#BRC20 #BRC_20 #BRC-20 #Ordinals #bitcoin #BTC 

 

 

 

A new hype in the crypto and NFT communities is taking the industry by storm for it is fundamentally transforming the application of Bitcoin: BRC-20 tokens.

 

With a nearly $1 billion market cap on May 8, 2023, and a last 24-hour trading volume of $207,446,993 (almost 100 times the BAYC market volume at the time of writing), there are currently 24,677 BRC-20 tokens in circulation (at the time of writing), with a total transaction number amounting to 2.36 million. During the May 1- peak alone, the volume of BRC-20 tokens reached 366,000 transactions (CoinMarketCap)

 

Why? Why have BRC-20 tokens become so popular? 

 

The article will explore the sudden hype of BRC-20 tokens and the reasons behind it:

• What are BRC-20 tokens, and why are they so popular?

• How do BRC-20 tokens work?

• Which BRC-20 tokens are most profitable?

• What are some of the upsides and concerns of investing in BRC-20?

• What do industry leaders think of BRC-20 tokens?

If you want to dig deeper into our research and insights, you can contact us at [email protected] to learn more about our exclusive offline events.

 

Key Takeaways

• BRC-20 is an experimental token standard that uses the Ordinal platform to enable NFT-like fungible tokens on the Bitcoin network.
• Bitcoin Ordinals are digital assets using the Ordinal protocol to inscribe Bitcoins with new information, including text, JPEG images, videos, and audio. Simply put, Bitcoin Ordinals are NFTs minted directly onto the Bitcoin blockchain.
• Currently, the most popular BRC-20 tokens are ordi, meme, punk, and pepe.
• BRC-20 proponents say that BRC-20 tokens contribute to innovating the Bitcoin network, and they also ensure extra incentives to Bitcoin miners as block rewards decrease over time. As a result, the Bitcoin network is more secure.
• BRC-20 detractors and purists cite network congestion, higher fees, Bitcoin blockchain size increase, and blockspace availability decrease.
  As a matter of fact, recent spikes in token minting have led to an increase in network fees and network congestion. Fees to execute transactions have jumped more than tenfold at times, resulting in costs exceeding the value of some smaller transactions.
• Given that BRC-20 tokens are still in the experimental phase, investing in them carries some risks, and users are encouraged to DYOR and delve deeper into the topic first.
• On May 14, 2023, Huobi announced a partnership with UniSat to develop industry standards for BRC-20, showing that some key industry voices are willing to invest in the healthy development of BRC-20.
• For some, Ordinals and Inscriptions may be here to stay, while BRC-20 may be simply a passing fad.

 

The Revolution of Bitcoin Ordinals and BRC-20

 

If you are familiar with NFTs, you may know that most NFT types are not stored on a blockchain. They simply represent a ‘proof of ownership’ of a given NFT, a shell of the Ntfs they are identified with. The actual nonfungible token is stored elsewhere, usually on a centralized or decentralized server through self-executing smart contracts (e.g., the Ethereum Virtual Machine). 

 

You may also know that the Bitcoin protocol is a relatively rigid one for it does not allow the minting of nonfungible tokens. This changed in 2016, though, as the Counterparty protocol worked around the issue by enabling the creation of the first-ever kind of Bitcoin NFTs, starting with the Rare Pepes. In the past few months, the Bitcoin Ordinal protocol further revolutionized the Bitcoin NFT space by allowing the storage, minting, and transferring of Bitcoin NFTs directly on the Bitcoin network without relying on other platforms, apps, or servers.

 

 

What are Ordinals? 

 

Bitcoin Ordinals are digital assets enabled by the Ordinal protocol which allows the inscription of Bitcoin with new information (the corresponding ordinal number). Simply put, Bitcoin Ordinals are NFTs minted directly onto the Bitcoin blockchain. The daily trading volume in the Ordinals market is currently around $3.42 million.

 

Similar to NFTs, Bitcoin Ordinals store data in the form of text, JPEG images, PDFs, videos, and audio. Nonetheless, they differ from traditional NFTs for they do not rely on a separate blockchain or token standard. Instead, they inscribe the smallest unit of Bitcoin currency, satoshi (‘sat’, corresponding to 0.00000001 BTC), with information to track and assign ownership of the content stored on the blockchain. When satoshis are inscribed with information, these inscriptions are attached to transactions, without involving miners.

 

The inscriptions are as durable, immutable, secure, and decentralized as Bitcoin itself. Thus, the resulting assets are unique Bitcoin-native digital artifacts that users can hold in their Bitcoin wallets and swap using Bitcoins ( Ordinals.com). 

 

 

How does it work?

 

Bitcoin Ordinals bear this name for they reflect the ordinal number that is assigned to a Bitcoin transaction according to the transactions’ execution sequence. In simple words, ordinal number 1 precedes ordinal number 2 for the transaction that ordinal number 1 is embedded into was executed before the transaction of ordinal number 2.

 

In order to better understand the concept, it may be useful to take a look at how Bitcoin transactions work:

 

1.    When Person A sends Bitcoin to Person B, the transaction between A and B is recorded on the Bitcoin blockchain. Each transaction is unique and can be tracked through the transaction’s unique identifier, called transaction ID or TXID;

2.    By assigning a specific ordinal number to a transaction according to the sequence of transactions, we can track the order in which a block’s transactions are executed;

3.    The ordinal number can be inscribed on the Bitcoin transaction by using the OP_RETURN function. This results in the creation of a Bitcoin ordinal by simply adding a piece of information to the transaction, without affecting the relationship between A and B.

 

 

Is BRC-20 the same as Bitcoin Ordinals?

 

No, it is not.

 

BRC-20, which stands for “Bitcoin request for comment” in coder parlance, is a token standard – a set of rules that specifies how fungible and non-fungible tokens should be built, stored, and used – that enables experimental fungible tokens, interchangeable and of equal worth, built on the Bitcoin blockchain. The BRC-20 token standard utilizes ordinal inscriptions to deploy contracts, mint, and transfer tokens. In other words, the BRC-20 token standard uses the Ordinal platform to enable BRC-20 fungible tokens.

   

The top 3 most valuable BRC-20 tokens today are ordi (with a time-high price of over $17 on May 15), meme, and punk.

Source: brc-20.io

 

The BRC-20 tokens took inspiration from the more well-known Ethereum’s ERC-20 tokens.

 

 

What is the difference between BRC-20 and ERC20?

 

While ERC-20 tokens employ Ethereum’s smart contracts, BRC-20 tokens operate on Ordinals and Inscriptions. Furthermore, BRC-20 tokens actually require a Bitcoin wallet to mint and trade.

 

Second, as Ordinals are inscribed on the transactions, Ordinal NFTs are stored directly on the blockchain and they do not require any extra layer or side blockchain to store data.

 

Third, ordinal NFTs and BRC-20 are fungible tokens, i.e., they are interchangeable and of equal value. This marks a striking difference from NFTs, which are unique and nonfungible tokens hosted somewhere other than the blockchain.

 

 

Are Ordinals new?

 

Quite. BRC-20 tokens even more.

 

Bitcoin-based NFTs can be traced all the way back to 2016 and the Counterparty Bitcoin protocol, which facilitated the development of Bitcoin NFTs such as Spells of Genesis and Rare Pepes. At first, many raised concerns about the storage space used up by these digital artifacts and the corresponding costs, but the issues were partially solved through the SegWit upgrade in 2017 to prevent transaction malleability and the Taproot soft fork in 2021. Thanks to the two upgrades, nowadays anyone can pay to store unlimited amounts of data on the chain provided the total block size is lower than 4 MB. 

 

Things started to change again in early 2023. In January 2023, network developer Casey Rodarmor launched the Ordinals protocol, which allowed NFT-like inscriptions to be carried on the blockchain for the first time. Then, on March 8, 2023, BRC-20 were announced in a tweet sent by a Twitter user called @domodata.

 

 

 

 

Why are BRC-20 and Ordinals so popular?

 

The hype surrounding Ordinals began in February 2023, while BRC-20 tokens gained popularity very soon after their announcement in March 2023 and the launch of the network last April (Coindesk).

 

Several reasons can explain the surging popularity of Ordinals and BRC-20.

 

They are profitable

Thanks to the increasing popularity of these tokens, miners have generated additional income in transaction fees. The meme coin fever is back, and everyone’s looking to profit from it. Since April 2023, Ordinals’ transaction fees have become one of the major sources of income for miners, who are not relying solely or mainly on Bitcoin block rewards anymore.

 

They are innovative

Bitcoin has always represented the traditional, grounded network and store of value that has no application outside of its original purpose. This is no longer the case, and the industry is ecstatic.

 

Bitcoin is more than just the store and transfer of value

Ordinals and BRC-20 have expanded the use case of Bitcoin beyond its purpose of transferring value between users. Storing other kinds of data on the network allowed more use cases in the art, gaming, and entertainment industries.

 

 

What Ordinal tokens are the most profitable?

 

The value of Ordinals is dependent on how rare they are. Several different pieces of attributes recorded on the block can make the block rare or even unique, including:

 

• Block number: A new block is mined approximately every 10 minutes.

• Difficulty adjustments: Every 2016 block (ca. every two weeks), the Bitcoin network adjusts to hash rate changes by re-calibrating the difficulty target required to accept orders and mine blocks.

• Halvings: Every 210,000 blocks (ca. every four years), the amount of new Bitcoin (and therefore, satoshis) created in every block is cut in half.

• Cycles: Every six halvings (ca. every 24 years), the halving and the difficulty adjustment coincide, resulting in a so-called conjunction. The time period between conjunctions is a cycle. The very first conjunction is estimated to happen some time in 2032.

 

The attributes above describe the rarity of each ordinal inscription on the Bitcoin transaction, epitomized in four parameters that identify the ordinal:

 

• A° - Index of Sat (satoshi) in the Block.

• B’ - Index of the Block in the Difficulty Adjustment Period X/2016

• C’’ - Index of Block in Halving Epoch X/210,000

• D’’’ - Cycle Number

 

Based on the total supply of Bitcoin, the rarity of different satoshis is categorized in Common, Uncommon, Rare, Epic, Legendary, and Mythic Ordinals. As of now, it is hard to find even uncommon satoshis  (Ordinals.com).

 

Source: Ordinals.com

A common Satoshi would look like the code below:

 

 
Source: Ordinals.com

 

The Satoshi below is mythic:

 

Source: Ordinals.com

 

The Pros and Cons of Ordinals and BRC-20

 

In favor of BRC-20 

On May 10, 2023, Binance announced it would add the Ordinal protocol to its NFT marketplace (Yahoo Finance). One day later, Coindesk reported that “...a group of developers has deployed Uniswap’s smart contracts [called ‘Trustless Market’] onto the Bitcoin network to capitalize on the rise of BRC-20 tokens and develop the decentralized finance (DeFi) ecosystem,” (Coindesk). On May 20, OKEx officially launched spot trading for ORDI/USDT. 

 

Several industry leaders and stakeholders seem to be bullish about Ordinals and BRC-20. These proponents cite several attributes that benefit both the industry actors as well as the ecosystem.

 

They improve transparency

Ordinal NFTs mirror the ordinal numbers inscribed onto Bitcoin transactions. For this reason, they serve the purpose of tracking the order of transactions on the blockchain, which in turn helps increase transparency for it is also tracking the movement of funds.

 

They are profitable and incentivize security

For the first time since 2017, miners are receiving higher rewards for processing transactions rather than creating new BTC. This fuels security since higher rewards are likely to incentivize miners to preserve a healthy network.

 

They add value to the Bitcoin network

Apart from the peer-to-peer value transfer enabled by Bitcoin, Ordinals allow us to rethink the application of the Bitcoin network, and approach new use scenarios for different kinds of industries. 

 

They are pushing the limits of innovation

One of the most vocal personalities in the Bitcoin space, Michael Saylor, seems to be mildly bullish about Ordinals and BRC-20 for one main reason: they push the limits of application and reinvent Bitcoin in ways we couldn’t think before. 

On May 14, 2023, Huobi announced a partnership with UniSat to develop industry standards for BRC-20, showing that some key voices in the sector have somewhat faith in the healthy development of BRC-20. 

 

 

Detractors of BRC-20 

Not everyone is excited about this innovation of the Bitcoin network, though. Rene Pickard, a well-known Bitcoin maximalist, published a post as early as February 8, 2023 – following the BitMex tweet that further fueled the Ordinals hype – claiming that Ordinals are merely “spamming jpegs”  (Twitter).

 

Why are some voices singing against the chorus?

 

It is a passing fad 

Ordinals and BRC-20 are still in the experimental stage, which may cause some risks to users such as bugs and increased vulnerability. Some compare them to Crypto Kitties, especially following the network congestions BRC-20 recently caused that remind us of the Ethereum network bottleneck that resulted from the Crypto Kitties hype in 2017 (see more on network congestion below).

 

BRC-20 won’t stand the test of time

The Ordinals protocol may withstand the test of time, while the BRC-20 tokens may not. 

On May 4, 2023, CoinMarketCap wrote: 

 

Even though these tokens are built on Ordinals, we are of the opinion that the Ordinals technology might stand the test of time, but for BRC 20 Tokens to survive in the long term has a very low likelihood. We feel that once the hype diminishes, the value potential for the coins will drop significantly, and hence investing in them may not be the best option.

 

Bitcoin was not meant for this

Many Bitcoin purists and maximalists advocate for the exclusive use of the Bitcoin network for peer-to-peer (P2P) cash use. 

 

They impact the fee market

Ordinals, i.e., inscribed satoshis, are competing for blockspace (see more on blockspace in the FAQ) with regular BTC transactions. As a result, network fees have increased for users, thus increasing the transaction fees paid to miners, although some argue that miners’ rewards are a crucial incentive for them to secure the blockchain. The Bitcoin community seems to be divided on this point.

 

They increase the Bitcoin blockchain size

In the long term, it will have an impact on the total data size of the Bitcoin blockchain, thus accelerating the Bitcoin blockchain towards a state of consistently near-full blocks.

 

They reduce the Bitcoin network blockspace

According to the Bitmex tweet that added fuel to the fire in February of this year, the sudden influx of images and other media files onto Bitcoin has consumed 526 megabytes of block space and cost creators 6.77 bitcoin. Around the same time, Glassnode estimated that Ordinals occupied 50% of the Bitcoin blockspace, with the mean block size increasing from 1.5-2.0MB to 3.0-3.5MB.

 

Network congestion

As a result of the flood of tokens inscribed on satoshis in recent weeks, network fees have increased and network congestion has happened, leading to a Bitcoin bottleneck spike on May 10, 2023, due to pepe coin, as many media reported. Fees to execute transactions have jumped more than tenfold at times, resulting in the costs exceeding the value of some smaller transactions.

 

 

 

 

Apart from the evident discomfort caused by the incident, this had more severe repercussions as epitomized by Binance’s halt of Bitcoin withdrawals twice within 24 hours on May 7, 2023, due to escalating transaction fees and a surge in withdrawal requests. Even though this is a temporary suspension, it has caused panic among users.

 

Some market participants are looking for solutions to the network congestions caused by BRC-20, though. Already on May 8, 2023, Binance announced in a tweet that it is working on “...enabling BTC Lightning Network withdrawals, which will help in such situations.”

 

Some final thoughts

• Ordinals and BRC-20 are changing the industry for they are changing the way Bitcoin miners are incentivized to mine. They are expanding the application of Bitcoin from a mere transfer of value to a more eclectic network.

• Ordinals and BRC-20 are driving innovation as they prompt market participants to rethink problems and solutions to embrace them or antagonize them. No matter if Bitcoin conservatives or revolutionaries, everyone is trying to find ways to adjust to this major innovation.

• While the future of BRC-20 tokens is still highly uncertain, it is more likely that Ordinals will withstand the test of time

• As the crypto sector is often subject to boom-and-bust cycles facilitating the introduction of will-o'-the-wisp projects, we always encourage everyone to DYOR. 

• More innovation of the Bitcoin network is underway, including BRC-21, a token standard for mining and redeeming tokens on the Bitcoin network, and facilitating Lighting transactions, as well as ORC-20, some sort of upgraded version of BRC-20. 

 

FAQ

 

• What are Satoshis (sats)?

Satoshis (“sats”) are the atomic unit of Bitcoin. A single Bitcoin corresponds to 100 million satoshis (1 BTC = 100,000,000 sats). Thus, there will only ever be 21 million bitcoin, and there will only ever be 2.1 quadrillion satoshis (RiverFinancial).

 

• What is a Token Standard?

A token standard is a type of smart contract standard, i.e., a set of rules to be observed to enable basic token-related functions, e.g., creating tokens or executing transactions ( CoinMarketCap)

 

• What is the Ordinal Theory? 

As indicated on the Ordinals official website, the Ordinal Theory:

“...concerns itself with satoshis, giving them individual identities and allowing them to be tracked, transferred, and imbued with meaning. Satoshis, not bitcoin, are the atomic, native currency of the Bitcoin network. One bitcoin can be subdivided into 100,000,000 satoshis, but no further. Ordinal theory does not require a sidechain or token aside from Bitcoin and can be used without any changes to the Bitcoin network. It works right now. Ordinal theory imbues satoshis with numismatic value, allowing them to be collected and traded as curios,” ( Ordinals.com).

 

• What are inscriptions?

Inscriptions are a method to inscribe transactions with arbitrary data such as images, audio files, and even software. “Inscriptions inscribe sats with arbitrary content, creating bitcoin-native digital artifacts, more commonly known as NFTs. Inscriptions do not require a sidechain or separate token,” (Ordinals.com).

 

• What is blockchain blockspace?

Blockspace is the available space on a given blockchain that can be used to store information and run code. Learn more about blockspace from Chris Nixon, General Partner at a16z.

 

• What is the SegWit upgrade?

In 2017, the SegWit upgrade served to allow more transactions per block. It also laid the groundwork for Layer 2 payment platforms such as the Bitcoin Lightning Network (read more on Trustmachines.co).

 

• What is the Taproot upgrade?

Taproot is a Bitcoin network upgrade that went live in November 2021. It was the biggest network upgrade since SegWit in 2017, which led to the creation of Bitcoin Cash (read more on Decrypt).

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