BRC20 tokens: How they differ from other cryptocurrencies

The BRC-20 standard of Bitcoin has become the latest trend in the crypto ecosystem, especially after the wild rise of the Pepe (PEPE) memecoin. Currently, there are over 14,000 different coins that have been created using the BRC-20 standard, almost all of which are meme coins like PEPE and Memetic (MEME).

BRC-20 standard is an experimental token creation model created using the Ordinals and Inscriptions protocol and stored in the Bitcoin blockchain. The system uses ordinal inscriptions of JSON data to create and transfer tokens.

It is not a token model similar to blockchain networks that enable smart contracts like Ethereum. It is a way to store token data in Bitcoin’s smallest individual units, i.e., satoshis.

The BRC-20 standard was created by Twitter user @domodata on March 8, 2023. The name is a pun on Ethereum’s ERC-20 token standard, although BRC-20 does not match its features since these new tokens do not have the ability to interact with smart contracts like ERC-20 tokens. The market value of BRC-20 coins has grown explosively in the past month, and currently, BRC-20 tokens surpassed the $1B market cap.

BRC-20 tokens are a stress test for Bitcoin’s scalability

The creation and transfer of tokens have also begun to affect Bitcoin’s network usage. On May 1, a one-day transfer record was seen on the Bitcoin network, with 682,280 transfers made in 24 hours. The previous record before this year was from December 2017, and the number of transfers was more than 2.5 times higher than that. With the growth in the number of transfers, the fees paid for them have also increased, and mining has become more profitable.

However, increased transfer volumes may not be positive news for the average user. Transfers have become more expensive on average, and due to the limited transfer capacity, congestion, and even higher prices for ensuring fast transfers are looming on the horizon.

Bitcoin’s network has not previously faced the same load caused by token creation as Ethereum has, so the phenomenon is new to Bitcoin. To assess the consequences, it is worth looking at how the growth in transfer volumes has affected Ethereum, for example. Ethereum’s developers are trying to scale the network with new updates, but the process is slow and cannot cope with growth pressures in the short term. The solution has come in the form of so-called Layer-2 solutions such as Optimism and Arbitrum. Fortunately, there are also different second-layer scalability solutions available for Bitcoin, such as the Lightning Network, which makes microtransactions cheap and almost instantaneous.

The increase in transfer fees on the main network has both good and bad sides for the Lightning Network. The positive side is that using the Lightning Network for transfers becomes more attractive as the savings in transfer fees increase for users – thus increasing the adoption of the Lightning Network and Bitcoin. On the other hand, the downside is the higher cost of opening and closing new Lightning Network channels. Lightning Network maintainers earn small amounts from using their nodes in channeling transfers. However, the current high costs of opening a new channel on the Bitcoin main network make it difficult to cover those costs with small Lightning Network transfer fees, requiring a significant number of channeled transfers. This emphasizes the need for more rational and efficient payment channel arrangements and planning.

Above all, it is essential to remember that the use and cost structure of the main network operates entirely according to the laws of supply and demand, and network usage cannot be arbitrarily prevented. The cost increase, therefore, represents the fact that the network user community values these so-called “basic transactions” more – at least temporarily.

Increased traffic on the main network is also not bad, as adoption is inevitable. The increased cost structure of the main network also further increases the incentive for miners to mine (as block rewards decrease) and thus de facto increases the security of the main network.

Finally, it is also important to note that the network consensus is to scale the network on top of the main network, not within it (cf. larger block size Bitcoin forks). The so-called blockchain trilemma of “scalability” is tackled with second-layer solutions not to jeopardize the other corners of the triangle. This certainly gives impetus to further development and adoption of scalability solutions.

BRC-20 tokens — F.A.Q

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