What are BRC-20 Tokens? A Beginner Guide

While blockchain technology keeps bringing innovations every other day, the latest talk of the town is BRC-20, or Bitcoin Request for Comment 20.

Can Bitcoin evolve beyond being a digital store of value and unlock new advanced functionalities? A fascinating experiment pushes the boundaries by introducing native fungible tokens on the Bitcoin network. The BRC-20 protocol. BRC-20 is an innovative experimental token standard that cleverly overcomes Bitcoin's programmability limitations, paving the way for creating semi-fungible tokens through ordinal inscriptions.

This article takes a closer look at BRC-20 tokens, comprehensively exploring their mechanics and contemplating their potential as a standardized token system within the Bitcoin ecosystem.

What is the BRC-20 Protocol?

In March 2023, an anonymous developer named Domo proposed Bitcoin Request for Comment 20 (BRC-20), drawing inspiration from Ethereum's widely adopted ERC-20 (Ethereum Request for Comment 20) token standard.

BRC-20 serves as a token standard on the Bitcoin blockchain, leveraging ordinal inscriptions to facilitate the minting and transfer of fungible tokens.

Token standards establish the rules governing the behavior of tokens within a blockchain ecosystem. For example, ERC-20 defines the guidelines for creating ERC-20 tokens on Ethereum.

Bitcoin was initially conceived as a peer-to-peer (P2P) decentralized currency without the ability to execute smart contracts or host decentralized applications (DApps). However, the introduction of the Bitcoin Taproot upgrade in 2021 ushered in a new era by enabling the attachment of additional data onto Bitcoin block space through the ordinal protocol. Ordinals is a Bitcoin protocol launched in January 2023 – leading to the emergence of Bitcoin NFTs and the development of the BRC-20 token standard. The ordinal protocol assigns a unique serial number, or ordinal, to each satoshi (the smallest unit of Bitcoin) and includes this data within Bitcoin transactions.

BRC-20 tokens leverage JavaScript Object Notation (JSON) embedded into ordinal inscriptions to define and initialize the functionality of token smart contracts. This innovation empowers users to deploy, mint, and transfer tokens seamlessly on the Bitcoin network.

By adopting the BRC-20 standard, Bitcoin expands its capabilities beyond its original design, embracing the exciting realm of tokenization and opening new possibilities for decentralized finance (DeFi) and blockchain applications.

How do BRC-20 tokens work?

BRC-20 tokens, although considered fungible, have some unique characteristics that make them semi-fungible. Here's how they operate:

Minting BRC-20 tokens:

To create BRC-20 tokens, a user generates a mint JSON NFT that specifies the desired quantity of tokens.
The user then participates in a priority gas auction, competing with others, to finalize the minting process.

Exchanging BRC-20 tokens:

When exchanging BRC-20 tokens natively on the Bitcoin network:

The seller must use transfer NFTs to divide their original mint NFT into smaller chunks, enabling the sale of predefined batches of tokens.
To purchase a specific amount of BRC-20 tokens, the buyer needs to find a seller who has the exact quantity they want to buy.

Determining BRC-20 token balances:

To check the balance of BRC-20 tokens in a wallet:

Users must rely on an off-chain indexer that adheres to the rules defined by the token's inscriptions.
Merely running a Bitcoin full node is insufficient for accurately calculating BRC-20 token balances.

By understanding these key aspects of BRC-20 tokens, users can effectively navigate the process of minting, exchanging, and tracking their BRC-20 token balances on the Bitcoin network.

What is the difference between BRC-20 and ERC-20 tokens?

The Ethereum ERC-20 and Bitcoin BRC-20 token standards are used in different blockchain ecosystems, though the former is said to have inspired the latter. ERC-20 is the primary token standard on the Ethereum blockchain, while BRC-20 is a new (experimental) token standard introduced on the Bitcoin blockchain in 2023.

ERC-20 tokens enable the use of smart contracts on Ethereum, allowing tokens to automatically execute agreements when specific conditions are met. They are widely used for creating fungible tokens on Ethereum, where each token has the same value and can be exchanged directly. Many cryptocurrencies use the ERC-20 standard, including: Shiba Inu, Tether, USD Coin, UniSwap, BNB Coin, Wrapped Bitcoin.

BRC-20 tokens, on the other hand, are based on the Ordinals protocol and allow developers to create tokens on top of the Bitcoin blockchain. The Ordinals protocol addresses another limitation experienced by the Bitcoin blockchain: its inability to host non-fungible tokens (NFTs) and enables the creation of fungible assets on Bitcoin.

While ERC-20 tokens have been established for a longer time and have many tokens built on the Ethereum blockchain, BRC-20 tokens are still in their early stages of development. Some of the top BRC-20 tokens include ORDI (the first BRC20 token), PEPE, MEME, PIZA, and RARE, but their demand and value still need to be well-established.

What are the use cases of BRC-20 tokens?

BRC-20 tokens serve various use cases:

Peer-to-Peer (P2P) Transfer

Users can utilize BRC-20 tokens for peer-to-peer transactions between wallets on the network. Since BRC-20 tokens are based on Bitcoin, transaction fees are charged in Bitcoin.

Tokenization

With further development, BRC-20 tokens can be used to create crypto assets that are pegged to other commodities such as fiat currency or gold. Users can use JSON code to define token characteristics and properties, including supply, minting, and issuance mechanisms through ordinal inscriptions.

Decentralized Finance (DeFi)

BRC-20 tokens present an opportunity to enhance the growth and liquidity of the Bitcoin blockchain. By integrating additional features, these tokens can be incorporated into DeFi exchanges, yield farming protocols, and GameFi applications.

These are some of the potential use cases for BRC-20 tokens, which may evolve as the standard and ecosystem continue to develop.

Where can I trade BRC-20 tokens?

BRC-20 tokens can be traded in two ways:

Listed BRC-20 Exchanges – You can buy or sell BRC-20 tokens through centralized or decentralized exchanges (DEX) in which they are listed, then store them in supporting wallets. Crypto exchanges for trading BRC-20 tokens include Binance, OKX, Deepcoin, Bitrue, B20 By Alex, and CoinW.

Ordinal Exchange – You will need an ordinal wallet in order to trade on the ordinal exchange. Follow the steps below:

Step 1: Go to ordinalswallet.com and create an ordinal wallet. Make sure to back up your secret phrase.

Step 2: To find all listed BRC-20 tokens on the platform, click on BRC-20 in the navigation bar,

Step 3: Select the token you wish to buy from the given token list to see available tokens for sale. Next, click the “Buy Now” option to purchase a token.

Conclusion

BRC-20 tokens are currently in their experimental stages and might face challenges ahead.

However, with continued development and integrations, BRC-20s hold the potential to unlock new opportunities for DeFi projects and decentralized applications (DApps) within the Bitcoin ecosystem. Traders and investors are encouraged to carefully monitor market liquidity, diversify their portfolios, and employ adequate risk management strategies.

Keep an eye on our blog to stay informed about the latest developments in the blockchain and NFT space.

What are BRC-20 Tokens? A Beginner Guide