What are BRC-20 Tokens?

The resurgence of excitement that came with the Ordinals protocol was reflected in a new series of subsequent developments on the Bitcoin blockchain. This included the BRC-20 token protocol, a token standard that looked to explore the concept of fungibility on Bitcoin.

While Leather does offer BRC-20 support, the token standard itself is also in the early stages of its development. However, a good number of Bitcoin users are still interested in the potential that BRC-20 could bring. 

What is a Token Standard?

A token standard is the set of guidelines and rules that define how tokens operate on a particular blockchain network. These standards establish a common framework for creating, managing, and interacting with digital tokens on the base layer. Think of them as a blueprint or protocol that ensures consistency and interoperability among different tokens and applications.

Token standards typically address things like how new tokens are created, how they can be transferred between addresses, how token balances are recorded and verified, and how permissions for token transactions are managed. With a common set of rules, developers can build applications and smart contracts that seamlessly interact, without conflict.

The most prominent and well-known token standard is ERC-20 (Ethereum Request for Comments 20) on the Ethereum blockchain. ERC-20 standardized the creation and management of fungible tokens, enabling:

• The explosion of tokenization

• Initial coin offerings (ICOs)

• Decentralized finance (DeFi) projects

• Non-fungible tokens (NFTs)

  
  

ERC-20 tokens have become the backbone of many blockchain projects and platforms. And, before the revelation of Ordinals and BRC-20 on Bitcoin, many people believed Ethereum was the best option for building new use cases.

Token standards are important because they help democratize access to tokenization, empower developers to build diverse applications, and foster interoperability across blockchain networks.

How do Ordinals Work?

Bitcoin Ordinals work by assigning a unique "serial number" to each Satoshi (the smallest unit of Bitcoin) based on the order in which they are mined on the blockchain. This process, known as the Ordinals theory, enables the attachment of additional data like text, images, or audio, to individual sats. 

The inscription process involves embedding information directly onto a Satoshi, "inscribing" it with data. To mint an inscription using the Ordinals protocol, users encode the desired information, typically in JSON (JavaScript Object Notation) format, and attach it to a specific sat. This inscription often includes the token's name, symbol, maximum supply, and functions for deploying, minting, and transferring tokens. 

Once the information is minted and linked to a Satoshi, it becomes part of the Bitcoin blockchain's immutable ledger. It is then accessible to anyone with the appropriate tools to read and interpret the data.

What is BRC-20 and How Did it Start?

Ordinals revealed a new reality where additional information could be inscribed on the Bitcoin blockchain. This was something most crypto builders had all but given up on, moving to other blockchains for building dApps and programs.

But unlocking an unforeseen feature on Bitcoin laid the groundwork for new possibilities beyond simple transactions. BRC-20 tokens use a token standard that leverages the Ordinals protocol by inscribing JSON data onto Satoshis. This effectively created a new type of token directly on the Bitcoin blockchain.

BRC-20 tokens are making a significant impact on the Bitcoin ecosystem. They unlock new capabilities and use cases like a brand new space for decentralized finance (DeFi) on the Bitcoin network. With BRC-20 tokens, users can issue, transfer, and manage fungible assets directly on Bitcoin.

A Bitcoin token standard expands the network’s utility beyond its original purpose as a peer-to-peer payment system. However, BRC-20 tokens operate differently from ERC-20 tokens on Ethereum. 

ERC-20 tokens use smart contracts on Ethereum for functionality and interoperability with other decentralized applications. But BRC-20 tokens operate natively on the Bitcoin blockchain, offering a different set of advantages and limitations.

Until now, both Ethereum and Bitcoin have struggled to solve the blockchain trilemma of security, scalability, and decentralization. Bitcoin was designed to prioritize security and decentralization at a cost to its scalability. However, solutions like the Lightning Network have improved Bitcoin scalability and enable faster, cheaper transactions.

While the technical implementations of ERC-20 and BRC-20 standards differ, they are both critically important for innovation on the two most widely-used blockchains. 

What are BRC-20 Tokens Used For?

BRC-20 tokens opened a variety of possibilities for fungible tokens on the Bitcoin blockchain. One application of BRC-20 tokens that has been seen more prominently has been in decentralized finance (DeFi) protocols directly on Bitcoin. There have been cases where users have leveraged BRC-20 tokens to participate in lending, borrowing, liquidity provision, and other financial activities. This suggests that the Bitcoin token standard has started to pave the way for builders to develop additional decentralized lending platforms, automated market makers, and yield farming opportunities.

BRC-20 tokens have also facilitated the tokenization of real-world assets. By representing assets such as real estate, commodities, or securities as BRC-20 tokens, individuals and institutions can trade fractional ownership of these assets on Bitcoin. This process enhances liquidity, reduces barriers to entry, and enables new investment opportunities for a broader range of participants.

Of course, the applications of BRC-20 that we’ve mentioned here are still in their infancy. Nevertheless, BRC-20 tokens have already shown promise as a versatile way for innovators to explore new financial and asset tokenization applications on Bitcoin.

Conclusion

A new era of building on Bitcoin has begun and BRC-20 tokens are positioned to play a role in Bitcoin’s growth. Many crypto enthusiasts remained confident that a large part of the crypto and Web3 ecosystem would be built on Bitcoin. Innovations like BRC-20 are an example of how those predictions are coming true.

With innovations like Ordinals, BRC-20, and L2 solutions like Lightning Network, marketplaces, applications, wallets, and platforms are beginning to spring up all over the network. This is the Web3 and DeFi future so many Bitcoin lovers have been waiting for.