BRC-20 token projects are a new type of asset created and stored on the Bitcoin network. The new standard allows users to print and exchange tokens on the Bitcoin network by writing data on satoshis, Bitcoin’s smallest unit. BRC-20 tokens are named after the popular ERC-20 token standard in Ethereum (ETH), the technology that underpins much of the tokenized world. However, unlike ERC-20 tokens, BRC-20 tokens are not based on smart contracts and have less features and functionality. While the prices of these tokens continued to rise, the total market value of BRC-20 token projects increased 20 times in 10 days. So what do investors need to know about this latest craze in crypto?
What is BRC-20 Token?
BRC-20 tokens are an experimental swappable token that adds a small amount of data to each satoshi using a loophole in Bitcoin’s 2021 Taproot upgrade. As we have also reported as Kriptokoin.com, 100 million satoshi represents one Bitcoin. A protocol update in 2014 allowed Bitcoin users to add small amounts of arbitrary data to each transaction in an attempt to limit the amount of data stored on the blockchain. The 2021 upgrade expands data that can be saved directly to the Blockchain, allowing everything from GIFs to audio files to be stored. BRC-20 tokens now use this “inscription” process to create tokens and add a short piece of JSON code to track their existence.
Tracking these posts requires a system that assigns different identities to each satoshi. BRC-20 tokens currently use a system known as “Ordinals” introduced by developer Casey Rodarmor in January 2023. This system assigns numbers to all 2.1 quadrillion satoshis in order of publication. The assignment of these sequential identification numbers is possible because each portion of Bitcoin transactions can be tracked on an initial continuous basis. By having a ledger of each satoshi, the Ordinals protocol can help users keep track of exactly who owns what written ones.
This is not the first time developers are trying to store more information on the Bitcoin Blockchain. Layer 2 protocol Stacks (STX) uses a secondary blockchain to store data and then creates transactions on the Bitcoin Blockchain to verify. Miners send predetermined amounts of Bitcoin to specific addresses to “complete” a transaction on the Stacks network. But BRC-20 tokens take this even further by assigning information directly to the Bitcoin Blockchain in a traceable, standardized manner.
How to create BRC-20 Token?
Creating the BRC-20 token is a simple process for those with a little knowledge of JSON and Bitcoin transactions. For this, you can follow the steps below:
- Create a BRC-20 contract: The BRC-20 token contract is a JSON file that defines the four-letter name, maximum supply, decimals, and mint limit. You can distribute your token by overwriting the JSON file on a satoshi using a wallet that supports ordinates and texts. This creates the first token set of your BRC-20 token and assigns it to your wallet address.
- Issue more tokens: To print more of your new BRC-20 token, you can write another JSON file on another satoshi using the same process. The JSON file will be slightly shorter as you don’t need to specify the same information as in the initial deployment.
- Transfer tokens: To transfer the tokens of your BRC-20 token to another wallet address, the writing process is the same as above. This JSON file should contain the number of tokens you want to transfer, the name of the token contract you deployed in the first step, and the recipient’s address. This should reduce the balance of your wallet address and increase the balance of the recipient’s wallet address.
However, BRC-20 tokens are still experimental, meaning a lot of things can go wrong. On April 24, BRC-20 wallet UniSat Wallet announced that scammers exploited the double-spend deficit to steal tokens. The company has since announced that it will issue refunds to users. The ease of issuing new tokens means that most of them will eventually become worthless. More than 10,000 BRC-20 tokens are currently available, and the naming conventions mean millions more will emerge.
How to buy/sell BRC-20 Tokens?
Speculators looking to buy or sell BRC-20 tokens will need a Taproot-enabled Bitcoin wallet and connect it to an exchange that supports the Ordinals, inscription, and BRC-20 standards. Some of these exchanges are UniSat and Ordinals Wallet. Some decentralized exchanges such as Ordswap also allow P2P exchange of BRC-20 tokens, but the liquidity is much lower. Either way, you need Bitcoin in your wallet to pay the holders and any transaction fees.
The reverse is done for selling BRC-20 tokens. You can also transfer your BRC-20 tokens to another Bitcoin wallet that supports them, auction them off on a decentralized exchange, or burn the tokens by sending them to an invalid address.
BRC-20 vs. ERC-20
From a broad perspective, BRC-20 and ERC-20 tokens differ due to Blockchains. BRC-20 tokens reside on the Bitcoin Blockchain while ERC-20 tokens reside on the Ethereum Blockchain. This means that some practical differences also emerge. These differences are as follows:
- Functionality: BRC-20 tokens are not smart contracts, meaning they cannot interact with other protocols or applications on the Bitcoin network. This gives them much less functionality than ERC-20 tokens, which can allow users to indirectly borrow, lend and more cryptocurrencies.
- Storage: While ERC-20 tokens are specific to the Ethereum protocol, these tokens use Ordinals and scripts to jointly “hack” a solution to store data in satoshis. This adds technological uncertainty to Bitcoin’s BRC-20 standard. Any future update to the world’s largest cryptocurrency could make BRC-20 tokens non-tradable or even disappear altogether.
- Availability: BRC-20 tokens are experimental and come with issues that have plagued the Bitcoin network for a long time. Transaction fees are relatively high and users may encounter scalability issues that are not present on the Ethereum network. It also takes about 10 minutes for each Bitcoin “block” to be confirmed, meaning multiple transfer functions can be written to the same block. Validity must then be determined in order of approval.
Should you buy BRC-20 Tokens?
BRC-20 tokens have soared in recent weeks with speculative interest. The total value of BRC-20 tokens is currently over $100 million. Many higher profile BRC-20 tokens are inspired by their ERC-20 and BEP-20 counterparts on the Ethereum and Binance networks. BRC-20’s SHIB uses exactly the same images as Ethereum’s Shiba Inu. This new token is currently worth over $4 million. PEPE, a clone of popular meme token Pepe, is currently worth $7 million. It was actually worth $24 million on May 2. For speculators looking for quick wealth, these enormous returns present an irresistible urge to buy.
However, BRC-20 tokens have yet to prove themselves as ERC-20 and BEP-20 tokens do. For now, they remain inscriptions on satoshis that do not add any additional functionality like Ethereum’s Uniswap (UNI). Low trading volumes for these tokens also open the door to price manipulation. A malicious actor could theoretically issue a BRC-20 token, set a limit of 20 million, and trade himself a token for $100 in Bitcoin. They can claim that their new token has a market cap of $2 billion.
Some will take things even further with “wash sales” by swapping tokens for themselves hundreds of times to inflate trading volumes. This is a common practice with NFTs. Until any of Bitcoin’s BRC-20 tokens prove useful, investors should realize that they are purchasing speculative investments where the sole purpose is to sell the shares to someone else at a higher price. As a result, BRC-20 tokens are designed solely as a blockchain experiment.
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