In March 2023, pseudonymous crypto programmer Domo asked an interesting question:
What would happen if you could encode Bitcoin (BTC-USD) to handle fungible tokens?
A whitepaper and many lines of code later, the BRC-20 token was born.
BRC-20 tokens are a new type of asset created and stored on the Bitcoin network. The new standard allows users to mint and trade tokens on the Bitcoin network by inscribing data onto satoshis, the smallest unit of Bitcoin. BRC-20 tokens were named after the popular ERC-20 token standard on Ethereum (ETH-USD), the technology underpinning much of the tokenized world. Unlike ERC-20 tokens, however, BRC-20 tokens do not rely on smart contracts and have fewer features and functionalities.
As the prices of these tokens continue to rise, here’s what investors should know about crypto’s latest craze.
The largest BRC-20 tokens as of May 2, 2023
Source: OrdSpace
What Is a BRC-20 Token?
BRC-20 tokens are an experimental fungible token that uses a loophole in Bitcoin’s 2021 Taproot upgrade to add a small amount of data to individual satoshis. (As a reminder, 100 million satoshis represent one Bitcoin). In 2014, a protocol upgrade allowed Bitcoin users to attach small amounts of arbitrary data to each transaction in an effort to limit the amount of data stored on the blockchain. The 2021 upgrade expanded what could be saved directly onto the blockchain, allowing everything from GIFs to sound files to be stored. BRC-20 tokens now use this process of “inscription” to add a short piece of JSON code to create tokens and track their existence.
A sample BRC-20 token deployment
Source: Domo
Tracking these inscriptions requires a system that assigns distinct IDs to every satoshi. BRC-20 tokens currently use one known as “Ordinals,” which was introduced by developer Casey Rodarmor in January 2023. The system assigns numbers to all 2.1 quadrillion satoshis in their minted order.
An example of a traced Bitcoin block
Source: Ordinals
Assigning these ordinal ID numbers is possible because every fraction of Bitcoin transactions can get traced from their initial creation. Hobbyists had long watched the 10,000 Bitcoin famously used to buy two Papa John’s (NASDAQ:PZZA) pizzas in 2010, when the coins were only worth $41. By having a ledger of every satoshi, the Ordinals protocol can help users trace exactly who owns which inscribed ones.
It’s not the first time developers have attempted to store more information on the Bitcoin blockchain. Layer 2 protocol Stacks (STX-USD) uses a secondary blockchain to store data and then creates transactions on the Bitcoin blockchain to validate. Miners send predetermined amounts of Bitcoin to specific addresses to “complete” a transaction on the Stacks network.
But BRC-20 tokens take this further by assigning information directly onto the Bitcoin blockchain in a traceable, standardized way.
How to Create a BRC-20 Token
Creating a BRC-20 token is straightforward for those with some knowledge of JSON and Bitcoin transactions.
- Deploy a Token Contract. The BRC-20 token contract is a JSON file that defines the four-letter name, maximum supply, decimals and mint limit. You can deploy your token by inscribing the JSON file onto a satoshi using a wallet that supports ordinals and inscriptions. This creates the first set of tokens of your BRC-20 token and assigns it to your wallet address.
- Mint More Tokens. To mint more of your new BRC-20 token, you can inscribe another JSON file onto another satoshi using the same process. The JSON file will be slightly shorter since you don’t have to specify the same information from the initial deployment.
- Transfer Tokens. To transfer tokens of your BRC-20 token to another wallet address, the inscription 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 decrease the balance of your wallet address and increase the balance of the recipient’s wallet address.
However, BRC-20 tokens are still experimental, meaning plenty can go wrong. On April 24, BRC-20 wallet UniSat Wallet announced that scammers had exploited a double-spend vulnerability to skim tokens. (The company has since announced it will reimburse users). And the ease of minting new tokens means that most will eventually become worthless. Over 10,000 BRC-20 tokens already exist and naming conventions mean millions more pop up. The four-character limit allows special symbols, numbers and foreign characters.
Tweet from UniSat Wallet announcing the double-spend attacks on BRC-20 tokens
Source: Twitter
How to Buy or Sell BRC-20 Tokens
Speculators who want to buy or sell BRC-20 tokens will need a Taproot-enabled Bitcoin wallet and connect it to an exchange supporting ordinals, inscriptions and BRC-20 standards. Some of these exchanges include UniSat (mentioned above) and Ordinals Wallet. Certain decentralized exchanges like Ordswap also allow P2P exchanges of BRC-20 tokens, though liquidity will be far lower. In either case, you will also need Bitcoin in your wallet to pay holders and for any transaction fees.
Selling BRC-20 tokens involves the same process in reverse. You can also transfer your BRC-20 tokens to another Bitcoin wallet that supports them, auction it off on a decentralized exchange, or burn the tokens by sending them to an invalid address.
BRC-20 Tokens vs. ERC-20 Tokens
From a high level, BRC-20 and ERC-20 tokens differ because of their blockchains. BRC-20 tokens exist on the Bitcoin blockchain while ERC-20 tokens exist on the Ethereum blockchain
That means several practical differences also emerge.
- Functionality. BRC-20 tokens are not smart contracts, meaning they cannot interact with other protocols or applications on the Bitcoin network. That gives them far less functionality than ERC-20 tokens, which can indirectly allow users to borrow cryptocurrency, lend and more.
- Storage. These tokens use ordinals and inscriptions to “hack” a solution together for storing data on satoshis while ERC-20 tokens are native to the Ethereum protocol. That adds technological uncertainty to Bitcoin’s BRC-20 standard. Any future update to the world’s largest cryptocurrency could cause BRC-20 tokens to become untradable or even disappear entirely.
- Usability. BRC-20 tokens are experimental and come with issues that have long-plagued the Bitcoin network. Transaction fees are relatively high and users can run into scalability issues that don’t exist on the Ethereum network. Each Bitcoin “block” also takes roughly 10 minutes to approve, meaning multiple transfer functions can be inscribed to the same block. Validity must then be determined by the order of confirmation.
Should You Buy BRC-20 Tokens?
BRC-20 tokens have spiked in recent weeks on speculative interest. The combined value of BRC-20 tokens is now more than $100 million.
Many higher-profile BRC-20 tokens draw inspiration from ERC-20 and BEP-20 counterparts on the Ethereum and Binance (BNB-USD) networks. BRC-20’s SHIB uses exactly the same imagery that Ethereum’s Shiba Inu (SHIB-USD) does. The upstart token is now worth over $4 million. And PEPE, a copy of popular meme token Pepe (PEPE-USD), is now a $7 million asset. In fact, it was worth $24 million on May 2. To speculators seeking quick riches, these enormous returns are an irresistible call to buy in.
However, BRC-20 tokens have yet to prove themselves the way ERC-20 and BEP-20 tokens have done. For now, they remain inscriptions on satoshis that don’t add any additional functionality like Ethereum’s Uniswap (UNI-USD) might.
Low trading volumes for these tokens also open the door to price manipulation. A bad actor could theoretically mint a BRC-20 token, set a 20 million limit and trade one token to themselves for $100 of Bitcoin. In a strict sense, they could multiply the two figures and claim their new token has a $2 billion market cap.
Some will take it further with “wash sales” by trading tokens to themselves hundreds of times to inflate the volumes traded. It’s a practice commonly seen with non-fungible tokens (NFTs).
The face of a $4 million token
Source: Twitter
Until any of Bitcoin’s BRC-20 tokens prove their utility, investors should realize they’re buying speculative investments where the only goal is to sell stakes to someone else for a higher price. These tokens offer no dividends, no profits and are a negative-sum game once transaction costs are factored in.
BRC-20 tokens were only ever designed as a blockchain experiment. And investors can be sure that scammers and hucksters will run their own tests to see how much money they can make from crypto’s latest craze.
On Low-Capitalization and Low-Volume Cryptocurrencies: InvestorPlace does not regularly publish commentary about cryptocurrencies that have a market capitalization less than $100 million or trade with volume less than $100,000 each day. That’s because these “penny cryptos” are frequently the playground for scam artists and market manipulators. When we do publish commentary on a low-volume crypto that may be affected by our commentary, we ask that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.
Read More: How to Avoid Popular Cryptocurrency Scams
As of this writing, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
