The era of Satoshi’s valuation has arrived, is it still self-entertainment in the bear market? R3PO takes a cautious attitude towards this, but please pay close attention to this field. Is this prosperity a real wealth opportunity or will it further exacerbate the overall market fatigue? All of this began with an experiment, just like all other transformative technologies – Bitcoin, Ethereum, NFT… the list goes on.
I. The Birth of BRC-20
At the end of December 2022, Casey Rodamorr appeared in everyone’s sight with the concept of Bitcoin Ordinals and Inscriptions.
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First, let’s introduce some related knowledge. The Bitcoin block is like a page of a shared ledger that records all BTC transactions. In 2021, the size limit of the Bitcoin block is 1 megabyte. This limit is to prevent spam attacks on the network. Two Bitcoin updates – SegWit in 2017 and Taproot in 2021 – increased the block size to 4 megabytes.
Suppose you want to create your own virtual currency on Bitcoin, you need two things: satoshis and labels. Satoshis are the smallest unit of Bitcoin, similar to cents being the smallest unit of the US dollar. The label is additional data that can be attached to satoshis. Ordinals allow data to be engraved into a single “satoshi” of Bitcoin. They use a logical ordering system called ordinal theory to give each independent “satoshi” a unique number. Then, any data can be engraved into each individual “satoshi”. The data engraved on the “satoshi” can be images, videos, audio, text, or even entire applications.
Ordinals enable the creation of NFTs. It is completely native to Bitcoin, works without a second-layer solution, does not require changes to the Bitcoin protocol, and is backward compatible with the network.
On March 9, 2023, anonymous developer domo launched the $ordi token and the experimental standard protocol BRC-20. BRC, which stands for Bitcoin Request for Comment, is a protocol for soliciting opinions on Bitcoin. It is worth noting that the BRC-20 standard does not use smart contracts like the popular token standards on EVM blockchains. BRC-20 tokens embed JSON data in the serial number inscriptions, allowing users to deploy, mint, and transfer tokens.
The first batch of created BRC-20 tokens, $ordi tokens, contains the following JSON data, defining the token’s name. Each minting factory is limited to 1,000 tokens, with a maximum of 21 million tokens:
For most people, Bitcoin has only been used as digital gold. Shouldn’t Bitcoin support more complex functions? The introduction of ordinal and inscription NFTs has sparked renewed interest in Bitcoin, and the community has started to explore the potential of the Bitcoin network as a way to store immutable data.
2. What impact has the BRC-20 craze had on the Bitcoin ecosystem?
According to brc-20.io, as of May 22, 2023, more than 24,000 tokens have been deployed on BRC-20, with a total market value of $400 million. $ordi is firmly in first place, with a market value of $200 million, accounting for half of the total market value. $ordi is the first native token of Bitcoin, with a total of 21,000 tokens, and as the first BRC-20 to be born, it has symbolic significance, like Punk in NFTs. Creator domo also stated that $ordi is only an experimental token with no practical significance, but this does not affect people’s speculation and FOMO sentiment.
1. BRC-20 brings more revenue to Bitcoin miners
Bitcoin’s model incentivizes miners to protect the network in two ways: block rewards and transaction fees. Block rewards are halved approximately every four years and will eventually decrease to zero in the long run. Therefore, in the end, Bitcoin’s transaction fees will be the only compensation for miners, which have only accounted for a small portion of miner revenue and have been a long-standing issue in the Bitcoin community. Now, transaction fees account for a historically high percentage of miner revenue. According to Dune Analytics data, as of May 22, the total fees generated by the BRC-20 protocol have reached 1201 BTC, 87.6% of which come from BRC-20.
2. BRC-20 has caused serious congestion in the Bitcoin network
In the past month, due to the wealth effect of $ordi tokens, a large number of users have flooded into the Bitcoin network to trade BRC-20 tokens, causing severe congestion and a surge in gas fees on the Bitcoin chain. On May 7, Binance suspended Bitcoin withdrawals twice in one day due to large withdrawal transactions and skyrocketing fees. On May 8, the Bitcoin network stopped producing blocks for an hour due to congestion, with the gas fee for each transaction on the chain reaching as high as $30, setting a new record since May 2021.
Currently, the increased interest in Ordinals and BRC-20 has led to high transaction fees and slow operation of the Bitcoin network. The Bitcoin network can be likened to a two-lane highway, with each car representing a transaction from point A to point B. Miners act as toll booths, verifying transactions and allowing them to pass through, with transaction fees being the price paid by drivers to pass through toll booths. Ordinals NFT and BRC-20 tokens are like trucks carrying digital items, occupying more space on the highway and at toll booths. A large number of trucks (NFTs and tokens) can cause congestion and saturation on the Bitcoin network, with congestion leading to longer wait times for processing transactions. Some users are willing to pay higher fees to prioritize processing, increasing overall transaction costs for everyone.
The creation and exchange of NFTs and BRC-20 tokens help increase demand for transaction processing on the Bitcoin network, thereby affecting transaction fees. The deployment of Ordinals not only significantly increases activity on the Bitcoin blockchain but also leads to a significant increase in activity on the Litecoin network.
3. Bitcoin Layer 2 network narrative back in people’s view
BRC-20 does indeed have some help in expanding the Bitcoin implementation ecosystem, and the consensus of many people in the entire crypto world will return to Bitcoin itself. But from a practical perspective, BRC-20 currently has no actual value, just like writing a number on a piece of paper and then saying it is a check. BRC-20 has no smart contracts and uses inscriptions as ledgers, but it is difficult to produce an efficient and stable system with an immutable ledger. And it occupies very valuable resources on the Bitcoin chain, including paying a certain amount of satoshis as a miner fee and the time cost of waiting for transaction confirmation. Due to its instability, it is easy to have problems in transactions, and even shortly after UniSat launched the BRC-20 trading market, it was suspended due to attacks. The frenzy of BRC-20 and Ordinals NFTs once caused serious congestion on the Bitcoin chain, and “how to solve on-chain congestion and reduce gas fees” has become an urgent problem to be solved in the current development of the Bitcoin ecosystem.
Therefore, the narrative of the Bitcoin Layer 2 network has once again returned to people’s attention:
1. Lightning Network: One of the earliest L2 solutions for Bitcoin
Lightning Network is mainly applied in Bitcoin payment scenarios, which can help users save costs and improve efficiency. The core idea is to conduct user transaction links off-chain, and only the final transaction result is confirmed on the Bitcoin mainnet chain, thereby improving the transaction efficiency of the Bitcoin network and allowing users to complete payments at lower costs and faster speeds.
2. RGB Protocol: Provides infrastructure for smart contract support for the Bitcoin network
RGB protocol is a color coin protocol based on Bitcoin. It allows users to create and exchange different types of digital assets by extending the Bitcoin protocol without affecting transactions on the main chain. It is equivalent to a scalable and privacy-featured smart contract system. Developed by the LNP/BP Association, it is mainly used to support smart contract deployment for Bitcoin and Lightning Network. Developers can create, deploy and execute smart contracts on Bitcoin or Lightning Network, while maintaining the security of their data. Through the RGB protocol, developers can deploy tokens, NFT asset issuance contracts, decentralized finance applications (DEX, lending), DAO, etc. on Bitcoin. The protocol promises to support and be compatible with complex smart contracts running on Bitcoin and Lightning Network.
3. Layer2 Sidechain Solution
As the name suggests, the sidechain solution means creating a separate public chain with a custom ledger, consensus mechanism, transaction type, script, and contract support, which can be redefined and then linked to the Bitcoin mainnet through specific cross-chain technologies. Bitcoin sidechains such as Stacks, Rootstock, and OmniLayer transfer BTC between the sidechain and the mainnet through cross-chain bridges. Smart contracts can also be supported on the sidechain to build various decentralized applications such as DeFi, with strong scalability and relatively low implementation difficulty, and the ledger is relatively secure. However, the nodes of the sidechain are not available to everyone, and the ledger consensus depends on the management of certain central institutions, with low decentralization. The difficulty of solving the risk of cross-chain bridge is a major reason why many good sidechain expansion solutions have not been widely adopted.