What Is the BRC-20 Standard & How Does It Work?

Bitcoin might be one of the oldest cryptocurrencies, but it's still going through a lot of changes. The BRC-20 token standard on the Bitcoin network, launched in March 2023 by an anonymous blockchain analyst known as Domo, has the potential to change how users interact with the blockchain. If you want to experiment with this exciting new token standard, it's helpful to understand how it works. It's quite different from other, similar token standards, such as ERC-20, so even experienced crypto enthusiasts may become confused. To learn more about BRC-20 and understand how you can use it, we’ll explore it in this helpful guide.

Key Takeaways:

• The BRC-20 token standard is a type of experimental token that uses Bitcoin’s Ordinals protocol and allows users to mint, deploy and transfer fungible tokens.

• The BRC-20 token standard was developed in March 2023 by an anonymous developer known as Domo.

• As of early 2024, the Bitcoin community is anticipating a critical update to Bitcoin Core that may significantly impact the functionality of BRC-20 tokens.

• Those interested in trading BRC-20 inscriptions can look forward to doing so on Bybit’s new Inscription Marketplace.

What Is the BRC-20 Standard?

The BRC-20 standard, a type of experimental token that uses Bitcoin’s Ordinals protocol, allows users to mint, deploy and transfer fungible tokens.

The BRC-20 token was developed in March 2023 by an anonymous developer, known simply as Domo. As a fungible token, BRC-20 is both divisible and non-unique, and doesn’t use smart contracts. Instead, it utilizes the Ordinals protocol implemented in January 2023 by the Bitcoin network. This unique system creates tokens that can hold information while being seamlessly compatible with the Bitcoin blockchain.

BRC-20 tokens are somewhat experimental, and users are still figuring out how to work with fungible token standards and learning all of their use cases. The tokens are currently popular for creating meme coins and joke cryptos. However, since they have so many unusual features, these tokens may fulfill a very important role in the Bitcoin ecosystem. The BRC-20 standard allows users to create crypto assets that are pegged to real-world commodities, as well as decentralized finance (DeFi) apps and games.

According to Kaiko - Research, the BRC-20 market has seen a remarkable surge since November 2023, with trading volumes exceeding $500 million as of January 2024. This substantial increase in trading volume indicates a robust interest and engagement with BRC-20 tokens within the cryptocurrency market. It also demonstrates the market's positive reception, and the potential for BRC-20 tokens to evolve into a significant segment within the Bitcoin blockchain.

As of early 2024, the Bitcoin ecosystem is preparing for a significant Bitcoin Core update that’s expected to have a substantial impact on the functionality of BRC-20 tokens, which are a recent innovation on the Bitcoin network. This update is particularly noteworthy, as it addresses vulnerabilities that BRC-20 tokens, along with Ordinals, have been exploiting. The changes might alter the way these tokens are integrated and function within the Bitcoin blockchain, potentially influencing their usage, transaction methods and overall blockchain dynamics.

How Does the BRC-20 Standard Work?

To learn how BRC-20 tokens work, it's essential first to understand the Ordinals system that they run on. Ordinal inscriptions are a special feature that lets people add data to satoshi tokens. Named after the founder of Bitcoin, satoshis are essentially small pieces of BTC tokens. One BTC can be broken into 100 million satoshis.

Thanks to the implementation of Ordinal inscriptions, JavaScript Objection Notation (JSON) data can be added to individual satoshi tokens. The tokens can hold text, images and even code. When they're transferred between users, they retain this data. Any satoshi with JSON data added to it is now referred to as an Ordinal. Ordinals are non-fungible, essentially functioning as Bitcoin NFTs.

BRC-20 takes the basic idea of Bitcoin NFTs inscribed with data and adds fungibility to the token. Each BRC-20 token is interchangeable, with the same value. However, just as with Ordinals, they can include additional data. Every BRC-20 can hold 4 MB of unique data that remains present, even after you transfer tokens.

Even though the new fungible tokens are based on Ordinals, they have their own value and purpose, independent of the value of a satoshi. Instead of being a single definitive token, BRC-20 is a type of token standard. People can build on it to create their own DeFi cryptocurrency systems, such as PEPE.

Despite their innovative nature, BRC-20 tokens face limitations to versatility as compared to ERC-20 tokens, primarily due to their non-reliance on smart contracts.

How Does the BRC-20 Standard Affect the Bitcoin Blockchain?

BRC-20 tokens have already started to impact Bitcoin’s blockchain because they add the instruction data from each token directly to it. Therefore, any transaction that involves a BRC-20 with Ordinal inscriptions adds quite a bit of block space to the network. Since the token was launched, there have been some complaints that it’s slowing the network down.

For example, on May 8, 2023, users were shocked to find a huge backlog of transactions on the blockchain, as 415,000 transactions were pending due to the excess amount of data. Furthermore, the high amount of data transfer has affected transaction fees. The network had a record-high gas fee of $30 per transaction on the same date in May.

The situation with regard to unconfirmed transactions in Bitcoin's mempool has shown improvement since it peaked in May 2023. However, as of Jan 17, 2024, the number remains substantial, with over 270,000 transactions left unconfirmed in the mempool, which functions as a holding area for transactions on each Bitcoin node. 

After a transaction is verified by a node, it resides in the mempool until a miner includes it in a new block. As the mempool reaches its capacity, nodes begin to prioritize transactions based on the transaction fee, a process necessary to manage the mempool efficiently and to deter spam transactions. However, it also leads to higher transaction costs for users, as only those transactions with higher fees are likely to be processed promptly. This dynamic underscores the balancing act between efficient network operation and accessible transaction costs.

The above data, sourced from mempool.space, highlights the ongoing challenge of managing transaction backlogs in Bitcoin’s network. Additionally, the mempool's memory usage has seen a significant increase, now exceeding 300 MB and reaching as high as 1.74 GB. This surge reflects the continued high demand for transaction processing on the Bitcoin network.

Advantages of the BRC-20 Standard

There are many reasons to give this type of token a try. Working with the BRC-20 token standard provides the following perks.

Bitcoin Compatibility

BRC-20 lets people create tokens that easily integrate with the rest of the Bitcoin blockchain. Since this network is one of the most trusted in the world, being able to build on it is highly useful. Furthermore, BRC-20 works with existing wallets and exchanges that support the Bitcoin network, so it's extremely convenient to start working with this new standard.

Security

Unlike random tokens generated by independent blockchains, BRC-20 is very secure. It's backed by one of the most robust blockchains, so it's incredibly hard for malicious actors to harm BRC-20 systems. In addition, the BRC-20 standard is decentralized and relies on a proof of work (PoW) mechanism, which has made the Bitcoin network almost impossible to hack or control.

Straightforward to Use

The BRC-20 standard’s lack of smart contracts makes it an incredibly straightforward token. You don't have to configure smart contracts, or fulfill certain contract conditions to use the tokens. Instead of deploying token contracts, you simply buy and sell them directly, and then your wallet can read the metadata attached to the token.

For those who aren't tech-savvy, using BRC-20 can make it easy to send images or other data over the Bitcoin network. Furthermore, it's extremely easy to mint, so you can create new tokens without complex computers and large amounts of processing power.

Disadvantages of the BRC-20 Standard

Though the BRC-20 standard can be quite useful, it's not going to work well in every scenario. There are situations where the tokens come with some downsides.

Pricey and Lengthy Transactions

The vast number of new Bitcoin Ordinals created in the past few months has been a problem for the Bitcoin community, and as mentioned above, processing extra Bitcoin transactions on the main chain is proving to be a challenge. Not only are transactions taking longer to finalize, but their fees are increasing. This could mean that using the BRC-20 token is too expensive and time-consuming for more extensive projects.

Despite these challenges, the rapid growth and potential of BRC-20 tokens suggest significant possibilities for future development. Innovations such as the ORC-20 standard aim to enhance BRC-20 functionalities, indicating ongoing evolution and adaptability within the Bitcoin blockchain.

Reduced Capabilities

Though some users like that BRC-20 is simple, the lack of smart token contracts does limit the token's functionality. People can deploy token contracts for asset management, automation, conditional transfers and network transparency. Without smart token contracts, this experimental token standard's functions are limited to more straightforward transactions.

BRC-20 Tokens vs. ERC-20 Tokens

Since these two tokens have similar names and uses, it's no surprise that BRC-20 and ERC-20 are often compared. Each one is a type of fungible token on its respective network that was designed to help create and transfer other tokens. They bridge the gap between users and the blockchain, so users can create their own projects while still enjoying the blockchain's security and convenience. Much as BRC-20 operates on Bitcoin, ERC-20 operates on the other main crypto network, Ethereum.

Despite these basic similarities, there are some major differences. First of all, ERC-20 uses a smart contract system. Tokens can have a lot of complex functions and interact fully with the Ethereum network. Meanwhile, BRC-20 stores information through the Ordinals inscription system. These tokens are thus less capable of integrating with the Bitcoin network (as compared to ERC-20 tokens with Ethereum), but can hold data in ways that ERC-20 cannot.

Users also need to be aware that ERC-20 tokens are more well-established than BRC-20. ERC-20 tokens have been around for years, and are fully embraced by the Ethereum community. Many reputable cryptos and DApps run on ERC-20, which is quite reliable. In contrast, BRC-20 is a relatively new and experimental token standard, and Bitcoin users are still just beginning to understand the concept and develop potential uses for it. The limitation of not using smart contracts reduces the BRC-20 token’s ability to interact with other protocols and applications, restricting it to simpler transactional functionalities. The result is that, so far, meme token projects are the most popular use case for the BRC-20 token standard, underlining its current limitations and experimental nature.

The Future of the BRC-20 Standard

It’s hard to tell what's next for BRC-20. Some people in the Bitcoin community are highly skeptical. Domo, the token’s creator, has previously expressed some concern about the way people are using this token standard, emphasizing that its tokens were simply meant to be an experiment in fungibility and should not be viewed as the next big gold mine for crypto investors.

There's certainly a chance that the BRC-20 craze might crash and burn. It's already causing enough problems on the Bitcoin protocol to frustrate the rest of the community, and so far, the tokens are mostly just being used for meme coins. There’s definitely a possibility that most of these coins will lose value over time, and investors will be left with essentially worthless tokens that have small, random bits of metadata attached to them.

However, the potential risk associated with these coins doesn't negate the fact that they’re very popular right now. They're still relatively new and interesting enough that a lot of users are having fun trading them. This can lead to some neat opportunities for investors. For example, PEPE has a market cap of around $508 million at the time of this writing. A wise investor could use short-term, high-risk strategies to potentially make a lot of money off of PEPE and similar BRC-20 coins.

There's also the chance that BRC-20 could expand beyond its current promise as a crypto investment. These tokens add some interesting utility to the Bitcoin blockchain. Since they can store data, they can be used to tokenize real-world assets. People could create cryptos based on everything from currently growing wheat crops to actual bars of gold. There’s also a chance that more DeFi projects could start working with the BRC-20 standard. Potential uses for them could include things like creating tokens for games, or allowing users to send personalized payments to each other. Due to the popularity of the Bitcoin protocol, more developers may soon begin working with BRC-20 tokens.

Trading BRC-20 Inscriptions

For those interested in delving into the world of BRC-20 inscriptions trading, an exciting development is on the horizon. Bybit is gearing up to launch its exclusive Inscription Marketplace. This new platform is set to make a significant entrance by initially integrating with BRC-20.

The Bybit Inscription Marketplace aims to provide a streamlined and user-friendly platform for trading BRC-20 inscriptions. This initiative reflects Bybit's commitment to staying at the forefront of cryptocurrency innovations and offering its users access to the latest and potentially lucrative trading opportunities.

With BRC-20 as the first token standard to be integrated, traders can expect a unique trading experience. This integration will not only facilitate access to a new range of digital assets, but also provide a secure and efficient environment for trading these inscriptions. As the Inscription Marketplace nears its launch, stay tuned to the official Bybit Web3 X (formerly Twitter) page for developments and be among the first to engage in this new trading venture. The integration of BRC-20 is just the beginning, and Bybit's platform is expected to continually evolve, adding more chains and offering an even broader spectrum of trading options in the future.

You can also tune in to our AMA with Lorenzo from UniSat and Dirk from Bybit Web3 on Jan 29, 2024, 1PM UTC.

The Bottom Line

BRC-20 is a new and exciting token standard that holds a lot of promise for the Bitcoin ecosystem. Based on Bitcoin Ordinals, these tokens let users send images, text and videos in a Bitcoin transaction. Currently, they're most popular among the meme community and short-term crypto investors. However, these fungible tokens have a lot of potential for other DeFi transactions, and savvy crypto enthusiasts should definitely keep an eye on this project.

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