Meta: Is it an NFT? Is it a cryptocurrency? No, it’s BRC-20, the new fungible token that’s taking crypto by storm. Find out what they are, how they work and whether you should invest.
You know all about non-fungible tokens (NFTs). You’ve heard about memecoins and why they are so popular. You’re even into Bitcoin Ordinals (yes, they’re supposed to be some sort of NFT and they’re on Bitcoin, right?).
But the most exciting thing about hitting crypto in mid-2023 isn’t NFT. It’s on Bitcoin. It sounds like the familiar tokens floating around all over the Ethereum blockchain. And yes, most of them are memecoins.
Enter BRC-20, a new type of crypto token that lives on the Bitcoin blockchain.
Confused? In this article, we take a look at the new type of cryptocurrency that threatens to break the Bitcoin blockchain (literally).
Technically, BRC-20 is a type of cryptocurrency that takes its name from the more popular ERC-20 token. ERC stands for Ethereum Request for Comment and is a common prefix for a range of tokens built on Ethereum. ERC-20 is the most commonly used type of token and the simplest. They represent anything fungible and so are usually used to represent currency, as well as in-game assets or shares in a company.
In the same technical way, BRC-20 is a fungible token just like ERC-20, except it is built for the Bitcoin network. As a token standard, it enables the creation of fungible tokens on Bitcoin. However, unlike ERC-20, it does not support smart contracts.
BRC-20 was first created by pseudonymous developer Domo, who announced the launch on Twitter as an “experiment in “brc-20s” and ordinal fungibility on bitcoin.”
Basically, this experimental token standard was supposed to be a Bitcoin solution for creating and transferring new digital assets.
The backstory behind this was the popularity of Bitcoin Ordinals – NFTs on the Bitcoin blockchain – which emerged several months earlier in January 2023.
NFTs had long been the playground of Ethereum and other smart contract blockchains. Bitcoin supposedly had extremely limited smart contract capabilities, and in the past only supported Bitcoin and little-known Dapps and tokens. It was also thought to be very difficult to create fungible tokens on the network
NFTs, as you may recall, are non-fungible tokens. They are completely unique and different from each other. The whole reason why NFTs represent collectibles and “rare” items.
BRC-20 tokens are fungible, allowing for a new type of token that can be exchanged with each other.
Although BRC-20 is loosely based on ERC-20, they don’t actually work the same way under the hood. Both let users create their own crypto tokens – you can now literally create your own tokens and bet on Bitcoin just like you would with ERC-20 on Ethereum.
Ordinals, the protocol used to create Bitcoin NFTs, reminded people that Bitcoin could be used in other ways, by using a new type of protocol to “enroll” data into satoshis, the smallest unit of bitcoin – 1 BTC = 100 million satoshis.
By using the Ordinal protocol, one could enroll 0.00000001 BTC with additional data, which includes a serial number pointing to the location of a Bitcoin-based NFT.
By using the same Ordinal protocol, people can now create Bitcoin-based tokens and minuses that are fungible in nature – the new BRC-20 token.
Within weeks of the release of BRC-20, the experiment resulted in a tsunami of new tokens. The first few to gain traction were called ORDI, PEPE, MEME, and PUNK. Apart from ORDI, if it is not clear to the reader, the rest are all derivatives of meme tokens and NFTs that exist on other blockchains.
Unsurprisingly, the next few hundred new tokens minted took on the same form of memecoins with seemingly random nonsensical names. As of mid-May 2023, there are now over 14,000 new BRC-20 tokens in circulation, with a collective market capitalization (market cap) of $527 million (data from BRC-20.io).
The introduction of Ordinals was already beginning to put pressure on the Bitcoin network as inscriptions took up precious block space, but the popularity of BRC-20 has reignited concerns about Bitcoin network congestion to levels not seen since 2017 seen.
In May 2023, as many as 400,000 bitcoin transactions were waiting to be confirmed, with fees running as high as 500 satoshi per byte.
To add context, you could only pay 1 satoshi per byte for most of 2022.
That means just trading tokens can save you tens if not hundreds of dollars worth of BTC in transaction fees.
Whether or not you should invest, the objective and educational perspective gives a firm “no”. BRC-20 tokens are experimental, have no proven usefulness, and currently appear to be nothing more than memecoins.
The amount of money changing hands for BRC-20 is a perfect demonstration of the FOMO (Fear of Missing Out) effect, with speculators eager to capitalize on the craze. Sure, early speculators are likely to cash in on excited buyers who come in later, sending prices skyrocketing. However, if you enter your entries incorrectly, you will probably lose everything when you try to trade tokens.
However, it is worth noting that the Ordinals protocol has reminded people that the Bitcoin blockchain is capable of much more than most people think. It is not too farfetched to think that BRC-20 tokens could be useful in the future once they overcome challenges such as negligible utility, low liquidity, high volatility and technical maturity.
Some of the more popular BRC-20 crypto assets can be bought on exchanges like Gate, but if you’re looking for more secure deals, you’ll have to search various Bitcoin-based decentralized exchanges or DEXs to find listings.
Some places you could check out include openorderex or OrdinalsWallet marketplace.
You will also need a Taproot address or wallet, which is a type of Bitcoin wallet that supports the latest Bitcoin upgrade called Taproot. Taproot allows using the Ordinals protocol, so you should familiarize yourself with options including Sparrow Wallet or Ordinals Wallet.
You will use these to transfer tokens, and also to pay for them. Please note that you should familiarize yourself with Taproot wallets and the Ordinals protocol as they can be quite technical, although the wallets mentioned in this article make it easier to use these new technologies with each daily update.