The era of Satoshi valuation has arrived, but is it a self-entertainment in the bear market? R3PO takes a cautious attitude towards this, but please keep a close eye on this field. Is this prosperity a real wealth opportunity or will it further exacerbate the overall market fatigue? It all started with an experiment, like all other transformative technologies-Bitcoin, Ethereum, NFT… too numerous to mention.
1. The Birth of BRC-20
At the end of December 2022, Casey Rodamorr appeared in everyone’s sight with the concepts of Bitcoin Ordinals and Inscriptions.
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: Satoshi and a label. 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 on a single “satoshi” of Bitcoin. They use a logical sorting system called the Ordinals theory to give each independent “satoshi” a unique number. Then, any data can be engraved on each individual “satoshi”. The data engraved on the “satoshi” can be images, videos, audios, text, or even entire applications.
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Ordinals enable the creation of NFTs, which are completely native to Bitcoin, do not require second-layer solutions, do not need to change the Bitcoin protocol to work, and are backward compatible with the network.
On March 9, 2023, anonymous developer domo launched the $ordi token and the experimental standard protocol BRC-20. BRC, the abbreviation of Bitcoin Request for Comment, means Bitcoin solicitation protocol in Chinese. It is worth noting that the BRC-20 standard does not use smart contracts like the popular token standard on the EVM blockchain. The BRC-20 token embeds JSON data in the ordinal inscription, allowing users to deploy, mint, and transfer tokens.
The first batch of BRC-20 tokens, including the $ordi token, contains the following JSON data, defining the name of the token and limiting each mint to 1,000 tokens, with a maximum supply of 21 million tokens:
For most people, Bitcoin has always been used as digital gold. But should Bitcoin also support more complex functions? The introduction of ordinal and inscription NFTs has sparked new interest in Bitcoin, and the community is beginning to explore the potential of the Bitcoin network as a way to store immutable data.
II. What impact has the BRC-20 frenzy had on the Bitcoin ecosystem?
According to brc-20.io, as of May 22, 2023, more than 24,000 tokens have been deployed on the BRC-20 protocol, with a total market capitalization of 400 million US dollars. The $ordi token is in the lead, with a market capitalization of 200 million US dollars, accounting for half of the total market capitalization. $ordi is the first native token of Bitcoin, with a total supply of 21,000, and it has symbolic significance as the first BRC-20 to be created, much like Punks in the NFT world. The creator, domo, has stated that $ordi is only an experimental token with no practical use, but this does not affect the hype and FOMO sentiment among investors.
1. BRC-20 has brought more revenue to Bitcoin miners
Bitcoin’s model incentivizes miners to protect the network in two ways: block rewards and transaction fees. The block reward halves roughly every four years and will eventually decrease to zero in the long run. Therefore, ultimately, transaction fees will be the only compensation for miners, which have only accounted for a small portion of miners’ revenue and have been a long-standing concern in the Bitcoin community. Today, transaction fees account for a record-high percentage of miners’ revenue. According to Dune Analytics, as of May 22, the total fees generated by the BRC-20 protocol have reached 1201 BTC, 87.6% of which comes from BRC-20.
2. BRC-20 Causes Severe Congestion in Bitcoin Network
In the past month, due to the wealth effect of the $ordi token, a large number of users have flooded into the Bitcoin network to trade BRC-20 tokens, resulting in severe congestion on the Bitcoin chain and a sharp increase in gas fees. On May 7th, Binance suspended Bitcoin withdrawals twice in one day due to large withdrawal transactions and skyrocketing transaction fees. On May 8th, the Bitcoin network stopped mining for an hour due to congestion, and the gas fee for each transaction on the chain soared to as high as $30, setting a new record since May 2021.
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 compared 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, and transaction fees are like the price drivers pay to pass through toll booths. Ordinals NFTs and BRC-20 tokens are like trucks that carry digital goods, taking up 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, and congestion leads to longer waiting times for processing transactions. Some users are willing to pay higher fees for priority processing, thereby increasing the overall transaction fees for everyone.
The creation and exchange of NFTs and BRC-20 tokens help to increase the 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 Focus
Indeed, BRC-20 has some assistance in expanding the Bitcoin ecosystem, and the consensus of many people in the entire encryption world will return to Bitcoin itself. But from a practical perspective, BRC-20 currently has no practical value, just like writing a number on a piece of paper and then saying that 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. Because it is very unstable, 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 craze for BRC-20 and Ordinals NFTs once caused severe congestion on the Bitcoin chain, and “how to solve chain congestion and reduce gas fees” has become an urgent problem to be solved in the current development of the Bitcoin ecosystem.
Thus, the narrative of Bitcoin’s Layer 2 network has once again come into view:
1. Lightning Network: One of Bitcoin’s earliest L2 solutions
Primarily used in Bitcoin payment scenarios, the Lightning Network can help users save costs and improve efficiency. The core idea is to conduct user transaction links off-chain, with only the final transaction results confirmed on the Bitcoin mainnet, thereby improving the transaction efficiency of the Bitcoin network and enabling users to complete payments at lower costs and faster speeds.
2. RGB Protocol: Infrastructure that provides smart contract support for the Bitcoin network
The RGB protocol is a Bitcoin-based colored coin protocol that 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-preserving smart contract system. Developed by the LNP/BP Association, it is mainly used to support the deployment of smart contracts for Bitcoin and the Lightning Network. Developers can use the RGB protocol to create, deploy, and execute smart contracts on Bitcoin or the Lightning Network while maintaining the security of their data. Through the RGB protocol, developers can deploy tokens, NFT asset issuance contracts, decentralized financial applications (DEX, lending), DAOs, and more on Bitcoin. The protocol promises to support and be compatible with complex smart contracts running on Bitcoin and the Lightning Network.
3. Layer 2 sidechain solutions
As the name implies, a sidechain solution involves creating a separate public chain with a customized ledger, consensus mechanism, transaction type, script, and contract support, which can then be redefined and associated with the Bitcoin mainnet using specific cross-chain technologies. Bitcoin sidechains like Stacks, Rootstock, and OmniLayer transfer BTC between the sidechain and the mainnet through cross-chain bridges. Smart contracts can also be supported on sidechains, enabling the construction of various decentralized applications such as DeFi, which are highly scalable and relatively easy to implement, while the ledger is relatively secure. However, not everyone can run nodes on the sidechain, and the consensus of the ledger depends on the management of certain central institutions, resulting in a low level of decentralization. The risk of cross-chain bridge problems is difficult to solve, which may be the main reason why many good sidechain expansion schemes have not been widely adopted.
III. Where will BRC-20 go as the tide recedes?
First of all, in the current market environment, the story of Ethereum NFTs seems to no longer be fresh, and the NFTs of the BTC ecosystem seem to have given investors a shot of excitement, like enthusiastic gold diggers, greedily cultivating the vast growth space of the BTC ecosystem. Especially many ETH holders and NFT players are quickly turning their attention to BRC-20, which is an indisputable fact. However, an important issue that cannot be ignored is that the prosperity of BRC is mainly driven by old players in the NFT stock market. These “gamblers” once bet over $500,000 on a monkey picture during the last bull market. Imagine that wherever these people go, we will see the liquidity and wealth effects emerging from the ecosystem. This is a life-changing opportunity for a few people, but for most people, it is more like a typical Ponzi scheme of passing the buck. As ordinary investors, we need to be extra careful about the risks in this BRC frenzy.
However, from this chart, we can see that even considering speculation and FOMO factors, we are still far away from the true potential of this new economy. At least compared to the market size of ERC-20 on Ethereum, BRC-20 is still a baby. Although BRC-20 has existed for some time and may have many problems and no practical value, if more builders pay attention to this track, I believe that in the near future, BRC-20 may be used for many other things, such as tokens for dApps built on BTC.
Although we do not encourage FOMO for this valueless hype, what we can see is that the ecosystem has developed from the initial off-chain order book trading to supporting facilities such as NFT wallets, secondary trading markets, and NFT issuance tools. Although many infrastructure are not yet mature, it is not difficult to see that the entire crypto market has a positive expectation for the future of the BTC ecosystem.
The narrative of the BTC ecosystem requires time and cycles, and BRC-20 can only be regarded as a spark. Whether it can eventually form a prairie fire, we need to focus on the next actions of projects such as Lightning Network and Layer2 sidechains. Ordinals and Inscriptions and BRC-20 tokens have already proven to the world that people’s demand for the Bitcoin block space is no longer limited to peer-to-peer transactions, and users hope to do the same things on the Bitcoin chain as on the Ethereum and BNB chains. Although Casey Rodamorr and domo have stimulated the development of the ecosystem with their innovation, it is now up to the community and developers to take it to the next level.
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