Introduction
In the world of cryptocurrencies, the concept of tokenization has gained significant attention. While Ethereum has been the go-to platform for creating and transferring digital assets through the ERC-20 standard, the idea of bringing tokenization to the Bitcoin network has been a subject of exploration. One such attempt is the BRC-20 protocol, which aims to enable token creation and management on the Bitcoin chain. In this article, we will dive into the technical aspects of the BRC-20 protocol and its implications.
The idea of tokenization on Bitcoin is not entirely new, as discussions around this concept emerged with the introduction of the Taproot update. Some companies, such as Taro and RGB, have already ventured into bringing assets onto the Bitcoin network through the Lightning Network and smart contract management systems, respectively.
Technical aspects
BRC-20 is an experimental token standard that enables the minting and transferring of fungible tokens via the Ordinals protocol on the Bitcoin blockchain.
By studying the workings of Ordinals and Inscriptions, which involve ordering and embedding files such as JPG or text within satoshis, it has become possible to create not only non-fungible tokens but also fungible tokens. Although these tokens draw inspiration from the ERC-20 standard, they cannot be considered equivalent. Ethereum is designed to support and validate the creation and transfer of digital assets, while Bitcoin does not inherently recognize or regulate these tokens.
While this article aims to provide a high-level understanding and avoid diving into operational technicalities, it is worth mentioning that the creation and transfer of these assets involve specific processes. For readers interested in detailed technical information, the official Gitbook provides comprehensive insights.
BRC-20 tokens utilise Ordinals inscriptions of JSON (JavaScript Object Notation) data to deploy token contracts, mint, and transfer tokens. Currently, the BRC-20 token standard allows creating a BRC-20 token with the deploy function, minting an amount of BRC-20 tokens with the mint function, and transferring an amount of BRC-20 tokens via the transfer function.
It is important to acknowledge that the development and adoption of the BRC-20 protocol present significant challenges. The fear of missing out (FOMO) and the “degen mode” mentality often lead to issues in monolithic networks with limited scalability solutions. We witnessed this phenomenon during the NFT mania on Ethereum in 2021, and despite subsequent updates and Layer 2 solutions, similar problems have resurfaced with the craze surrounding memecoins.
Considering these factors, one could anticipate that events like these would impact the network’s fluidity and result in significant congestion on a network like Bitcoin. However, the extent of the repercussions has been unprecedented, surpassing historical levels.
On-chain data
By examining the below mentioned metrics, we observe a substantial surge in the number of transactions following the introduction of BRC-20 tokens. The transaction levels have reached heights even beyond the peaks of the 2017 bull market. This surge indicates the unrestrained interaction of speculators with these functionalities and reveals an inherent spamming issue within this innovative protocol.
Figure 1: Number of transactions on the Bitcoin network, source: glassnode.com
Although the number of transactions has significantly increased, the volume within these transactions is struggling to recover to pre-FTX and Alameda crash levels.
Figure 2: Volume transferred using BTC, source: glassnode.com
This observation leads us back to the aforementioned technical characteristics: BRC-20 tokens are inscribed within a single satoshi as a JSON file. The transactions involving these tokens require minimal amounts of satoshis to be moved, resulting in reduced volume. Such transactions are primarily necessary for deployment, minting, and transfer functions.
The Future of the Standard
As the most widely distributed consensus layer globally, it is understandable that Bitcoin prioritises security over scalability on its main layer. Bitcoin is designed to maintain a balance between the cost of securing the network and the rewards received through the block subsidy and its scarcity. Thus far, the system has remained operational. However, discussions on the security budget raise questions about how this equilibrium can be maintained, given the halving formula.
Some proponents of the protocol argue that the price of BTC itself will ensure sufficient returns for miners. They believe that as the block rewards decrease, the value of each bitcoin will increase, providing an ongoing incentive for miners. On the other hand, others see a potential solution to this dilemma through revising the protocol’s parameters.
Furthermore, there are those who believe that increased network usage and a subsequent rise in transaction fees will support miners in their block production efforts.
Figure 3: Fees paid per block in BTC, source: glassnode.com
The outlook for the standard’s future is still uncertain. Finding the right balance between security, scalability, and economic incentives is a complex task. The ongoing dialogue within the Bitcoin community aims to address these challenges and shape the direction of the protocol. As the network continues to evolve, it will be interesting to see how these perspectives and potential solutions unfold.
In conclusion, the BRC-20 protocol offers innovative possibilities for tokenization on the Bitcoin network. However, its experimental nature and the challenges associated with scalability and network congestion call for careful consideration and continuous improvements. The future of the standard relies on the collaborative efforts of the Bitcoin community to address these issues while maintaining the network’s security and integrity.
