Demystifying BRC-20: KuCoin’s Deep Dive into the Memecoin Machine

2023/05/10 10:16:45

BRC-20 tokens are a new type of cryptocurrency that can be created and traded on the Bitcoin blockchain. Inspired by the ERC-20 standard on Ethereum, BRC-20 tokens use a different protocol called Ordinals to inscribe data on satoshis, the smallest unit of Bitcoin, and therefore operate on the Bitcoin blockchain.

The BRC-20 market has grown rapidly since its launch in March 2023 by an anonymous developer named Domo. To date, the total BRC-20 market has rapidly accumulated over $700 million in total market cap and has captured the attention of the blockchain and cryptocurrency zeitgeist.

BRC-20 transactions now account for a large portion of Bitcoin transactions and represent a significant contribution to Bitcoin network congestion. Over the last week, BRC-20 transactions have dominated the Bitcoin mempool, as illustrated by Dune Analytics data.

BRC-20 Transactions | Source: Dune Analytics

The launch of any new token standard in the blockchain ecosystem, however, is typically a hotbed of confusion, hastily-minted memecoins, and conflicting information. Join us in a KuCoin deep dive into BRC-20 as we dismantle the hype surrounding this new token standard and find out what BRC-20 tokens are, how BRC-20 tokens work, and what BRC-20 tokens actually do.

What Are Token Standards?

The regulations and functions governing a cryptocurrency token's behavior are referred to as token standards. To fully understand token standards, it’s necessary to understand the fundamentals of smart contract standards. Smart contract standards are guidelines that must be followed by a smart contract in order for it to perform as intended on a given blockchain network.

These standards help create new tokens, name registries, and package formats, among other things, by providing a set of guidelines for the smart contract to follow. With these standards, anyone with enough knowledge can create their own token.

Token standards are a subset of smart contract standards, specifically focused on how to create, issue, and deploy tokens on the blockchain network. Some of the most common token standards are ERC-20, ERC-721, ERC-777, and ERC-1155, which are frequently used in Ethereum-based smart contracts.

What Are BRC-20 Tokens?

BRC-20 tokens are a new type of token standard that leverages a recent innovation within the Bitcoin development community – Ordinals. Ordinal Inscriptions are a new type of digital asset that are inscribed on satoshi, the smallest unit of Bitcoin.

Ordinals are similar to non-fungible tokens (NFTs) in that they are unique and cannot be replicated, but instead of being stored on a separate blockchain, they are inscribed onto the Bitcoin blockchain. This is made possible by the Taproot upgrade, which introduced a feature called the witness that can store data associated with a Bitcoin transaction.

By utilizing Ordinals and Inscriptions, the BRC-20 token standard operates as an experimental fungible token on the Bitcoin base chain. This standard deploys, mints, and transfers tokens through Ordinal inscriptions of JSON data.

It’s important to note, however, that unlike traditional token standards on EVM chains, the BRC-20 token standard does not rely on smart contracts to manage rules and regulations. Instead, it stores a script file in Bitcoin and attributes tokens to satoshis, allowing for easy transfers between users.

In this manner, BRC-20 tokens are a step away from “NFTs on Bitcoin” and a step closer to Bitcoin-based tokens that operate on the Bitcoin network – but, at the moment, without smart contract functionality.

Image source: Twitter

On March 8th, 2023, Twitter user @domodata announced experiments using the BRC-20 token standard, demonstrating fungibility on Bitcoin with Ordinals. While BRC-20 derives its name from Ethereum's ERC-20 token standard, the BRC-20 token standard does not possess the capability to interact with smart contracts like the EVM standard.

What Can BRC-20 Tokens Do?

  • Allow developers to create Bitcoin blockchain-based tokens, similar to ERC-20 tokens
  • Facilitate trade between other tokens of the same type
  • Allow token creators to mint or trade BRC-20 tokens from a Bitcoin wallet

What Can’t BRC-20 Tokens Do?

  • BRC-20 tokens can’t be used to interact with smart contracts
  • BRC-20 tokens are not NFTs – while Ordinals may facilitate NFTs on the Bitcoin blockchain, BRC-20 tokens are designed to be fungible and allow them to be traded for other like tokens.

What’s the Difference Between BRC-20 and ERC-20?

BRC-20 and ERC-20 are two distinct token standards that possess significant differences. BRC-20 tokens operate on the Bitcoin blockchain, while ERC-20 tokens operate on the Ethereum blockchain.

BRC-20 tokens are, therefore, secured by Bitcoin’s Proof of Work consensus mechanism, while ERC-20 tokens are secured by Ethereum’s Proof of Stake consensus mechanism. As outlined above, ERC-20 tokens can be used to interact with smart contracts in order to execute condition-based transactions, while BRC-20 tokens leverage Inscriptions through the Ordinals protocol in order to function as fungible assets.

In general, ERC-20 tokens are far more widely supported and versatile compared to BRC-20 tokens, largely due to the technical limitations and experimental nature of BRC-20 tokens. As the BRC-20 ecosystem scales, however, it’s possible that BRC-20 tokens may continue to develop features that emulate ERC-20 token features.

Which Projects Use The BRC-20 Token Standard?

The ease with which BRC-20 tokens can be minted has led to an explosion of BRC-20 projects, all of which have launched since March 9, 2023. BRC-20 token tracking platform currently lists over 14,000 BRC-20 tokens, most of which offer limited functionality or use cases – fewer than 30 of all currently-active BRC-20 tokens possess a market cap of over $1 million as of May 10.

BRC-20 hype has driven significant volume into the nascent BRC-20 ecosystem. Some of the highest market cap BRC-20 tokens, ranked in order from highest to lowest as of publishing time, include:

  • ORDI: As one of the first BRC-20 tokens, ORDI was created as part of the Ordinals Protocol and facilitates trade within the Ordinals decentralized digital asset marketplace.
  • NALS: Nals is a meme BRC-20 token tangentially related to Ordinals. There is no documentation available regarding Nals as of time of publishing.
  • MEME: As the name implies, Meme is simply a memecoin BRC-20 token that offers no utility or functionality as of time of publishing.
  • PEPE: Launched in late March, PEPE BRC-20 tokens are another memecoin that offers no utility or documentation, but is active on Twitter. KuCoin currently lists ERC-20 based PEPE.
  • PIZA: Inspired by the first real-world Bitcoin transaction for real world goods – a 10,000 Bitcoin purchase of two Papa John's pizzas on May 22, 2010 by Laszlo Hanyecz – PIZA is one of the only BRC-20 tokens to provide information via a website that describes the token as a “memecoin with no intrinsic value or expected financial return and is purely for entertainment purposes.”

What’s Happening With Bitgert, BRC-20, and BRISE?

It’s important to note that there is some confusion within the crypto community regarding which projects use or integrate BRC-20 tokens. Bitgert (BRISE), for example, is a high-speed blockchain with a throughput of more than 100k transactions per second (TPS) with zero gas fees.

During 2022, Bitgert referred to token standards on Bitgert’s BRISE chain as BRC-20 tokens. Bitgert’s previous reference to BRC-20, however, is not associated with the current Bitcoin-based BRC-20 token standard and is only used intermittently to refer to tokens within the context of the Bitgert BRISE Chain. For more information on the latest Bitgert updates, check KuCoin’s Bitgert price page.

What are the Consequences of BRC-20 Hype?

The recent surge in BRC-20 activity has had a significant negative impact on Bitcoin's network performance, as BRC-20 token transactions rely on the Bitcoin network. Hype surrounding BRC-20 led to a four-day transaction peak on the Bitcoin blockchain between April 29 and May 2, with BRC-20 transactions accounting for over half of all network transactions.

Bitcoin, while regarded as a highly secure blockchain network secured by Proof of Work consensus, is typically much slower to execute transactions when compared to other blockchain networks that use faster consensus mechanisms. The recent influx of BRC-20 transactions caused significant delay, with Bitcoin users reporting transition throughput timeframes of over 4 hours and significant spikes in transaction fees.

BRC-20 Transaction Congestion | Source: Dune Analytics

During a four-day period between April 29 and May 2, BRC-20 token swaps accounted for over 50% of all network transactions, causing congestion and delays for regular BTC transactions.

To date, BRC-20 transactions have generated over 869 BTC, or over $24 million USD, in fees for Bitcoin miners. The high cost of BRC-20 transactions is partially associated with the complex nature of the interfaces used by BRC-20 traders and developers to interact with them.

What Does the Future of BRC-20 Tokens Look Like?

While BRC-20 tokens are gaining attention for their potential use cases, it's important to note that they currently lack the ability to interact with smart contracts. This limits their functionality in ecosystems that foster the development and growth of new tokens, such as the DeFi space, where smart contracts are crucial for executing complex financial transactions.

Should BRC-20 tokens gain enough traction, adoption, and expanded functionality, however, it's possible that they could be upgraded to include smart contract functionality. There are, for example, a number of projects already working on integrating DeFi, NFTs, apps, and smart contract functionality with the Bitcoin blockchain, such as Stacks (STX).

Further development of BRC-20 tokens could potentially see BRC-20 token standards approach the same level of functionality offered by the ERC-20 token standard, allowing more advanced DeFi applications to be built on the Bitcoin blockchain. For the present, however, BRC-20 tokens are limited in scope to the issuance of memecoins.

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