In 2023, the value of Bitcoin will return, leading the rise of global risk assets. The MEME coin in the digital currency assets detonated the FOMO sentiment in the market with an increase of hundreds or thousands of times. Among them, the most concerned and discussed MEME coin is the BRC-20 token based on the Bitcoin network. We will introduce the development process of BRC-20 in this article, and conduct an objective analysis of its value and risks, in the hope that readers who are interested in BRC-20 can have a comprehensive understanding of this new type of token.
1. The predecessor of BRC-20: the Ordinals protocol
Before the Ordinals protocol, there was a history of experiments with non-fungible tokens (NFTs) on the Bitcoin network. 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 emergence of Bitcoin derivatives Counterparty provided users with a platform to create and trade digital assets. In 2016, “Rare Pepes”, which later inspired the Pepe meme NFT, was born at Counterparty. Although Bitcoin NFT was born earlier than Ethereum, under the choice of the market, people who mention Colored Coins and Counterparty are now very rare. It has become a consensus that Bitcoin is used as a stored value asset and Ethereum develops an innovative ecology.
However, this trend has changed this year. The Ordinals protocol created by Bitcoin core contributor Casey Rodarmor proposed new concepts of Ordinals and Incriptions, injecting new vitality into the Bitcoin NFT ecosystem.
1.1 Ordinals
Ordinals refer to the numbering scheme that assigns a number to each Satoshi on the Bitcoin network in the order in which they were mined. Satoshi is the smallest measurable unit of Bitcoin, referred to as sat, named after Satoshi Nakamoto, the founder of Bitcoin, and represents one hundred millionth of a cryptocurrency.
In the Ordinals protocol, no matter how sat is transferred between different wallets, its ordinal identity remains the same. These numbered Satoshis are tracked by Bitcoin full nodes running Rodarmor’s open-source software ORD. This provides us with a mechanism for accurately tracking each Satoshi and independently verifying it.
1.2 Inscriptions
Another key concept in the Ordinals protocol is Inscriptions. Inscriptions create digital collections native to the Bitcoin network by burning information on Satoshi. The realization of this concept has benefited from two important soft fork upgrades of Bitcoin in recent years: SegWit and Taproot.
SegWit introduces the concept of witness data, which reduces the block size occupied by each transaction by removing part of the information (witness data) from the transaction. This means that a block can contain more transactions, which indirectly increases the processing power of the network. Although in theory, the block after the SegWit upgrade can reach 4 MB, this requires that all transactions are SegWit transactions and have a specific form, so the actual block size is usually around 2 MB.
The Taproot upgrade improves privacy and efficiency by encoding all possible payment conditions (e.g., multi-signatures, timelocks, etc.) into a single public key, making the data requirements of all transactions the same. Taproot improves upon SegWit upgrades by removing the witness data size limit. It is possible to store inscriptions with a size of 4 MB by using Taproot’s scripts in the witness data.
By combining SegWit and Taproot, the Ordinals protocol can burn a file less than 4 MB per satoshi on the Bitcoin block, which is the inscription. Inscriptions can contain various forms of information, such as text, pictures, videos, etc.
Simply put, the ordinal numbering scheme provides each Satoshi with a unique and traceable number, making Satoshi non-homogeneous. Inscriptions can add indivisible data information to ordinal numbers, similar to artistic creation on a piece of white paper. The combination of the two allows Bitcoin to have a new NFT standard, opening up the imagination to create BTC‘s native NFT.
Using Ordinals can be used without making changes to the bottom layer of Bitcoin, and does not require a second layer of Bitcoin or a side chain. Notable BTC NFT collectibles include Bitcoin Frogs, DogePunks, Bitcoin Punks, TwelveFold, BTC DeGods, Taproot Wizards, Ordinal Punks, Bitcoin Rocks, and many more. These inscriptions are highly sought after in the market, and the transaction price of a single collection is as high as tens of thousands of dollars. At present, the transactions are mainly concentrated on Magic Eden, and both Binance and OKX plan to support Ordinal NFT transactions at the end of May or early June.
In addition to this, Ordinals also assign an artificial level of rarity to these satoshis, for example, satoshis with an integer sequence have similar attractiveness and scarcity value to fiat notes with special serial numbers (such as 000001 or 999999). Based on specific happenings in the Bitcoin network as a reference, sats numbers are divided into the following levels:
Normal: not the first satoshi of its block;
Rare: the first Satoshi of each block;
Rare: first satoshi per difficulty adjustment cycle;
Epic: the first Satoshi of each halving period;
Legendary: the first Satoshi of each cycle;
Myth: The first satoshi of the genesis block.
2. Opportunities of BRC-20
Since the Ordinals protocol can create Bitcoin NFT by assigning different “attributes” to each satoshi, it can also create Bitcoin FT by giving a unified “format” and “attribute”, that is, homogeneous tokens . Inspired by the Ordinals protocol, Twitter user @domodata created Bitcoin’s experimental alternative token standard BRC-20 on March 8, 2023, using the ordinal inscription of JSON data to deploy token contracts, mint coins, and transfer tokens.
Although the name is similar to ERC-20 tokens, BRC-20 cannot be programmed to achieve more applications. BRC-20 writes a piece of JavaScript Object Notation (JSON) text into Bitcoin NFT through the Ordinals protocol to deploy token contracts, mint coins, and transfer tokens. The key to BRC-20 deployment lies in the token name, total supply, maximum single minting amount, etc. For transfers or buy/sell transactions, additional NFTs are engraved to track off-chain balances.
BRC 20 implements a “first-come, first-served” mechanism. After a certain BRC 20 token is deployed, a token with the same name cannot be deployed. Even if a token with the same name is deployed, due to off-chain accounting During the parsing process, the platform has already recorded the previously deployed token with the same name, so it will consider the second deployment illegal and will not record it.
Domodata deployed the first BRC-20 token Ordi by itself, with a total of 21,000,000 tokens, limited to minting 1,000 tokens each time, and was minted within 18 hours.
2.1 BRC-20 Development Status
While demodata classifies BRC-20 as an interesting social experiment against speculators making financial decisions based on its design, cryptocurrency experiments usually have their own life cycle, and BRC-20 is no exception. Funds from the meme coin boom began pouring into the Bitcoin ecosystem in the past month, with BRC-20 minting and trading activity booming. As of May 18, 2023, there are 24,677 BRC-20 tokens with a total market capitalization of 466 million USD. Among them, Ordi has the highest market value, accounting for 66.7% of the total market value of BRC-20.
Because the casting cost of Ordi tokens is very low, it has created the myth of a thousand-fold return, which has attracted widespread attention from the market. In addition, the Bitcoin ecological infrastructure is relatively imperfect, and there are certain learning thresholds. The low liquidity makes BRC-20 tokens easy to be raised. The wealth effect has attracted an influx of savvy market players into the BRC-20 market. As shown in the chart below, BRC-20 had 25,717 transactions when it was released on March 9, and then fell silent for a while at the end of March. At the beginning of April, the activity ushered in a small climax, reaching a maximum of 60,516 transactions. In mid-April, it experienced another period of underestimation, with an average daily transaction of less than 10,000. After the end of April, BRC-20 began to be known and recognized by more people, and the activity continued to surge, reaching a single-day peak of 396,763 transactions on May 7. Although the number of transactions has declined recently, it is still significantly more active than in April. In May, the number of daily transactions remained above 200,000.
2.2 The impact of BRC-20 on BTC ecology
2.2.1 Active on-chain activities demand increased miner income
Bitcoin’s halving event, which occurs every four years, cuts the rewards of Bitcoin mining in half. After the 21 million bitcoins have been mined, the miners can only obtain transfer fee income. If this part of the income cannot cover the mining cost of the miners, some miners will shut down and withdraw from 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, which encourages miners to continue mining and protect the Bitcoin network. As shown in the figure below, the transaction demand from Ordinals (including BRC-20 and non-BRC-20) brought considerable income to miners, even exceeding the normal Bitcoin transfer fee on May 7, and miners earned $17.4 million in transaction fees, making it the third-highest fee-generating day in Bitcoin history. In addition, in addition to the additional income of Ordinals, the normal transfer transactions of non-Ordinals also pay more fees to miners because of the need to seize block space. It’s worth noting that it remains to be seen whether the spike in Bitcoin transaction fees facilitated by BRC-20 will be sustained, raising concerns about the reduced accessibility of the Bitcoin blockchain.
2.2.2 The increase in transfer fees reduces the accessibility of Bitcoin
The original intention of Bitcoin was to provide a decentralized peer-to-peer transfer solution, which is also the main usage scenario of Bitcoin at present. Bitcoin is a popular financial solution in areas that are unbanked or lack safe, efficient banks. However, if transaction costs rise, existing and potential potential users may choose to abandon or suspend the use of Bitcoin. According to data from The Block, the seven-day average number of active addresses on the Bitcoin network dropped after BRC-20 tokens became active in late April.
2.2.3 Congested and inflated block space triggers intense discussions in the community
According to Kunal Goel’s report, Bitcoin’s blocks were congested during the peak of the bull market in 2017, the revival in 2019, and the first bull market in 2021 due to the increase in BTC transactions, and the price of Bitcoin will soon collapse. Some investors judge speculative bubbles based on this. As can be seen in the chart below, the daily transaction volume on the Bitcoin chain tracked by the 7-day moving average has surged recently, hitting an all-time high of 587,100 transactions on May 12. Although Bitcoin is congested again, it is because of the active activity of BRC-20 tokens that the market story has changed.
Because BRC-20 activities take place on the Bitcoin network, this means they also take up block space, causing delays in normal Bitcoin transfers. Additionally, within a few weeks of Ordinals’ launch, the cap on Bitcoin’s average block size rose from 1.5-2.0 MB to 3.0-3.5 MB, according to Glassnode. Congested, bloated block space has 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, the harmony of Bitcoin transactions has been damaged, and developers should consider taking action.
Aleksandr believes that there are two options, one is to set non-standard transactions that can only occupy up to 10% of the block capacity, and the other is to change the structure to make Ordinals’ transaction fees more expensive and push it to the Lightning Network.
Li Qingfei, chief marketing officer of F2Pool, believes that “Ordinals is a useful exploration of Bitcoin applications, which will help to release greater value in the Bitcoin network.”
The author believes that the reason why Bitcoin is popular in the world today lies in its inclusiveness, freedom, permissionless, and anti-censorship characteristics. We should not try to censor transactions. It is not advisable to be a centralized referee 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 out of the circle in the largest MEME BTC ecosystem?
MEME currency is an important part of the cryptocurrency ecology, and BTC is a social experiment that started from free distribution. As banks have proved time and time again that they cannot help people manage their money well, and continue to create credit bubbles through currency to shrink personal wealth, more and more people recognize the value of Bitcoin and use Bitcoin to store assets. According to network effects, an increase in the number of participants in a system leads to an increase in the value and utilization of the underlying network and its services. This propped up the value of Bitcoin, which is now the twelfth-largest asset in the world after Tesla.
Bitcoin is not the only successful MEME. The birth of DOGE is the source
What started as a joke quickly grew into a large and passionate cryptocurrency community supporting some great causes and charities. After many rounds of bulls and bears, DOGE is now the third largest payment token by market value besides BTC and XRP, ranking among the top ten by market value.
Although there has been a substantial increase in a short period of time, the current market value of the entire BRC-20 market is only $589,003,867, which is lower than the market value of PEPE, a MEME coin in the ETH ecosystem. As can be seen from the figure above, the current number of BRC-20 leader ORDI’s currency holding addresses is much lower than other MEME coins, indicating that the number of participants is not large, and it is still in the early stage. According to the number of currency holding addresses/the number of chain addresses, it can be seen that ORDI is more dispersed in the comparison of chips in MEME coins, and the risk of giant whales smashing the market is smaller, but it also lacks strong traders. According to the circulation market value/the market value of the chain, SHIB is 4.74%, PEPE is 0.3%, and ORDI is only 0.05%. There are multiple MEME coins in the ETH ecology, and a hundred flowers are blooming. As the only out-of-circle MEME coin based on the largest MEME coin BTC, ORDI may enjoy a higher premium, although its current market value ranking is still outside the top 100.
At present, the market value of BRC-20 is low. On the one hand, it has appeared for a short time. Both DOGE and SHIB have achieved amazing currency price performance after a period of community construction. On the other hand, the infrastructure of BRC-20 is less perfect. Bitcoin currently has 47,606,484 addresses and Ethereum has 231,862,278 addresses. Bitcoin has long been used only as a value store and transfer function, while the Ethereum ecosystem is more prosperous and diversified, and it is more convenient for users to purchase MEME coins. If the BRC-20 currency price can maintain a benign and healthy development, it will attract more Ethereum ecological players to enter the Bitcoin ecosystem, increase the utilization rate of the Bitcoin network, and benefit the long-term development of Bitcoin.
In addition, BRC-20 is a new technology, and currently there are few exchanges that list BRC-20 tokens. At present, the largest amount of funds in the currency circle is still in the centralized exchange. If the BRC-20 ecology continues to develop steadily, the centralized exchange will be launched at the right time, which may lead to a situation where supply exceeds demand, and BRC-20 has a place in the cryptocurrency world. . But on the other hand, in the short term, early participants of BRC-20 have already made considerable profits, and they need to be wary of choosing to make profits due to the liquidity brought by centralized exchanges.
2.3.2 Does BRC-20 have application value?
BRC-20 is an alternative token engraved on Satoshi. Some investors regard it as an ornament made of digital gold bitcoin and hold it as a collectible. Therefore, the current BRC-20 token price is mainly supported by the consensus culture and MEME culture of the encryption circle. Intrinsic value refers to the discounted value of cash that can be generated during the life cycle of a product or enterprise, so BRC-20 has no intrinsic value. But the psychological value of BRC-20 is determined by the subjective emotions of the holder, which is similar to the emotional value brought by other collectibles or raising pets. Moreover, based on the BRC-20 is an alternative token standard, its circulation is better than that of other categories of non-substitutable collectibles.
BRC-20 is currently only deployed in the Bitcoin network. In the future, BRC-20 tokens can be cross-chained to other chains with smart contracts to play a role in DeFi. The cross-chain protocol Map Protocol proposed the BRC-201 cross-chain standard on May 19, committed to realizing this vision. But this depends on the subsequent development of BRC-20, and only a few first-issued BRC-20 tokens with strong consensus can play a role in DeFi.
In addition to using BRC-20 tokens in other ecosystems, there are also projects that plan to develop based on the Ordinal protocol, trying to introduce the BTC network into the LP model to provide liquidity for the BRC-20 ecosystem. But the feasibility and market acceptance of this idea remains to be seen.
One application scenario of the BRC-20 protocol is to provide a fairer currency issuance mechanism. Anyone can participate in token casting, which is a rebellion against the existing token sale method in which VCs obtain chips at a low price. Anyone can easily deploy tokens, an option for issuing community consensus tokens.
Compared with traditional industries, Web3 culture is more open, inclusive and dynamic. When Bitcoin was born, no one thought that smart contracts could be added. When ETH was in ICO, few people encountered the prosperity of DeFi and NFT. The ultimate success of new things comes out step by step. Although BRC-20 has no practical application value at present, it still deserves our attention.
3 Risks of BRC-20
3.1 Security risks of BRC-20
3.1.1 Centralization risk
For the BRC-20 protocol, it treats the inscription as a ledger that records the deployment, minting and transfer of BRC-20 tokens. Since smart contracts cannot be run on Bitcoin, BRC-20 tokens cannot query information about the current token by running smart contracts. Therefore, BRC-20 searches out the final balance of each user’s BRC-20 tokens through off-chain queries, that is, using a centralized server to retrieve Bitcoin blocks and record the deployment, minting and transfer operations of all BRC-20 tokens.
Simply put, BRC-20’s ledger 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 inquiries about BRC-20 tokens.
The centralization of the settlement process may cause different platforms to have different results for the query of an account balance. Although all operations are recorded on-chain, it is the responsibility of a client to verify these operations. If these centralized service providers do not disclose their verification rules, then the entire BRC-20 ecology has no guarantee.
3.1.2 False recharge/double spend attack risk
On the evening of April 23, UniSat launched the BRC-20 trading platform, but suffered a large number of double-spending attacks due to loopholes in the code library. Address bc 1 pwturek q4 w 455 l 64 ttze 8 j 7 mnhgsuaupsn 99 ggd 0 ds 23 js 924 e 6 ms 9 fxyht At first, the Ordinals NFT for transfer was minted and tried to transfer 5,000 ORDIs and 35,000 ORDIs to their own addresses one after another out of thin air , and tried to sell ordi minted out of thin air to other users. Unisat subsequently suspended access to the website to investigate and found 70 transactions were affected.
In other browsers of BTC, we can see that the user minted Ordinals NFT in this transaction at 9:00 p.m. on April 23 and forged a transfer of 5,000 ORDIs according to the BRC-20 protocol.
If Unisat hadn’t retrieved the error that night, the damage caused by the double-spend attack is expected to exceed $1 million. How to ensure that the centralized server retrieval verification is error-free is the most important problem 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 participated in trying to capture this wave of traffic. However, centralized exchanges are vulnerable to attacks and their internal operations are opaque. When ORDI was listed on an exchange, it fell all the way to 7.5 U. Some users accused it of smashing the market through data and absorbing chips.
After the exchange participates, the risks faced by users are more complicated, but blockchain technology cannot limit these risks of BRC-20. If more and more users participate in BRC-20 in the future, the emphasis on 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
The current BRC-20 token is in a very early stage, and the hype value is far greater than the actual value. According to the data of chaineye tool, there are about 10,000 users currently participating in BRC-20. The actual number of users is far lower than the surface popularity. Many BRC-20 tokens are illiquid, with prices but no markets. Therefore, users need to control their FOMO emotions and pay attention to the hype bubble of BRC-20.
As can be seen from the trend of ORDI in the figure below, since domodata launched the BRC-20 protocol and deployed the ORDI token on March 9, the ORDI token has been silent for a month. It was not until late April when a series of meme coins such as $PEPE and $Aidoge exploded that ORDI was noticed by some players and began to rise. It can be considered that the explosion of BRC-20 is actually because the funds of the meme season began to hype the tokens on BTC.
For the hype, we can see a similar process from the Ordinals NFT in February. On February 9th, some users participated in the minting of BTC PUNK NFT. After the Blur airdrop on February 15, the NFT market became more popular, and the NFT hype related to Bitcoin also began. On February 28, Yuga Labs entered the market and used the Ordinals protocol to mint NFT.
BRC-20 has risen all the way due to the popularity and users accumulated by the meme season and the previous Ordinals protocol, coupled with the fuel of the BRC-20 research report released by Grayscale on May 8, it rose to the current highest point of $123 on May 10 , with a market value of over 2.5 billion. But then its price dropped rapidly, falling to $6.7 on May 25.
4. Summary
BRC-20 is currently quite controversial. Some Bitcoin supporters believe that BRC-20 just aggravates the congestion of the Bitcoin network and stores worthless data. Some investors think that BRC-20 is similar to meme coins, because Bitcoin cannot run smart contracts, these tokens have no value, and most BRC-20 tokens return to zero after the heat. BRC-20 supporters believe that BRC-20 has created a fairer token distribution mechanism on the Bitcoin network, adding new application scenarios and requirements for Bitcoin, and the Bitcoin ecosystem may become a long-term hot spot in the future and narrative. The development of new things is difficult to predict and judge, and the determination and execution force promoted by the community play a key role. We will continue to monitor the development of BRC-20.
