You Heard of Bitcoin Ordinals, Now There's BRC-20 Tokens

Mike Halper, CFP®, MPAS®, SE-AWMA®, CDAA, CBDA

05/15/2023 09:19 AM Comment(s)

Like the Ethereum blockchain and its ERC-20 tokens, Bitcoin enthusiasts can now create, mint, and transact tokens (other than bitcoin) on the Bitcoin blockchain via the BRC-20 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. For more on Bitcoin Ordinals, you can read the previous Escient Financial Insights article Bitcoin Ordinals: A New Era of Digital Asset Ownership on the Bitcoin Network.

BRC-20 tokens are a technological progression on the Bitcoin blockchain, so 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. 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.

Bitcoin Ordinals take advantage of the fact that each individual satoshi can be uniquely identified by its equivalent of a serial number, but BRC-20 tokens build upon the concept of marking single satoshis. While Bitcoin Ordinals tag individual satoshis to serve as NFTs, BRC-20 tokens involve "minting" satoshis so they hold information about a whole collection of tokens.

This is not a token standard like you’re used to with Ethereum and other similar blockchains, which create smart contracts that manage the token standard and its various rules. Instead, it simply is a way to store a script file in bitcoin and use that file as a way to attribute tokens to satoshis and then allow them to move from one user to another.

How are BRC-20 Tokens Created?

As you may recall from the previous Escient Financial Insights article Bitcoin – The Who, What, When, Why, and How, satoshis are the smallest unit of currency on the Bitcoin network, where 100 million satoshis make up one bitcoin. Every satoshi on the Bitcoin network is numbered in the order of issuance. This numbering system is known as ordinals, and ordinals identify satoshis as single units and are able to tag them with specific data.

While Bitcoin Ordinals attach digital assets to satoshis, the BRC-20 token standard attaches JSON (Javascript Object Notation) code to satoshis using the ordinals protocol. They are executable code bits that can be deployed on the Bitcoin network and define every aspect of the token including the token's identity, supply, and minting limit.

On successful deployment, any waller compatible with Bitcoin Ordinals can mint the token, which can be spent like any other cryptocurrency. ORDI was the first fungible token created using the BRC-20 standard on the Bitcoin blockchain.

What Can BRC-20 Tokens Be Used For?

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 a few things that can currently be done with BRC-20 tokens.

Peer-to-Peer Transfers

The most basic thing you could do with a BRC-20 token is to transfer it to your peers. BRC-20 tokens inherit the efficiency level of the Bitcoin network and transaction fees are charged in bitcoin. Future integrations could allow for BRC-20 tokens to be used for making payments on commercial platforms and service providers seeking to adopt more flexible payment solutions, similarly to how Ethereum ERC-20 tokens, and similar tokens on other blockchains, can be used..

Decentralized Finance (DeFi)

DeFi on the Bitcoin blockchain is still in the early stages and far from reaching the heights of the DeFi space on Ethereum and other similar blockchains. However, the use cases for BRC-20 standard tokens as on DeFi protocols built on the Bitcoin network are numerous and they 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 on decentralized exchanges, lending protocols, yield farming systems, and more.

Tokenization

Just like the way the Ethereum blockchain and its EVM (Ethereum Virtual Machine) has been used, BRC-20 tokens can be used to create crypto assets pegged to other real world assets such as the U.S. dollar and other fiat currencies, as well as commodities like gold and real estate.

Impact of BRC-20 Tokens

For what began as an experiment, BRC-20 tokens have exploded in popularity. More than 14,000 BRC-20 tokens been created, with a cumulative market cap exceeding $1 billion. Overall the reception of BRC-20 tokens from cryptocurrency enthusiasts has been good, largely thanks to the reputation and popularity of the Bitcoin network on which they run. However, BRC-20 transactions have added more stress to the Bitcoin blockchain. Bitcoin Ordinal and Bitcoin BRC-20 transactions have caused the Bitcoin network to become overwhelmed over the past few weeks, with a backlog of more than 500,000 unsettled transactions at one point. This backlog also caused a significant increase in fees on the Bitcoin network.

The Effect of BRC-20 on Bitcoin Transaction Fees

Just when Ordinals were going back to being a niche phenomenon, BRC-20 tokens started rocking the transaction count boat. And rock they did: BRC-20 transactions currently make up a majority of all Bitcoin transactions. With the increased use of the Bitcoin network, and the massive backlog of transactions, transaction fees on the main layer of the Bitcoin network increased dramatically. Layer 2 solutions, such as Lightning, weren't affected by the increase in usage and fees.

The increase in fees, and the backlog, were certainly disappointing to may users, but there is a silver lining to the situation. Many have wondered about the viability of the Bitcoin network when the block rewards reduce approximately every four years, and to completely stop around year 2140. About a week ago the transaction fees that miners received for successfully mining blocks actually exceeded the block reward. That supports the concept that miners (who will eventually essentially become just validators) will eventually be able to fully function and be supported by transaction fees alone when mining of new bitcoin stops.

How to Buy BRC-20 Tokens

There are two major ways to purchase BRC-20 tokens.:

On centralized exchanges where they are listed. You can keep the tokens on the exchange, but if you want to transfer off the exchange a wallet that supports Bitcoin Ordinals would be required.
On ordinals exchanges, where a wallet that supports Bitcoin Ordinals is required. Keep in mind that you must have a sufficient amount of bitcoin in your wallet.

BRC-20 Tokens vs. ERC-20 Tokens

Since the BRC-20 name is a reference to the ERC-20 token standard used on the Ethereum network, there have been comparisons between BRC-20 tokens and ERC-20 tokens. While they both run on a parent blockchain network, they differ in many ways. Here are a few of the differences you will most likely experience:

An obvious difference is that BRC-20 tokens run on the Bitcoin network, while ERC-20 tokens run on the Ethereum network. The ERC-20 standard is also used to create smart contract tokens on other EVM-based networks.
ERC-20 tokens are created through a smart contract written in a language. The smart contract code is deployed on the state machine to create the tokens. BRC-20 tokens, on the other hand, are created through ordinal inscriptions on satoshis using JSON and do not use smart contracts. This can be seen as a limitation compared to ERC-20 tokens as smart contracts can provide more functionality, including borrowing and lending.
ERC-20 tokens distribution can be managed by a single entity, giving room for manipulation and centralization. BRC-20 tokens are instead issued in a community-oriented fashion with multiple ordinals wallets able to engage in the minting process of the BRC-20 token. It's a more inclusive token generation process and a more decentralized distribution mechanism.
ERC-20 is a token standard with a staggering 450,000+ ERC-20 tokens already in existence. ERC-20 tokens have been tested and proven to function stably. BRC-20 tokens are new, far fewer exist, they have not been fully-tested in the real world for a length of time, and their future has a high degree of uncertainty.
BRC-20 tokens have an edge as a tool for tokenization because of the decentralized nature in which they are minted and how the supply and limits are determined.

Risks of BRC-20 Tokens

The BRC-20 token standard is currently an experiment by programmers to facilitate fungibility on the Bitcoin blockchain. As it's still being tested, many things could go wrong.

It's also very easy to create and mint new BRC-20 tokens. The ERC-20 standard has invited numerous and plentiful scams to the Ethereum network, where investors and speculators are duped into putting money into projects with little to no value, causing them to lose their entire investment. With BRC-20 tokens borrowing from the ERC-20 name, the standard may invite those types of token creators from Ethereum, and the speculators with them. Investors should be very cautious and even suspicious of most BRC-20 tokens they come across. It's possible that most BRC-20 tokens will be useless with little to no utility and could end up being worthless. Users and investors should be cautious and conduct due diligence and proper research on any potential investment before investing in any token.

Bitcoin Ordinals and BRC-20 Tokens in a Financial Plan

Bitcoin Ordinals and the BRC-20 tokens the protocol brought with it are a new and exciting development for the Bitcoin network. The new protocol and standard are enabling utility and functionality with Bitcoin that was previously only available on Ethereum and other blockchains, but now on the most secure and longest tested network in the cryptocurrency space. Although these developments bring many new possibilities, they are very new, and investors should be cautious when investing in Bitcoin, Bitcoin Ordinals, and BRC-20 tokens, just as they should with any other cryptocurrency or digital assets, or even any traditional investment for that matter. Always be sure to conduct due diligence risk assessments and research before investing.

Investing in Bitcoin Ordinals or BRC-20 tokens may be right for some investors, but not others. In fact, it's more likely that they will not be appropriate or suitable for most investors at this time. However, the crypto and digital asset landscape is changing rapidly. Every investor is different, with different goals, risk tolerance, and interests. It's important that each investor determine on their own, or with the assistance of a financial advisor, if these new assets should or should not be included in their investment portfolio and financial plan.

Escient Financial, with Mike Halper as a Certified Digital Asset Advisor, is available to provide sound investment advice on cryptocurrency, digital assets, and other investments. For help with integrating cryptocurrency and digital assets in your financial plan, feel free to...

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