Beyond The Hype Of BRC-20: Pros and Cons of Bitcoin’s Latest Token Standard - Reading time: about 3 minutes

BRC-20 tokens are here, and are set to change the crypto landscape as we know it. This new token standard has gained attention in a short span of existence. But what exactly is the BRC-20 token, and what are the implications for the crypto industry at large?

This introductory article aims to answer this pressing question and to explain how this new class of crypto asset is likely to impact the ecosystem.

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 A Primer on BRC-20 Tokens

Much like the ERC-20 token standard that the Ethereum offers, BRC-20 (or Bitcoin Request for Comment 20) tokens has emerged as a modeled token standard used to implement smart contract-like implementation on the Bitcoin network. Unlike the popular ERC-20 token, however, the BRC-20 token standard does not have the recognition and approval that its Ethereum-based counterpart enjoys today.

BRC-20 tokens were initially conceived as experimental decentralized peer-to-peer assets, but have since garnered mainstream attention for their novel mechanisms. Unlike ERC-20 tokens, BRC-20 tokens are generated by encoding information on satoshis using JSON (JavaScript Object Notation) through Bitcoin ordinals.

The Ordinals protocol assigns a unique serial number to a satoshi, which is the smallest unit of currency in the Bitcoin network. This process involves inscribing a sequential identifier onto each individual satoshi, providing a distinct reference for tracking and identification purposes within the Bitcoin system. This allows BRC-20 tokens to take on fungible properties, which in turn allow these tokens to easily be transferred or swapped for tokens of the same type, on the Bitcoin blockchain.

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 The Good and The Bad of BRC-20 Tokens

There are, however, some major differences between BRC-20 tokens and the similarly named ERC-20 counterparts. In contrast to ERC-20 tokens, BRC-20 tokens are issued in a community-oriented manner such that there is a set cap on the number of tokens minted and multiple wallets can participate in the minting process to ensure a more inclusive token generation and a decentralized distribution mechanism. This approach aims to enhance community involvement and promote broader ownership of tokens. This is a novel development on the Bitcoin network. With more than 24,000 tokens now created in a short time span (with a total market cap of about $450 million as of this writing), the standard is likely to usher in a plethora of more digital assets to the Bitcoin network over time, which may have both positive and negative impacts as expounded on below.

The introduction of BRC-20 tokens answers burning questions around whether smart contract implementation is possible on the Bitcoin network. It signifies the increasing activity on the Bitcoin blockchain and showcases developers' exploration of potential advancements for the network. As a result, there have been suggestions that more crypto-related products and services —as have been recorded on the Ethereum platform—are likely to be replicated on the Bitcoin blockchain e.g. DeFi, tokenization, transfers, etc. There have also been talks of its potential for application development.

1. Security: The Bitcoin network is synonymous with being secure. For some, considering Bitcoin’s network as the most decentralized, the advent of BRC-20 tokens has seen them associated with Bitcoin’s popularity, prestige, and security. It boosts confidence and could make BRC-20 tokens considered more secure and hence preferred by some projects.
2. Is it really necessary? To some critics in the crypto space, the development of BRC-20 tokens can be seen as unnecessary, with some quarters questioning why Bitcoin is trying to become Ethereum. The BRC-20 standard has been quite topical for its clogging up of the Bitcoin network due to additional transactions, and its raising of transaction fees. More on this in our next point.
3. Network congestion: At some point in May 2023, the BRC-20 token’s popularity, coupled with its additional burden on the Bitcoin blockchain, saw the network set a record high of more than 400,000 pending transactions confirmation and even ground to a halt for a while. This development, which saw major exchanges like Binance shut down Bitcoin withdrawal more than once, is likely to continue as more BRC-20 tokens hit the market, and major exchanges list them to enhance the flow of their circulation.
4. More L2 chains on Bitcoin: At the same time, going by the Bitcoin network’s already-congested nature—even before BRC-20 tokens were introduced and somewhat worsened the situation—the addition of this new protocol could lead to Layer 2 chains springing up on the network in a bid to enable more transactions. This speaks to the projected expansion potential that the newly-introduced standard has for the Bitcoin ecosystem. For example, the increase in on-chain activity saw some exchanges resorting to using the Lightning Network for some of their transactions.  
5. Impact on other standards: Recently, there has been a notable increase in Dogecoin transactions attributed to the introduction of DRC-20, which has brought forth Doginals, similar to how BRC-20 did for Ordinals. This development has contributed to a surge in the utilization and engagement with Dogecoin, creating new possibilities and opportunities within the Dogecoin ecosystem.

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 Conclusion

The BRC-20 standard and its associated tokens significantly expand the possibilities for the Bitcoin blockchain, paving the way for future advancements and fostering the growth of the Bitcoin network and its ecosystem. These developments unlock new avenues for innovation, enabling the exploration of exciting possibilities for the future of Bitcoin. Meanwhile, although functionality is still somewhat limited when compared to ERC-20, it should be noted that any issues with BRC-20 tokens or the protocol itself do not impact the functioning of Bitcoin. In closing, while this experimental token standard can be seen as an exciting addition to the Bitcoin ecosystem, prospective investors and traders should approach it with caution, as smart contracts may have unknown bugs or exploits, adoption is yet to reach critical mass and liquidity for certain tokens may be limited.