Bitcoin’s New Era: Opportunities and Risks of BRC-20

Original author:

@Jesse_meta, SUSS NiFT, SUSS NiFT Security Alliance, Global Fintech Academy, Biteye Builder, Chartered Fintech Professional

In 2023, the value of Bitcoin will return, leading the world’s risk assets. Meanwhile, MEME coins in digital currency assets have exploded the FOMO sentiment in the market with hundreds and thousands of times of increase. The most concerning and hottest MEME coin is the BRC-20 token based on the Bitcoin network. In this article, we will introduce the development process of BRC-20, objectively analyze its value and risks, and hope that readers interested in BRC-20 can have a comprehensive understanding of this new type of token.

1. The predecessor of BRC-20: Ordinals Protocol

Before the Ordinals Protocol, experiments with non-fungible tokens (NFTs) on the Bitcoin network already had a history. As early as 2012, an asset called “Colored Coins” appeared on the Bitcoin network, representing all types of non-Bitcoin assets on the Bitcoin network. In 2014, the Bitcoin derivative CounterBlockingrty appeared, providing users with a platform to create and trade digital assets. In 2016, “Rare Pepes”, later inspiring Pepe meme NFT, was born on CounterBlockingrty. Although the birth time of Bitcoin NFT was earlier than Ethereum, under the market’s choice, people who mention Colored Coins and CounterBlockingrty are now very rare. Bitcoin has become a consensus as a store of value, and Ethereum has developed an innovative ecosystem.

However, this trend has changed this year. The Ordinals Protocol created by Casey Rodarmor, a core contributor to Bitcoin, proposes a new concept of ordinals and inscriptions, injecting new vitality into the Bitcoin NFT ecosystem.

1.1 Ordinals

Ordinals refers to a numbering scheme that assigns a number to each Satoshi in the Bitcoin network according to the mining order. Satoshi is the smallest measurable unit of Bitcoin, abbreviated sat, named after Satoshi Nakamoto, the founder of Bitcoin, representing one hundred millionth of a cryptocurrency.

In the Ordinals Protocol, the ordinal identification of each sat remains unchanged regardless of how it is transferred between different wallets. A Bitcoin full node that runs the open source software ORD developed by Rodarmor can track these numbered sats. This provides us with a mechanism to precisely track and independently verify each sat.

1.2 Inscriptions

Another key concept in the Ordinals protocol is Inscriptions. Inscriptions create native digital collectibles on the Bitcoin network by engraving information onto satoshis. This concept was made possible by two important soft fork upgrades to Bitcoin in recent years: SegWit and Taproot.

SegWit introduced the concept of witness data, which reduces the amount of space a transaction takes up in a block by moving a portion of the information (the witness data) out of the transaction. This means that a block can contain more transactions, indirectly increasing the network’s processing capacity. While theoretically SegWit-upgraded blocks can reach 4 MB, this requires all transactions to be SegWit transactions and have a specific form, so the actual block size is usually around 2 MB.

The Taproot upgrade improves on SegWit by encoding all possible payment conditions (such as multisignature, time locks, etc.) into a single public key, making all transaction data requirements equal, improving privacy and efficiency. Taproot removes the size limit of witness data. By using Taproot scripts in witness data, it is possible to store inscriptions up to 4 MB in size.

By combining SegWit and Taproot, the Ordinals protocol can engrave a file on each satoshi in a Bitcoin block, called an inscription, that is less than 4 MB. Inscriptions can contain a variety of information such as text, images, videos, etc.

In short, the ordinal numbering scheme provides each satoshi with a unique and traceable number, giving sats a non-fungible characteristic. Inscriptions allow for the addition of inseparable data information to satoshis, like creating art on a blank canvas. Together, they create a new NFT standard for Bitcoin, opening up the imagination space for creating BTC-native NFTs.

Ordinals can be used without modifying the underlying Bitcoin layer and without using Bitcoin’s second layer or sidechain. Famous BTC NFT collections include Bitcoin Frogs, DogePunks, Bitcoin Punks, TwelveFold, BTC DeGods, Taproot Wizards, Ordinal Punks, Bitcoin Rocks, and more. These inscriptions are highly sought after in the market, with individual collections selling for tens of thousands of dollars. Currently, trades are concentrated on Magic Eden, and Binance and OKX have plans to support Ordinal NFT trades by the end of May or early June.

In addition, Ordinals also gives sats an artificial rarity, similar to legal tender with special serial numbers (such as 000001 or 999999) having an attractive and scarce value. Based on specific events that occur in the Bitcoin network, sats are classified into the following levels:

Ordinary: Not the first block in its chunk;

Rare: The first block of each difficulty adjustment period;

Epic: The first block of each halving period;

Legendary: The first block of each cycle;

Mythical: The first block of the genesis chunk.

2. Opportunities for BRC-20

Since the Ordinals protocol can create Bitcoin NFTs by assigning different “attributes” to each block, it can also create Bitcoin FTs, i.e., fungible tokens, by giving a unified “format” and “attributes.” Inspired by the Ordinals protocol, Twitter user @domodata created the experimental Bitcoin replaceable token standard BRC-20 on March 8, 2023, using the ordinal inscription of JSON data to deploy token contracts, mint tokens, and transfer tokens.

Although the name is similar to the ERC-20 token, BRC-20 cannot be programmed to achieve more applications. BRC-20 deploys token contracts, mint tokens, and transfer tokens by writing a piece of JavaScript Object Notation (JSON) text into a Bitcoin NFT through the Ordinals protocol. The key to the deployment of BRC-20 lies in the token name, total supply, and maximum single minting amount. For transfer or trading transactions, additional NFTs are engraved to track off-chain balances.

BRC 20 implements a “first come, first served” mechanism. After deploying a BRC 20 token, you cannot deploy a token with the same name again. Even if you deploy a token with the same name, the off-chain accounting platform records the previously deployed token with the same name, so the second deployment will be considered invalid and will not be recorded.

Domodata deployed the first BRC-20 token Ordi, with a total supply of 21,000,000 tokens and a limit of 1,000 tokens per minting. The tokens were minted within 18 hours.

2.1 BRC-20 Development Status

Although domodata classified BRC-20 as an interesting social experiment and opposed speculators making financial decisions based on its design, cryptocurrency experiments usually have their own lifecycles, and BRC-20 is no exception. Funds from the Meme coin craze began to flow into the Bitcoin ecosystem over the past month, and BRC-20 minting and trading activities have flourished. As of May 18, 2023, there are 24,677 BRC-20 tokens with a total market value of 466 million USD. Ordi has the highest market value, accounting for 66.7% of the total market value of BRC-20.

Source: brc-20.io

Due to the low cost of minting Ordi tokens, it created a myth of thousand-fold returns and attracted widespread attention from the market. In addition, the relatively incomplete Bitcoin ecosystem has a certain learning curve, and the low liquidity makes BRC-20 tokens easy to be pushed up. The wealth effect attracted savvy market players to enter the BRC-20 market. As shown in the figure below, when BRC-20 was released on March 9th, there were 25,717 transactions, and then it was silent for a period of time at the end of March. The activity reached a small peak at the beginning of April, with a maximum of 60,516 transactions. In mid-April, it experienced a period of underestimation, with less than 10,000 transactions per day. After the end of April, BRC-20 began to be understood and recognized by more people, and the activity continued to soar. On May 7th, it reached a maximum of 396,763 transactions in a single day. Although the number of transactions has fallen recently, it is still significantly active compared to April, and most of the daily transactions in May remain above 200,000.

Source: https://dune.com/cryptokoryo/brc 20

2.2 The Impact of BRC-20 on the BTC Ecosystem

2.2.1 Increased on-chain activity demands increased miner income

The halving event that occurs every four years in Bitcoin reduces the return on Bitcoin mining by half. After all 21 million Bitcoins have been mined, miners can only obtain income from transaction fees. If this part of the income cannot cover the mining costs, some miners will shut down and exit the market, and the security of Bitcoin will be greatly reduced. The activity of BRC-20 brings more income from transaction fees to Bitcoin miners, motivating them to continue mining and guarding the Bitcoin network. As shown in the figure below, transaction demands from Ordinals (including BRC-20 and non-BRC-20) have brought considerable income to miners, and on May 7th, it even exceeded the normal Bitcoin transfer fee. On May 8th, miners earned $17.4 million in transaction fees, making it the third highest fee-generating day in Bitcoin history. In addition to the additional income from Ordinals, normal transfer transactions from non-Ordinals also paid more fees to miners because they had to occupy block space. It is worth noting that whether the surge in Bitcoin transaction fees promoted by BRC-20 will continue remains to be seen, which also raises concerns about the accessibility of the Bitcoin blockchain.

Source: https://dune.com/cryptokoryo/brc 20

2.2.2 The increase in transfer fees has reduced the accessibility of Bitcoin

The original intention of Bitcoin was to provide a decentralized peer-to-peer transfer solution, which is currently the main use case of Bitcoin. Bitcoin is a popular financial solution in areas without banks or with a lack of secure and efficient banks. However, if transaction costs increase, existing and potential users may choose to abandon or suspend the use of Bitcoin. According to Block’s data, the seven-day average number of active addresses on the Bitcoin network has actually decreased since the BRC-20 token became active in late April.

2.2.3 Congestion and bloated block space have sparked heated discussions in the community

According to Kunal Goel’s report, Bitcoin’s blocks were congested during the peak periods of the bull market in 2017, the revival in 2019 and the first bull market in 2021 due to an increase in BTC transactions, and Bitcoin’s price would soon collapse. Some investors have judged this as a speculative bubble. As can be seen from the following chart, the daily transaction volume on the Bitcoin chain has surged in recent times, reaching a historical high of 587,100 transactions on May 12. Although Bitcoin has experienced congestion again, it is due to the activity of BRC-20 tokens, and the market story has changed.

Source: https://www.theblock.co/data/on-chain-metrics/bitcoin/transactions-on-the-bitcoin-network-daily

Because BRC-20 activities occur on the Bitcoin network, this means that they will also occupy block space, causing delays in normal Bitcoin transfers. In addition, according to Glassnode’s data, within a few weeks after Ordinals was launched, the upper limit of Bitcoin’s average block size increased from 1.5-2.0 MB to 3.0-3.5 MB. Congestion and bloated block space have sparked heated discussions in the Bitcoin community.

On May 8, Bitcoin core developer Ali Sherief initiated an email discussion, arguing that BRC-20 is almost worthless and that the harmony of Bitcoin transactions has been disrupted, and that developers should consider taking action.

Aleksandr believes that there are two options: one is to limit non-standard transactions to a maximum of 10% of the block capacity, and the other is to change the structure to make Ordinals’ transaction fees more expensive and push it towards the Lightning Network.

F2Pool’s Chief Marketing Officer Li Qingfei believes that “Ordinals are a beneficial exploration of Bitcoin applications and help unleash greater value in the Bitcoin network.”

The author believes that the reason why Bitcoin can be popular worldwide today is due to its inclusive, free, permissionless, and anti-censorship characteristics. We should not try to censor transactions, and it is not acceptable for centralized arbitrators to define the validity of transactions.

2.3 Potential Opportunities and Application Value of BRC-20

2.3.1 Will ORDI be the first MEME coin to go mainstream in the largest MEME BTC ecosystem?

MEME coin is an important part of the cryptocurrency ecosystem, and BTC is a social experiment that started with free distribution. As banks continue to prove that they cannot help people manage their money and repeatedly create credit bubbles to shrink personal wealth, more and more people recognize the value of Bitcoin and use it to store assets. According to the network effect, the increase in the number of participants in the system leads to an increase in the value and utilization of the underlying network and its services. This supports the value of Bitcoin, which is now the world’s twelfth largest asset after Tesla.

Bitcoin is not the only successful MEME. DOGE was born from a joke and quickly developed into a large and passionate cryptocurrency community that supports great causes and charities. After many rounds of bull and bear markets, today’s DOGE is already the third largest payment token in terms of market capitalization, after BTC and XRP.

Data source: Chaineye, Coingecko, Ethscan, Blockchair, May 18, 2023, produced by SUSS NiFT, Beosin

Although there has been a substantial increase in a short period of time, the current market capitalization of the entire BRC-20 market is only $ 589, 003, 867, which is lower than the market capitalization of one MEME coin PEPE in the ETH ecosystem. As shown in the above figure, the number of holding addresses of ORDI, the leader of BRC-20, is much lower than that of other MEME coins, indicating that the number of participants is still small and it is still in the early stage. According to the number of holding addresses/addresses on the chain, it can be seen that ORDIs chips are more dispersed among MEME coins, and the risk of whale smashing the market is smaller, but it also lacks strong manipulation. According to the circulation market value/chain market value, SHIB is 4.74%, PEPE is 0.3%, and ORDI is only 0.05%. There are multiple MEME coins in the ETH ecosystem, and there is a variety of them. As the only mainstream MEME coin based on the largest MEME coin BTC, ORDI may enjoy a higher premium, although its current market capitalization is still outside the top 100.

Currently, the BRC-20 market value is relatively low for two reasons. Firstly, it has appeared for a short time, and DOGE and SHIB have suddenly had amazing coin price performances after a period of community development. Secondly, the infrastructure of BRC-20 is relatively imperfect. Currently, Bitcoin has 47,606,484 addresses, while Ethereum has 231,862,278 addresses. Bitcoin has long been only used for storage and transfer functions, while the Ethereum ecosystem is more prosperous and diversified, and it is more convenient for users to buy MEME coins. If the BRC-20 coin price can maintain a benign and healthy development, it will attract more Ethereum ecosystem players to enter the Bitcoin ecosystem, improve the utilization rate of the Bitcoin network, and be conducive to the long-term development of Bitcoin.

In addition, BRC-20 is a new technology, and there are currently few exchanges that have listed BRC-20 tokens. Currently, the largest amount of capital in the currency circle is still in centralized exchanges. If the BRC-20 ecosystem continues to develop steadily, listing on centralized exchanges at the right time may bring about a situation where supply exceeds demand, establishing a place for BRC-20 in the world of cryptocurrency. However, on the other hand, in the short term, early participants in BRC-20 have already obtained considerable profits, and they need to be vigilant about profit-taking due to the liquidity brought by centralized exchanges.

2.3.2 Does BRC-20 have application value?

BRC-20 is a replaceable token engraved on Cong, and some investors regard it as a decoration made by digital gold Bitcoin, to be held as a collectible. Therefore, the current BRC-20 token price is mainly supported by the consensus culture and MEME culture of the cryptocurrency circle. Intrinsic value refers to the discounted value of cash that can be generated during the product or company’s life cycle, so BRC-20 has no intrinsic value. However, the psychological value of BRC-20 is determined by the subjective emotions of the holders, similar to the emotional value brought by other collectibles or raising pets. Moreover, based on the fact that BRC-20 is a replaceable token standard, its liquidity is better than that of non-replaceable collectibles in other categories.

Currently, BRC-20 is only deployed on the Bitcoin network, and BRC-20 tokens can be cross-chain to other chains with smart contracts in the future to play a role in DeFi. The cross-chain protocol Map Protocol proposed the BRC-201 cross-chain standard on May 19, aiming to achieve this vision. But this depends on the future development of BRC-20, and only a few early BRC-20 tokens with strong consensus can play a role in DeFi.

In addition to using BRC-20 tokens in other ecosystems, there are plans to develop on the Ordinal protocol and introduce the BTC network to the LP mode to provide liquidity to the BRC-20 ecosystem. However, the feasibility and market acceptance of this idea remains to be seen.

One application of the BRC-20 protocol is to provide a fairer issuance mechanism. Anyone can participate in token minting, which is a rebellion against the existing token sale model where VCs can obtain chips at a low price. Anyone can easily deploy tokens, providing an option for issuing consensus tokens in the community.

Web3 culture is more open, inclusive, and vibrant than traditional industries. When Bitcoin was born, no one thought that smart contracts could be added, and when ETH was in the ICO stage, few people encountered the prosperity of DeFi and NFTs. The final success of new things is a step-by-step process. Although there is currently no practical application value for BRC-20, it is still worth keeping an eye on.

3 Risks of BRC-20

3.1 Security risks of BRC-20

3.1.1 Centralization risk

For the BRC-20 protocol, it treats inscriptions as a ledger to record the deployment, minting, and transfer of BRC-20 tokens. Since smart contracts cannot be run on Bitcoin, BRC-20 tokens cannot query relevant information about the current token by running smart contracts. Therefore, BRC-20 uses off-chain queries, that is, using centralized servers to retrieve Bitcoin blocks to record all BRC-20’s deployment, minting, and transfer operations so as to query the final balance of each user’s BRC-20 tokens.

Simply put, the ledger of BRC-20 is decentralized and recorded on the Bitcoin chain, but the settlement process is centralized. Currently, there are two websites, brc-20.io and unisat.io, that support relevant queries for BRC-20 tokens.

However, the centralization of the settlement process may cause different platforms to have different results when querying the balance of a certain account. Although all operations are recorded on the chain, verifying these operations is the responsibility of a certain client. If these centralized service providers do not disclose their verification rules, then the entire BRC-20 ecosystem actually has no guarantee.

3.1.2 False recharge/double-spending attack risk

On the evening of April 23, UniSat launched the BRC-20 trading platform, but due to vulnerabilities in the code repository, it suffered a large number of double-spending attacks. Initially, the user forged the Ordinals NFT for the transfer attempt, trying to transfer 5000 ORDI and 35000 ORDI to their own address one after another, and attempted to sell the ordi forged out of thin air to other users. Unisat subsequently suspended website access and conducted an investigation, and found that 70 transactions were affected.

https://unisat.io/brc20?q=bc1pwturekq4w455l64ttze8j7mnhgsuaupsn99ggd0ds23js924e6ms9fxyht&tick=ordi

In other BTC browsers, we can see that in this transaction on the evening of April 23 at 9 o’clock, the user forged the Ordinals NFT and fraudulently transferred 5000 ORDI according to the BRC-20 protocol.

If Unisat had not detected the error that evening, the losses caused by this double-spending attack were expected to exceed $1 million. Ensuring that centralized servers retrieve and verify without errors is the most important problem that needs to be solved in the development of BRC-20.

3.2 Policy Risks of BRC-20

Due to the popularity of BRC-20, many exchanges have joined in an attempt to capture this wave of traffic. However, centralized exchanges are vulnerable to attacks and have opaque internal operations. When ORDI was listed on a certain exchange, it fell all the way to 7.5 U. Some users accused it of smashing the market through data and absorbing chips.

After exchanges join in, the risks faced by users become more complex, while blockchain technology cannot limit these risks for BRC-20. If more and more users participate in BRC-20 in the future, the importance of regulation and compliance is likely to increase. At that time, how will the BRC-20 community and developers respond to regulatory policies?

3.3 Hype Risks Related to BRC-20

Currently, BRC-20 tokens are in a very early stage, and their speculative value far exceeds their actual value. According to the data from the chaineye tool, there are currently about 10,000 users participating in BRC-20. The actual number of users is far lower than the surface heat. Many BRC-20 tokens have poor liquidity and are worthless. Therefore, users need to control their FOMO emotions and pay attention to the hype bubble of BRC-20.

ChainEye – Free and open source omni-chain analytical tools

From the trend of ORDI shown in the following figure, it can be seen that after domodata launched the BRC-20 protocol and deployed the ORDI token on March 9th, the ORDI token remained silent for a month. It was not until the late April when a series of meme coins such as $PEPE and $Aidoge became popular that some players noticed and began to buy ORDI, causing its price to rise. It can be said that the popularity of BRC-20 is actually due to the funds of meme season starting to speculate on tokens on BTC.

BRC-20.io | ordi price today, market cap and chart

With regard to speculation, we can see a similar process from the Ordinals NFT in February. On February 9, some users participated in the minting of BTC PUNK NFT. Then, on February 15, the Blur airdrop caused the NFT market to heat up, and the speculation of NFT related to Bitcoin also began. On February 28, Yuga Labs entered and minted NFT using the Ordinals protocol.

BRC-20 has risen all the way due to the heat and users accumulated by meme season and the previous Ordinals protocol. In addition, the release of the BRC-20 research report by Grayscale on May 8th has also given it a boost. It reached its highest point of $123 on May 10th, with a market value of over 2.5 billion. However, its price quickly dropped and fell to $6.7 on May 25th.

BRC-20.io | ordi price today, market cap and chart

4. Summary

BRC-20 is currently controversial. Some Bitcoin supporters believe that BRC-20 only exacerbates the congestion of the Bitcoin network and stores worthless data. Some investors believe that BRC-20 is similar to meme coins, and because Bitcoin cannot run smart contracts, these tokens have no value, and most BRC-20 tokens return to zero after their popularity fades. Supporters of BRC-20 believe that BRC-20 has created a more fair token distribution mechanism on the Bitcoin network, adding new application scenarios and demand for Bitcoin, and in the future, the Bitcoin ecosystem may become a long-term hotspot and narrative. The development of new things is difficult to predict and judge, and the determination and execution of the community have played a key role. We will continue to pay attention to the development of BRC-20.

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