In January 2023, Casey Rodarmor introduced the ordinal theory, triggering a surge of activity akin to Ethereum's NFT minting frenzy. This innovation facilitated users to embed diverse files (such as images, text, videos) up to 4MB in size directly within satoshis, the smallest unit of Bitcoin. This marked a significant step in storing an array of data on the blockchain. Text inscriptions experienced remarkable growth among various file types, hinting at the possibility of individuals crafting novels on the Bitcoin network.

This phenomenon coincided with domo's application of Ordinals to formulate a novel standard called BRC-20 tokens. BRC-20 tokens, which function as a fresh token standard, leveraged inscribed text on a satoshi to enable seamless issuance and transfer of tokens. This approach swiftly gained momentum in April, leading to an astronomical rise in inscriptions and a surge in transaction fees on May 8th. The Bitcoin network grappled with over 400,000 pending transactions, prompting Binance to suspend Bitcoin deposits and withdrawals.

As BRC-20 tokens have gained traction, they have also seen their prices rise vertically. The individual price of ordi tokens, the first token in the BRC-20 standard, started at $0.1 per token and increased to $5.8 on August 12, giving it a market capitalization of nearly $114,909,530. A market capitalization of this magnitude would place it at around #70 on Coingecko, higher than Sui and Optimism.

The rapid evolution of blockchain technology has given rise to revolutionary concepts that are reshaping the financial landscape. One such concept, the BRC-20 token (often confused with ERC-20 tokens), has emerged as a key player in the world of decentralized finance (DeFi). Is the attention garnered by BRC-20 tokens justified? This article seeks to delve into the core principles of ordinals and the BRC-20 standard that serve as the foundation for BRC-20 tokens. It also explores the complexities of BRC-20 tokens, examining their functionalities, practical use cases, security considerations, regulatory dimensions, and potential impacts on the future trajectory of the cryptocurrency space.

What are BRC-20 Tokens

BRC-20 is modelled after Ethereum’s ERC-20 token standard and was proposed in Bitcoin Request for Comment 20 by Anonymous developer Domo in March 2023.

The BRC-20 is a token standard that uses ordinal inscriptions to enable the minting and transfer facilities of fungible tokens on the Bitcoin blockchain. Token standard is simply a set of rules defining the working of created tokens; for example, ERC-20 is the standard for creating ERC-20 tokens on the Ethereum blockchain. However, unlike the ERC-20 standard, the Bitcoin BRC-20 standard is not approved and is still in progress.

Originally, Bitcoin was created just as a decentralized p2p currency, without functionalities to deploy smart contracts or other decentralized applications. The Bitcoin Taproot upgrade in 2021 opened the gate to attach more data onto Bitcoin block space through ordinal protocol giving rise to Bitcoin NFTs and BRC-20 token development. The Ordinals protocol is a system to inscribe a serial number to each satoshi(smallest unit of bitcoin) and add them onto bitcoin transactions along with ordinal data.

BRC-20 tokens embed JavaScript Object Notation(JSON) into ordinal inscription to define and initialize token smart contract functionality. Hence, allowing users to deploy, mint, and transfer tokens on the Bitcoin network.

That said, there haven't been other “BRC” numbers as Bitcoin changes go through a process called BIP, or Bitcoin Improvement Proposals. So there hasn’t been a BRC-1 or BRC-2 and so on.

What is a BIP?

Periodically, improvements are introduced to how Bitcoin operates, ranging from minor optimizations to substantial transformations like Taproot. Behind each implementation lies a "BIP," a Bitcoin Improvement Proposal. A BIP constitutes a formal proposition to modify Bitcoin, integrating upgrades and security enhancements into the Bitcoin codebase. While some BIPs propose alterations to the codebase, others, like BIP 39, establish standards for other Bitcoin-related projects.

A Bitcoin Improvement Proposal (BIP) is a formal proposal to change Bitcoin. Upgrades and security improvements enter the Bitcoin codebase via BIPs. Upgrades such as SegWit, HD Wallets, PSBT and more were all introduced via BIPs, which then underwent a review process and community discussion before being accepted. However, not all BIPs propose code changes. Some, such as BIP 39’s standard of mnemonic phrase backups, establish standards to be used by other Bitcoin-related projects.

Smaller changes to Bitcoin, such as bug fixes, code refactoring, or minor efficiency improvements are not included in BIPs. Rather, these changes are submitted directly to Bitcoin’s codebase as proposed code changes.

One of the major events in Bitcoin history was the Taproot upgrade. Taproot is an upgrade to Bitcoin which brought several new features and benefits to Bitcoin users and also gave developers an expanded toolbox to work with as they continue to ideate, iterate and build on Bitcoin. The Bitcoin community activated Taproot at block 709,632 on November 14th, 2021.

Taproot is a melting pot of various technical innovations throughout Bitcoin’s history into one upgrade. It was first proposed by Greg Maxwell in 2018. Since then, the three Bitcoin Improvement Proposals (BIPs) that codified Taproot were written by Pieter Wuille, Tim Ruffing, A.J. Townes and Jonas Nick, and merged into Bitcoin Core in October 2020.

At the root of the upgrade are “Schnorr signatures.” Bitcoin has been using a cryptographic scheme ECDSA for its “digital signatures” where a user signs a transaction with their private key to approve sending it somewhere else.

Taproot upgrades to a different scheme called Schnorr. Every transaction using Taproot will now use this new digital signature scheme, adding capabilities designed to boost the privacy, security and scale of Bitcoin transactions.

In addition to being smaller and faster than ECDSA, Schnorr signatures have the added benefit of being “linear,” a combination that will boost Bitcoin’s transaction privacy and allow for more lightweight and complex “smart contracts” (an encoded contract with self-executing rules).

Taproot will have many positive repercussions for various projects across the ecosystem. For instance, multi-signature transactions, which require more than one out of a group of signers to sign a transaction, will be cheaper and will use less data.

The Taproot upgrade is composed of three Bitcoin Improvement Proposals(BIPS)which define three distinct upgrades to the Bitcoin protocol:

• Schnorr Signatures (BIP 340)

• Taproot (BIP 341)

• Tapscript (BIP 342)

Together, these three upgrades are known as the Taproot upgrade, often collectively referred to as BIP Taproot. These BIPs introduced new, more efficient, flexible, and private ways of transferring Bitcoin.

Schnorr Signatures - BIP 340

As part of the Taproot upgrade, BIP 340 introduces Schnorr signatures for use in Bitcoin. Schnorr signatures bring several benefits to Bitcoin users, including superior privacy, lower fees, and more flexible multi-sig

This BIP also specifies how Schnorr public keys and signatures are to be encoded for use in Bitcoin. Public keys used for Schnorr signatures are 32 bytes long, compared to ECDSA’s 33-byte public keys. Additionally, Schnorr signatures are 64 bytes long, compared to ECDSA signatures, which range from 71-72 bytes, including sighashflag. These small space savings offer fee savings to Bitcoin users who adopt Taproot.

Taproot - BIP 341

While BIP 340 defines the specification for generating and encoding Schnorr signatures and public keys, BIP 341 defines how Bitcoin’s protocol integrates Schnorr signatures. Specifically, Bitcoin Script must be updated to also evaluate Schnorr signatures. Taproot also integrates Merkelized Alternative Script Trees(MAST), which allow users to lock outputs to multiple scripts.

Tapscript - BIP 342

To implement P2TR transactions, BIP 342 adds and updates several opcodes These new scripts are used to verify Taproot spends and Schnorr signatures, and they are collectively known as Tapscript.

Tapscript was designed to maximize future flexibility of P2TR spending to allow for upgrades which are not yet foreseen.

What Are Ordinals?

Bitcoin Ordinals has become one of the popular highlights in the web3 landscape right now. Casey Rodarmor introduced the project in January 2023 and created divided opinions in the crypto community. Ordinals enable data to be inscribed into individual satoshis on Bitcoin. They use a logical ordering system called ordinal theory to give each satoshi a unique number. Then, arbitrary data can be inscribed into each satoshi.

This data inscribed to satoshis can range from images, video, audio, text, and even entire applications such as a simplified version of the video game DOOM. As we’ll see below, BRC-20 tokens are essentially ordinal inscriptions with a specific type of text embedded into them, providing a set of rules and specifications for creating and managing the tokens. While inscribing text has been a popular early use case for Bitcoin NFTs, due to the nascency of the technology, new use cases may emerge over time.

As a result, the satoshis can become unique and have the same identity as a basic non-fungible token. How can you add text, images, or other digital assets in the lowest denomination of Bitcoin? The answer points to the working of the protocol for enabling inscription on Bitcoin.

The ordinal numbers assigned to sats are represented in a variety of ways, including the following

• Integer notation: 2099994106992659 — The number in the order they were mined, and since the total number of bitcoins is 21,000,000 and 1 BTC=100,000,000 sat, the maximum value of the ordinal numbers is 2,100T.

• Decimal notation: 3891094.16797 — The first number represents the height of the Bitcoin block in which the sat was mined, and the second number represents the order (offset) of the sat within that block.

• Degree notation: 3°111094′214″16797‴ — The last number is the order in which the sat was mined in the block, followed by the block height in degrees.

• Percentile notation: 99.99971949060254% — A way to express where the sat is in the total supply of Bitcoin as a percentage.

• Name: satoshi — A method for representing ordinal numbers using the alphabet a-z.

Interestingly, the creator of Ordinals Theory also assigned a rarity to each sat based on the ordinal number assigned to it:

• Common: All but the first sat in each block

• Uncommon: First sat in each block (appears about once every 10 minutes)

• Rare: First sat after difficulty adjustment (appears about once every two weeks)

• Epic: First sat after halving events (appears about once every 4 years)

• Legendary: First sat after a coincidence of difficulty adjustments and halving events (appears about once every 24 years)

• Mythic: The first sat of the Bitcoin Genesis block (only one exists)

The demand for resources to learn Bitcoin applications and the technology behind them has been growing by huge margins. Bitcoin Ordinals have become the next big thing in the world of crypto and web3. In April 2023, the record of daily inscriptions with the use of Ordinals was shattered around four times with growing network activity. Users flooded the network with video games, images, and other types of content.

What is an Inscription?

The definition of Bitcoin Ordinals provides insights into one of the most common highlights of the protocol. Ordinals can help in inscribing a digital asset on the lowest denomination of Bitcoin, i.e., Satoshi. The data you can choose for inscribing on Bitcoin can also feature smart contracts, which can help in representing NFTs.

As a result, inscription enables the creation of Bitcoin NFTs. You can find valid answers to “How are Ordinals different from NFTs?” by referring to the inscription. The Taproot upgrade introduced on the Bitcoin network in November 2021 offered a massive advantage for inscribing on satoshis.

Bitcoin developers have worked hard to introduce NFTs to the Bitcoin network. One of the earliest efforts for bringing non-fungible tokens to Bitcoin points at Counterparty in 2014 and Stacks in 2017. The inscription process primarily helps inscribe data of the content stored in the witness of Bitcoin transactions. Bitcoin network introduced SegWit upgrade in 2017, thereby bringing the witness feature.

You can create, mint, and transfer BRC-20 tokens by inscribing three functions in sats: Deploy, Mint, and Transfer.

Deploy Function

{
  "p": "brc-20",
  "op": "deploy",
  "tick": "ordi",
  "max": "21000000",
  "lim": "1000"
}

To initially deploy BRC-20 tokens, simply inscribe the above JSON format in a specific sats. Here’s what each key represents

• p: Other systems recognize that this inscription is about BRC-20.

• op: Write the type of operation (Deploy, Mint, Transfer).

• tick: Write a four-letter ticker for the BRC-20 token you want to deploy.

• max: The total supply of BRC-20 tokens.

• lim: The maximum amount of this BRC-20 token that users can mint at once. (Not required)

• dec: Determines the decimal of the token. Defaults to 18. (Not required)

Deploy is merely the process of establishing the presence of a BRC-20 token, whereas actual issuance necessitates executing a Mint function.

Mint Function

{
  "p": "brc-20",
  "op": "mint",
  "tick": "ordi",
  "amt": "1000"
}

The Mint Function is only applicable to BRC-20 tokens that have already been deployed. To issue a token, inscribe the preferred token’s ticker into the “tick” section and the amount in the “amt” section in the JSON format on a separate sat, which will then result in the issuance of the BRC-20 token. It is important to note that the value entered in the “amt” section must be lower than the deployed token’s “lim” value. Likewise, the Mint Function will be considered invalid if used for tokens issued beyond the “max” value.

Transfer Function

{
  "p": "brc-20",
  "op": "transfer",
  "tick": "ordi",
  "amt": "100"
}

To transfer tokens you possess to another person, complete the token transfer preparation by writing the desired quantity in the “amt” section in the JSON format on a different sat. After this step, the token transfer is set. To finalize the token transfer, send this sat to the intended recipient’s Bitcoin wallet address.

Future Developments and Innovations

The future of the BRC-20 token standard is dependent on the ever-evolving blockchain technology industry, its growing community, and its expanding user base. As with any technology, the future of BRC-20 tokens is subject to the dynamics of the blockchain industry and token economy. However, given the current excitement surrounding the BRC-20 standard, it is likely that its usage will increase in the medium term.

Despite this potential growth, it's worth noting that BRC-20 tokens do not have an established track record like their counterparts supported by protocols such as the ERC-20 token standard. Nevertheless, continued innovation and adoption of the BRC-20 standard could solidify its position in the market.

Given that the BRC-20 standard is still in the experimental phase, BRC-20 tokens are not yet considered to be suitable for investment. Although these tokens show promise and potential as blockchain-based digital assets, their evolving status requires careful consideration.

Risks and Considerations

Considerations

BRC-20 tokens offer several advantages that have contributed to their rapid popularity:

1. Compatibility with the Bitcoin network: BRC-20 tokens' compatibility with the Bitcoin network is a pivotal advantage. This facilitates seamless integration into the Bitcoin blockchain ecosystem, capitalizing on its robustness and widespread acceptance. Leveraging existing infrastructure, including wallets and exchanges, bolsters the swift adoption of BRC-20 tokens within the Bitcoin community.

2. Simplicity: BRC-20 tokens distinguish themselves through their user-friendly simplicity. This standard avoids complex smart contracts, streamlining tokenization by sidestepping intricate configurations. This simplicity empowers users to mint and transfer BRC-20 tokens without specialized technical expertise.

3. Security: The Bitcoin blockchain's inherent security mechanisms enhance the security of BRC-20 tokens. Bitcoin's decentralized structure, algorithmic foundations, and proof-of-work consensus mechanism collectively fortify the network's security. By leveraging these attributes, BRC-20 tokens inherit robust security measures, safeguarding their integrity.

4. Interoperability: BRC-20 tokens seamlessly interact with other Bitcoin-based applications and services, facilitating integration within the existing ecosystem.

Risks

While BRC-20 tokens possess inherent strengths, they also contend with limitations due to their early-stage nature:

1. No smart contract functionality: In contrast to token standards like ERC-20, BRC-20 tokens lack support for smart contracts. This omission restricts the potential applications of BRC-20 tokens in areas that benefit from smart contract capabilities.

2. Dependency on the Bitcoin blockchain: BRC-20 tokens rely on the Bitcoin blockchain, exposing them to the network's inherent limitations. These include low scalability and slow transaction speeds. Increased network congestion has led to extended transaction processing times and higher fees, affecting the efficiency and cost-effectiveness of BRC-20 token transfers.

3. Limited interoperability: The BRC-20 token standard's design confines its operation within the Bitcoin blockchain ecosystem. This limitation impedes seamless token transfers across diverse blockchain networks, hindering users from leveraging alternative networks when advantageous.

4. Limited utility: BRC-20 tokens excel at tokenizing fungible assets but are ill-suited for tokenizing nonfungible assets or implementing complex token features. Projects requiring specialized tokenization functionalities may turn to comprehensive token standards offering more advanced capabilities.

Conclusion

BRC-20 tokens entered the scene with Casey Rodarmor's innovation in January 2023, sparking a surge in activity on the Bitcoin network. By enabling the embedding of diverse files within satoshis, BRC-20 tokens introduced a novel dimension to the Bitcoin landscape. The subsequent adoption and price appreciation of ordi tokens showcased the potential of this novel standard.

Bitcoin's evolution has also introduced transformative concepts like Taproot, a significant upgrade that introduced Schnorr signatures and other enhancements. Bitcoin's journey, governed by Bitcoin Improvement Proposals (BIPs), has been instrumental in shaping its trajectory.

Ordinals, another groundbreaking concept, brought data inscription to individual satoshis. This innovation paved the way for Bitcoin NFTs and BRC-20 tokens. The intricate process of inscription allows the creation, minting, and transfer of BRC-20 tokens through different functions inscribed into satoshis.

BRC-20 tokens offer advantages like compatibility, simplicity, security, and interoperability. However, their limitations, including the absence of smart contract functionality and dependency on the Bitcoin blockchain, underscore the challenges they face.

In the rapidly evolving landscape of blockchain and cryptocurrencies, BRC-20 tokens stand as a testament to innovation and experimentation, contributing to the ongoing narrative of reshaping financial landscapes through technology. Their future trajectory will depend on the maturation of blockchain technology, the response of the community, and the evolution of user demands and expectations.