Overview

BRC-20 tokens represent a promising yet inefficient token standard, developed for the creation of interchangeable tokens using the Bitcoin blockchain. Drawing inspiration from Ethereum’s ERC-20 tokens, BRC-20 tokens utilize the Bitcoin Ordinals protocol for inscribing data onto individual satoshis, facilitating their transfer and trading.

The Origin of BRC-20 Tokens

The BRC-20 token standard was first presented by an anonymous developer named Domo in March 2023. This was shortly after the Bitcoin Ordinals protocol was introduced by Casey Rodarmor in January 2023, which provided the means to inscribe data onto each satoshi, enabling the formation of NFTs on the Bitcoin blockchain. The inaugural BRC-20 token, known as “ordi,” rapidly gained traction and stimulated the creation of a myriad of other BRC-20 tokens.

BRC-20 tokens were designed to enhance the Bitcoin network with the versatility of interchangeable tokens, akin to the way ERC-20 tokens diversified the Ethereum ecosystem. However, the functionalities and execution of BRC-20 tokens are markedly different from their Ethereum counterparts.

Understanding How BRC-20 Tokens Function

The Ordinals protocol is utilized by BRC-20 tokens to inscribe JSON data onto satoshis. This data determines the token’s characteristics and functions, such as its deployment, creation, and transfer. Unlike ERC-20 tokens on Ethereum, BRC-20 tokens operate without smart contracts, thereby limiting their functionality. However, their simplicity facilitates easier asset tokenization on the Bitcoin network.

Deployment and Creation: The process is initiated by deploying a token and inscribing its characteristics onto a satoshi. Once deployed, tokens can be created in specific quantities and transferred between users via Bitcoin transactions. The JSON data includes information like the token’s name, maximum supply, and creation conditions.

Token Transfer: The transfer of BRC-20 tokens involves the creation of a new inscription that outlines the transfer details. This inscription is then included in a Bitcoin transaction, rendering the transfer immutable and verifiable on the blockchain.

Pros and Cons

Advantages:

1. Simplicity: The non-reliance on smart contracts simplifies token creation and transfer, making it more user-friendly.
2. Security: Utilizing Bitcoin’s robust security features ensures high levels of trust and immutability.

Disadvantages:

1. Absence of Smart Contracts: The lack of smart contract capabilities limits the functionality and potential applications of BRC-20 tokens.
2. Dependency on Network: BRC-20 tokens are affected by Bitcoin’s prioritization of security and decentralization over transaction speed, potentially leading to higher fees during periods of high demand.
3. Network Congestion: The popularity and flawed design of these tokens resulted in increased transaction fees and network congestion, especially at launch when demand was high. As popularity waned, so did the congestion.
4. Limited Interoperability: BRC-20 tokens, being specifically designed for the Bitcoin network, lack the ability to interact with other blockchain ecosystems.

Real-world applications and Examples

Decentralized Application Tokens: Developers can create new tokens for decentralized applications (dApps). By inscribing the token’s details into a Bitcoin transaction using the Ordinals protocol, developers can manage the token directly on the Bitcoin blockchain without the need for additional layers or complex smart contracts. These tokens can then be used within the dApp for various functions, such as access control, rewards, or governance.

Tokenized Assets: Businesses wishing to tokenize their assets, such as shares or real estate, on the Bitcoin blockchain can use BRC-20 tokens. The tokens representing these assets can be inscribed, thereby enabling secure, transparent ownership transfers. This can streamline the process of buying, selling, or transferring ownership of these assets while leveraging Bitcoin’s robust security.

Loyalty Points System: Businesses can implement a loyalty points system using BRC-20 tokens. By creating and managing loyalty points as tokens, customers can earn, transfer, and redeem points directly on the Bitcoin blockchain. This ensures transparency and security, reducing the risk of fraud and increasing customer trust.

Community Tokens: A community group can create its own token to facilitate various activities and rewards within the community. By using BRC-20 tokens, the group can inscribe tokens that members can use for participation in events, voting on community decisions, or rewarding contributions.

BRC-20 tokens are often promoted as solutions for a variety of applications, from decentralized apps to tokenized assets. However, they often attract speculative trading and gambling. While they leverage Bitcoin’s secure network, their main use has primarily been the creation and trading of meme tokens and low-value digital assets.

The Runes Protocol: An Improved and Efficient Solution

The Runes protocol, introduced by Casey Rodarmor, offers a more efficient and scalable alternative to BRC-20 tokens. By leveraging Bitcoin’s UTXO model and the OP_RETURN opcode, Runes avoid creating unspendable UTXOs, reducing network congestion and enhancing performance. Unlike BRC-20, which relies on JSON inscriptions that can bloat the network, Runes provide a streamlined process for token creation and transfer, integrating seamlessly with the Lightning Network and supporting various wallet types. This makes Runes an advantageous choice for developers seeking to create and manage tokens on the Bitcoin blockchain with greater efficiency and flexibility.