What Are BRC-20 Tokens And How Do BRC-20 Tokens Work

The BRC-20 token standard is an experimental protocol that facilitates the creation and transfer of interchangeable tokens using the ordinals protocol. Continue reading this article to know more about BRC-20 tokens, their working and much more.

18 MAY 2023, 4 min read

Recently, the introduction of BRC-20 tokens on the Bitcoin blockchain has been a game changer in the crypto world. These tokens, much like Ethereum's ERC-20 tokens, open a new world of possibilities for applications on the blockchain, from decentralized finance to NFTs and beyond.

This article will explore BRC-20 tokens, their working mechanism, and how they could transform the crypto landscape.

What are BRC-20 Tokens?

On March 9, 2023, an unknown developer unveiled a new concept - BRC-20 tokens. Instead of following the usual path of using smart contracts like other blockchain tokens, BRC-20 tokens brought something fresh to the table. They're born directly on Bitcoin's blockchain, thanks to a special method that lets you store a script file on Bitcoin, allocating tokens to the smallest unit of Bitcoin, called satoshis.

Here's where it gets interesting: BRC-20 tokens embed a type of data, called JSON, into something known as 'ordinal inscriptions.' This makes it easy for users to create, mint, and send tokens without a hitch. The first BRC-20 tokens came with this JSON (JavaScript Object Notation) data that named the token, set a per-mint limit of 1,000 tokens, and declared a maximum count of 21 million tokens.

Bitcoin Oridinals

Imagine the Bitcoin blockchain as a vast library and satoshis, the smallest unit of Bitcoin, as its books. Using the principles of ordinal theory, Ordinals assign a unique number to each "book," akin to a library cataloging system. This allows us to write data into each satoshi, much like writing notes in the margins of a book.

These notes can be diverse – from pictures and songs to text and even entire programs. Regarding BRC-20 tokens, these marginal notes comprise specific rules and instructions dictating how to create and manage the tokens.

Initially, people used ordinal inscriptions primarily to create Bitcoin NFTs. However, given this technology is still in its infancy, we can expect a range of innovative uses to emerge soon.

To sum it up, think of ordinal inscriptions as a way to etch unchangeable information into the "books" in Bitcoin's extensive library.

How do BRC-20 Tokens Work?

They work in three main steps - creation, production, and sending.

Firstly, you create a BRC-20 token with the 'deploy' function. Think of it like deciding on the design of a new coin. Next, you 'mint' an amount of BRC-20 tokens. Lastly, you 'transfer' these tokens to others, like sending money electronically.

However, BRC-20 is a fresh concept, and the process is not as smooth yet. Limited tools and services are available to help you, but the scenario is improving, and soon, using BRC-20 tokens might become as easy in the coming times.

Read More: What are ERC-20 Tokens?

Effect of BRC-20 Tokens on Bitcoin Transaction Fees

Consider BRC-20 tokens as complex digital transactions needing a larger parking spot on the Bitcoin blockchain. While a typical Bitcoin transaction is akin to a compact car, BRC-20 transactions - given their complexity - are more like a semi-truck, taking up to 4MB of space.

The rising fees are like surge pricing - the transaction cost can increase as more people compete for the limited node resources.

Analysts from the data firm CryptoQuant suggest that the recent popularity of BRC-20 tokens is behind the growing congestion on the Bitcoin network. These tokens differ from their Ethereum counterparts because they don't rely on smart contracts and are exclusive to Bitcoin-supporting wallets. Consequently, the average transaction fee sharply rose, peaking at $29 on May 9.

Advantages & Limitations of BRC-20 Tokens

Advantages

Fungible: BRC-20 tokens are interchangeable.
Versatile: They can represent a variety of assets, including digital and physical ones.
Mintable: These tokens are created using a Bitcoin wallet that supports the BRC-20 standard.
Transferable: BRC-20 tokens can be sent to any Bitcoin address.
Tradable: They can be traded on exchanges that support the BRC-20 standard.

Limitations

Limited functionality due to newness.
Not as widely supported as other digital assets.

BRC-20 Tokens V/S ERC-20 Tokens

While BRC-20 and ERC-20 may seem identical due to the resemblance in names, they are substantially different in many ways.

BRC-20 tokens operate on the Bitcoin network, while ERC-20 tokens belong to the Ethereum network. A unique aspect of BRC-20 tokens is their independence from smart contracts, which results in a more limited range of functions. Conversely, ERC-20 tokens leverage smart contracts, allowing them to interact with various protocols and applications, facilitating numerous services such as lending and borrowing.

ERC-20 is an established token standard with countless tokens already in circulation and widely utilized. These tokens have weathered various trials, demonstrating their stability and reliability. On the other hand, BRC-20 tokens, being relatively new, face a future filled with uncertainties.

Frequently Asked Questions

What is the future of tokens on Bitcoin?

The future of Bitcoin tokens like BRC-20 looks promising but is still uncertain. As a new technology, they could revolutionize various applications, including decentralized finance and NFTs. However, their widespread adoption and use will depend on further development and acceptance within the crypto community.

What is the BRC-20 token standard?

The BRC-20 token standard is a new protocol on the Bitcoin network that allows for token creation, minting, and transfer. Unlike other token standards, BRC-20 doesn't rely on smart contracts but instead uses a unique method to store a script file on Bitcoin, allocating tokens to individual Bitcoin units called satoshis.