tokens by Market Cap

The ease of minting BRC-20 tokens has led to a proliferation of BRC-20 projects, with many emerging since March 9, 2023. The BRC-20 tracking platform, ordiscan.com, currently boasts a staggering high of over 40 million Ordinals inscriptions. Since their launch, there have been over 40 million BRC-20 transactions on the Bitcoin network, accounting for transaction fees of over 1,300 BTC till November 2023.

The growing interest in BRC-20 tokens has injected considerable enthusiasm into the burgeoning BRC-20 ecosystem. The following is a list of the top 10 BRC-20 tokens by market cap at the time of writing:

SATS: SATS is a BRC-20 token that aims to facilitate microtransactions and enable the representation of smaller units of Bitcoin on the blockchain.
ORDI: One of the earliest BRC-20 tokens, ORDI was created as an integral part of the Ordinals Protocol. It facilitates trading within the decentralized digital asset marketplace of Ordinals.
RATS: RATS is a distinctive meme token, inspired by animals, and it operates on the Bitcoin blockchain, adhering to the BRC-20 token standard. The name of the token is derived from the most abundant mammal on earth - the rat.
BANK: BANK is a BRC-20 token that aims to provide decentralized financial services, including lending, borrowing, and yield farming, on the Bitcoin blockchain.
trac: trac is a BRC-20 token that aims to bring improved transparency and traceability to supply chains by leveraging blockchain technology.
Wojak Coin: Wojak Coin is a BRC-20 token inspired by internet culture and memes, with no specific functionality or utility.
0XBT: 0XBT is a BRC-20 token that aims to create a decentralized exchange (DEX) ecosystem on the Bitcoin blockchain, enabling users to trade various cryptocurrencies.
Vmpx: Vmpx is a BRC-20 token offering a decentralized marketplace for buying and selling virtual assets, including in-game items and digital collectibles.
Chamcha: Chamcha is a BRC-20 token with no known specific functionality or utility as of now.
BIOP: BIOP is a BRC-20 token that aims to facilitate incentivized environmental sustainability and conservation actions through blockchain-based mechanisms.
NALS: NALS is a meme-themed BRC-20 token with ties to the Ordinals Protocol. Unfortunately, no comprehensive documentation is available regarding NALS at the time of this publishing.

In addition to the top BRC-20 tokens mentioned, there are other notable BRC-20 projects worth mentioning:

PEPE: Launched in late March, PEPE BRC-20 tokens are memecoins with no utility or documentation but are active on Twitter. KuCoin currently lists an ERC-20 version of PEPE.
MEME: As the name suggests, MEME is a memecoin BRC-20 token that offers no functionality or utility when publishing.
PIZA: Inspired by the historic purchase of two Papa John's pizzas in 2010 using 10,000 Bitcoins, PIZA is a BRC-20 token that describes itself as a "memecoin with no intrinsic value or expected financial return, purely for entertainment purposes" and provides information through its website.

Check out how to buy BRC-20 tokens.

What Are the Consequences of the BRC-20 Trend?

The BRC-20 trend is shaping the future of digital assets on the Bitcoin blockchain, but it also presents various opportunities and challenges that will continue to evolve as the trend develops. Let’s look at the pros and cons of BRC-20 tokens:

Pros of BRC-20 Tokens

1. Token Innovation: The BRC-20 trend encourages innovation in creating new tokens on the Bitcoin blockchain, allowing for the development of diverse use cases and specialized functionality.

2. Expansion of the Bitcoin Ecosystem: BRC-20 tokens are changing the landscape of the Bitcoin ecosystem, expanding its utility beyond just being a cryptocurrency. These tokens bring a new layer of functionality and innovation to the Bitcoin blockchain.

3. Increased Market Activity: The popularity of BRC-20 tokens has been on the rise, with a surge in transaction activity and fees. This trend is intricately linked to Bitcoin and has contributed to the overall growth of the cryptocurrency market.

4. BRC-20 Staking: BRC-20 staking has become a prominent part of the trend. While staking offers benefits such as earning rewards, it also comes with risks like smart contract vulnerabilities and token value fluctuations.

BRC-20 Tokens’ Impact on Bitcoin Gas Fees | Source: Dune Analytics

Cons of BRC-20 Tokens

1. Network Congestion: The introduction of BRC-20 tokens can contribute to network congestion on the Bitcoin blockchain, leading to slower transaction processing times and higher transaction fees. For instance, during the four-day period between April 29 and May 2, BRC-20 token swaps constituted more than 50% of all network transactions, resulting in congestion and delays for regular BTC transactions.

2. Gas Fee Increase: BRC-20 tokens consuming block space can result in higher gas fees, reducing cost efficiency and accessibility for users conducting transactions on the Bitcoin blockchain. On 8 May 2023, Bitcoin’s transaction fees surged to a record high of $30, with over 300,000 pending transactions, mostly because of BRC-20 token swaps.

3. Potential for Scams: The popularity of BRC-20 tokens may attract the attention of scammers seeking to exploit unsuspecting users, highlighting the importance of conducting thorough research and due diligence before participating in token-related activities.

4. Ecosystem Fragmentation: A large number of BRC-20 tokens may result in a fragmented ecosystem, with many tokens having limited use cases and struggling to gain widespread adoption and utility.

What’s Next for BRC-20 Tokens?

While BRC-20 tokens are gaining attention for their potential use cases, they currently cannot interact with smart contracts. This limitation restricts their functionality within ecosystems like DeFi, where smart contracts play a vital role in executing complex financial transactions.

The emergence of BRC-20 tokens has introduced fungible and non-fungible tokens (NFTs) into the Bitcoin ecosystem, thanks to the Ordinals protocol. However, if BRC-20 tokens continue to gain traction and widespread adoption, they could be upgraded to include smart contract functionality. Several ongoing projects are actively exploring the integration of DeFi, NFTs, applications, and smart contract functionality with the Bitcoin blockchain, with initiatives like Stacks (STX) leading the way.

Further developments in BRC-20 tokens could propel them to a level of functionality similar to the ERC-20 token standard, opening the door to more advanced DeFi applications being built on the Bitcoin blockchain. BRC-20 tokens are primarily associated with the issuance of memecoins, but their future could see them evolve into a more versatile asset within the cryptocurrency ecosystem.

FAQs on BRC-20 Tokens

1. How Are BRC-20 Tokens Different from Other Tokens?

BRC-20 tokens have their own distinctive characteristics, primarily due to their reliance on the Bitcoin blockchain. They are fungible tokens but stand out in terms of their protocol and use cases.

2. What Are the Use Cases of BRC-20 Tokens?

BRC-20 tokens are currently utilized for Ordinals NFTs and meme coins. However, there's ongoing exploration into expanding their use cases, including potential integration with DeFi and NFT applications.

3. How to Mint BRC-20 Tokens

You can mint BRC-20 tokens through platforms like Unisat.io or Xverse. Input the desired token details such as name and symbol, specify the amount to mint, and confirm the transaction. It's a straightforward process that enables the creation of your own BRC-20 tokens on the Bitcoin blockchain.

4. How to Store BRC-20 Tokens

To store BRC-20 tokens, you can use Bitcoin-compatible wallets that accommodate Bitcoin Taproot addresses. These wallets can handle BRC-20 tokens and store them securely alongside Bitcoin.

5. How to Stake BRC-20 Tokens

You can stake BRC-20 tokens on supported platforms. Research to find the most reliable platforms that support BRC-20 staking, create your account, and follow the instructions to stake your tokens and earn rewards.