A Beginner's Guide to BRC-20

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Blockchain technology is always evolving. At Trust Wallet we keep our finger pulse of what’s new and innovative in the crypto space, and one of the the latest innovations is the BRC-20 token standard. This experimental protocol introduces the minting and sending of fungible tokens on Bitcoin's blockchain, creating new possibilities, but also challenges.

This beginner’s guide aims to explain the BRC-20 token standard, how it works, its benefits, the relationship with meme coins, and the associated risks. Whether you're a developer, investor, or an enthusiast, join us as we uncover the BRC-20 landscape.

What Is BRC-20?

BRC-20 is a new token standard on the Bitcoin network. A token standard is a set of rules and guidelines that must be followed for the creation and interaction of tokens within a specific blockchain ecosystem. And so, simply put, BRC-20 is an experiment in how to mint and transfer new fungible tokens on the Bitcoin blockchain.

The concept is inspired by ERC-20 tokens on the Ethereum network, but comes with its own unique mechanics and functions. Also, it’s important to note that, unlike ERC-20, this new BRC-20 token standard does not support smart contracts.

First developed in March 2023, by a pseudonymous programmer known as Domo, BRC-20 came out of a curiosity about the possibility of creating fungible tokens on Bitcoin following the launch of the network’s Ordinals protocol in January 2023.

How Does BRC-20 Work?

The functionality of BRC-20 tokens lies in the Bitcoin Ordinals protocol. This innovative protocol assigns numbers to satoshis — the smallest unit of Bitcoin — and provides a system for adding extra data to them through a process known as “inscription”.

BRC-20 tokens exploit the inscription feature of Ordinals through the application of JavaScript Object Notation (JSON) data. This enables the creation of token contracts, the minting of new tokens, and the transfer of these tokens across the Bitcoin network.

The first BRC-20 token to be deployed was named “ORDI”. Its creation sparked great interest and the emergence of numerous other BRC-20 tokens. As a result, a number of Bitcoin wallets soon developed the necessary tools to support this new token class.

What Are The Benefits Of BRC-20?

The BRC-20 token standard brings a variety of advantages to users and developers alike. Here are some of the key benefits:

  1. Fungibility: BRC-20 tokens, by definition, are fungible. This means each token is identical to every other token; they are interchangeable, like traditional currencies.

  2. Security: BRC-20 tokens enjoy the inherent security of the Bitcoin network, which is underpinned by its robust PoW consensus mechanism. The strength of Bitcoin's security makes it difficult for malicious entities to compromise these tokens.

  3. Innovation on Bitcoin: One of the most significant advantages of BRC-20 is they’ve delivered a new level of innovation on the Bitcoin network. They've shown that Bitcoin, which wasn’t originally designed for token issuance, can support such functionality.

  4. Adoption and Popularity: Despite their recent arrival, BRC-20 tokens have seen a surge in adoption. At the time of writing, nearly 25,000 BRC-20 tokens have been issued, with several gaining popularity, and a total market cap of more than $500m.

  5. Compatibility: BRC-20 tokens are compatible with the Bitcoin blockchain. This means they can be stored and sent just like Bitcoin, using the same network (and BRC-20 compatible wallets), making them a seamless addition to the ecosystem.

However, while considering the benefits, you should also note that BRC-20 tokens come with limitations, and are still in an experimental phase. These tokens lack smart contract capabilities and compatibility with the Ethereum Virtual Machine (EVM), which may restrict the breadth of their potential applications and the overall ecosystem.

BRC-20 & Meme Coins

In the dynamic world of crypto, meme tokens hold a special, quirky spot.

Meme coins, as they’re often called, are cryptocurrencies inspired by internet memes. They often start as joke projects, but some have attracted serious attention, and indeed, substantial market capitalization. At the time of writing, data from CoinMarketCap shows two meme coins in the top 15 tokens by market capitalization, with a combined value of some $14.8 billion (Dogecoin and Shiba Inu).

Now, with the advent of the BRC-20 token standard on the Bitcoin network, the meme coin trend has found a new playground. At this stage of BRC-20’s journey, this particular token standard has no specific utility, which is where meme coins come in.

A number of these have now been minted as BRC-20 tokens, contributing to their increasing popularity. The first-ever BRC-20 created was ORDI, designed as a meme token to show the potential of the new standard. Following ORDI, other BRC-20 meme tokens such as PIZA, PEPE, PUNK, and MEME entered the scene.

The creation of these tokens has not just been a testament to the technical capabilities of BRC-20, but also a driving force in its popularity and adoption. They have played a pivotal role in familiarizing users with the concept and potential of BRC-20 tokens, and encouraging the growth of the BRC-20 token ecosystem.

While it's exciting to see the growth of BRC-20, you should approach these meme coins with caution. Many of these tokens have little to no inherent utility, and their value is largely driven by social-media hype and speculative trading. As such, their prices can be extremely volatile and if you buy them there is always the risk of losing your money.

What Are BRC-20’s Risks And Problems?

While BRC-20 tokens offer a variety of innovative possibilities, it’s crucial to remember that they also come with significant risks and potential problems.

  1. Experimental Phase & Technical Uncertainty: The BRC-20 token standard is still in an experimental phase. Potential technical issues, bugs, or unforeseen consequences of the Ordinals protocol could lead to disruptions or even the loss of tokens.

  2. Overproduction & Devaluation: Due to the ease of creating BRC-20 tokens, there is a risk of overproduction leading to devaluation. A flood of tokens, especially those without any real utility, could dilute value and lead to many becoming worthless.

  3. Limited Utility & Adoption: BRC-20 tokens don't yet have broad utility or mainstream adoption. While it’s expected that the ecosystem will grow over time, the current state of the market presents a risk for early adopters.

  4. Network Congestion & Transaction Fees: The growth of BRC-20 tokens has caused significant congestion on the Bitcoin network and led to an increase in transaction fees. Daily transactions reached an all-time high of 682,000 in May 2023 — almost 40% higher than the previous peak in 2017. As such, the network has slowed considerably.

5: Lack of Versatility: Finally, the BRC-20 standard lacks the versatility of Ethereum's ERC-20 standard. The lack of smart contracts limits the possible applications for BRC-20 tokens. At the moment, it allows for meme coins, and not much else.

Given the risks, it's crucial you exercise caution when dealing with BRC-20 tokens. Always do your own research! Consideration of all factors, both good and bad, should form part of a balanced risk assessment before getting involved.

Final Thoughts

The success of the BRC-20 token standard in the short time since its inception is undeniable. Despite its limitations, the protocol has managed to carve out a significant niche in the Bitcoin ecosystem, giving rise to a plethora of tokens.

Although the BRC-20 token standard presents unique possibilities, it’s not without its challenges, most notably increased network congestion, and the lack of smart contract capabilities. Moreover, the experimental status of these tokens underscores the need for caution and thorough research before diving in.

The future of BRC-20 tokens may be uncertain, but what's clear is that they have added an entirely new dimension to the Bitcoin network. As we look forward to more advancements, the story of BRC-20 serves as a reminder of the innovative spirit that continues to drive the crypto world forward.

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