Home » BRC-20 elucidated: The Functions of Bitcoin Tokens and Their Controversial Nature

BRC-20 elucidated: The Functions of Bitcoin Tokens and Their Controversial Nature

The Ethereum protocol known as ERC-20 (Ethereum Request for Comment 20) served as the model for BRC-20, or Bitcoin

by V. Sinclair
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While the concept of putting tokens on the Bitcoin blockchain is not new, earlier attempts haven’t gained the same level of traction as BRC-20.

When the amount of unconfirmed transactions reached an all-time high over the weekend of May 6, 2023, the Bitcoin blockchain came to a temporary halt. Leading cryptocurrency exchange Binance had to twice halt withdrawals due to skyrocketing fees.

BRC-20 Described
The Ethereum protocol known as ERC-20 (Ethereum Request for Comment 20) served as the model for BRC-20, or Bitcoin Request for Comment 20, which was unveiled in March 2023 by Domo, an anonymous developer. With a few significant exceptions, such as the absence of smart contracts, BRC-20s are essentially Bitcoin’s take on ERC-20s.

Nevertheless, since Bitcoin modifications go through a procedure known as BIP, or Bitcoin Improvement Proposals, there haven’t been any additional “BRC” figures. Therefore, no BRC-1, BRC-2, or so forth have been released.

The Ethereum token standard known as ERC-20 allows programmers to design tokens with integrated smart contracts and compatibility with the larger Ethereum network. These tokens have the ability to represent a wide range of transferable rights or assets, including ownership rights of access, ownership, or even different cryptocurrencies—many cryptocurrencies, including Tether and Shibu Inu Coin, are actually ERC-20 tokens.

BRC-20 borrows a page from this book. It was made feasible by the Taproot update that was released by Bitcoin in November 2021. This upgrade allowed ordinal inscriptions, the technical details that go into making BRC-20 tokens function.
Ordinals engrave a unique number onto a satoshi, which is the smallest bitcoin unit of currency. This serial number is entered into the witness signature field of the bitcoin transaction, together with the ordinal’s data. This information guarantees that the money being used is legitimately owned and prevents it from being spent twice.

Ordinals are used by BRC-20 tokens, but not all ordinals are BRC-20 tokens. For this reason, there are just over 14,000 BRC-20 tokens compared to millions of ordinals.

The JSON (JavaScript Object Notation) ordinals inscriptions used by BRC-20 tokens are used to create new tokens, move existing tokens, and start token contracts—which are currently quite basic because smart contract functionality is still being developed.

In comparison to ERC-20, the BRC-20 protocol currently has much less functionality. As of right now, users can only mint, deploy, and transfer tokens.

It’s crucial to take note of a few additional variations from ERC-20. In contrast to ERC-20, BRC-20 is still in the proposal stage and is not yet an approved standard. Additionally, BRC-20 tokens are currently difficult to trade on exchanges.

What effect do BRC-20 tokens have on Bitcoin transactions and fees?

In contrast to straightforward peer-to-peer transactions, the creation and transfer of BRC-20 tokens necessitates greater blockchain space and complexity. An ordinal inscription, on which a BRC-20 token is layered, can have a size of up to 4MB, whereas a traditional bitcoin transaction may be measured in kilobytes.

Ordinals are distinct from conventional non-fungible tokens (NFTs) on Ethereum or other blockchains in part because all of the data associated with them is stored directly on the blockchain. This means that any image or token instructions added to the inscription become part of the transaction. When using a traditional NFT, the token typically just has data or a link pointing to an outside service where the artwork is kept.

Due to increased competition for block space, users who want quicker confirmation times may have to pay higher transaction fees. Throughout, unconfirmed transactions are kept in a collective storage area called the mempool (short for memory + pool) until they are processed. This space keeps getting bigger and bigger. During the height of activity in the beginning of May, certain traders were compelled to employ a technique known as replace-by-fee. In this method, they bid to swap one version of an unconfirmed transaction for a new version that pays nodes a higher transaction fee.

A discrepancy between the transaction fees that Binance typically pays to facilitate transactions and the transaction fee that the blockchain requires to be picked up was the cause of Binance’s two withdrawal pauses during that peak.
The nodes on the blockchain that facilitate the transaction—typically miners—are compensated with these transaction fees.

This is a matter of supply and demand; since nodes are a fixed resource and the demand for their time is cyclical, fees will increase in response to changes in supply. The nodes are required to maintain the integrity of the Bitcoin blockchain, and they are compensated for their labor with transaction fees and block rewards.

What makes BRC-20s contentious?

Ordinals and BRC-20 tokens have generated some debate for two main reasons: One, to increase fees and clog the network. Another criticism posed by some is that BRC-20 tokens and ordinals “pollute” the blockchain by introducing data that is incompatible with Satoshi’s goal of establishing a peer-to-peer electronic payment system. Anything else is an improper use of the bitcoin blockchain, according to bitcoin maximalists.

As previously indicated, Bitcoin’s ordinal NFTs ensure that all data is stored on the blockchain by containing the complete data file within the witness signature field of Bitcoin transactions, in contrast to Ethereum’s NFTs, which store files on an external server.
They are larger than other NFTs, but this also means that they are more immutable than other NFTs, improving the asset’s integrity really big.

According to Luke Dashjr, a developer for Bitcoin Core, ordinals are a “attack” on Bitcoin due to file size congestion.
However, others have noted that the miners have benefited greatly from the BRC-20 boom despite facing difficulties on several fronts as a result of the bear market, including high-profile bankruptcies.

“Ordinals on Bitcoin equal NFTs.” Longtime supporter of bitcoin and former Kraken executive Dan Held tweeted, “This is good for Bitcoin.”

As a result of BRC-20 tokens and ordinals, some Bitcoin miners are now making more money from transaction processing on the blockchain than from mining new BTC for the first time since 2017.
According to analysts contacted, this development may be able to counteract Bitcoin mining’s declining profitability because purposefully reducing mining rewards by half. “With ordinals and NFTs, we were able to move past a bearish scenario and into a bullish scenario. In a recent interview, Michael Saylor of MicroStrategy stated, “I would be ecstatic if I were a miner.”

Renowned bitcoiner Nic Carter expressed a similar sentiment in an opinion piece, stating that he was “heartened” by the increased demand for blockspace that ordinals have opened up. “Miners must be paid in some way, and fees will need to make up for the lost revenue as the miner subsidy continues to erode.”

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