Ordinals and BRC-20 tokens: innovation coming to the Bitcoin blockchain
Introduction
In the fast-evolving landscape of blockchain technology, innovations happen extremely frequently. One of the recent advancements that has occurred is the introduction of ordinal inscriptions on the Bitcoin network. It added a new layer of functionality to the project, which resulted in new use cases that were not thought possible before. One of these use cases is the establishment of so-called BRC-20 tokens, a new token standard on the Bitcoin blockchain. Among these new tokens is the popular meme token PEPE, which has gained attention due to its incredible rise in price value.
This article aims to provide an informative overview of ordinals, in particular we will look at the BRC-20 token standard. We will explore the inner workings, practical applications and the implications that these innovations could have, not only on the Bitcoin network, but on the entire crypto-industry. Furthermore, the differences between ERC-20 tokens and BRC-20 tokens will be looked at.
What are ordinals and how do they work?
Bitcoin ordinals utilize the ordinals protocol to inscribe information on a single Satoshi, which is the smallest unit of BTC; one Satoshi equals one hundred-millionth of a Bitcoin. The ordinals protocol serves as a system that labels each Satoshi with a serial number, allowing them to be tracked. The numbering is determined by the order in which the Satoshi’s were mined and transferred. The actual inscribing of data on the Satoshi is made possible by two soft forks that have taken place on the network: the Taproot and the SegWit (Segregated Witness) upgrades. One of the main features of SegWit was to remove the witness data (the signatures and scripts) outside of the transaction data. (Investopedia). As a consequence, a Bitcoin block could contain more transactions, enhancing its capacity to 4 MB. The Taproot upgrade combined numerous transactions together to save more space on the block, thus increasing transaction speed and efficiency. Together, these upgrades made it possible to inscribe a file containing below 4MB of data onto an individual Satoshi on a Bitcoin block. This happens through the witness data and is thus possible without relying on a side-chain or a separate token. The added file can contain videos, images or some other form of information, however, the Satoshi can still be spent normally. So, the inscription process allows users to add extra data to a Satoshi and number it, effectively making the Satoshi non-fungible. This so-called “ordinal NFT” is thus similar to traditional NFT’s, except that the latter are typically based on smart contracts and the asset they represent is not necessarily stored on the blockchain of the network. Ordinal inscriptions, on the contrary, are always stored on-chain and therefore they inherit the security, decentralization and immutability of the Bitcoin network.
What is a BRC-20 token
One of the most apparent applications of Bitcoin ordinals are the BRC-20 tokens. BRC-20 is a new token standard on the Bitcoin blockchain. As opposed to ordinal NFT’s, these are fungible tokens that represent smart contract tokens and can be minted by community members, albeit with a limit. They are created by inscribing Javascript Object Notation (JSON) code on a Satoshi, these pieces of code contain all the information about the tokens; their maximum supply, identity and minting limit. So far, the BRC-20 standard has mostly been used to create meme tokens. The first minted BRC-20 token was the meme token ORDI, but by far the most well-known is PEPE.
ERC-20 vs BRC-20
The name “BRC-20” refers to the popular ERC-20 token standard on the Ethereum network. However, despite their similarities in name and main idea, they are not quite the same. Namely, ERC-20 tokens can also be created on other EVM compatible chains and are thus not native to the Ethereum network. BRC-20 tokens on the other hand, are exclusive to the Bitcoin network. Another difference lies in the distribution of the tokens. Since there is a limit on the number of mints a single ordinal wallet can make, BRC-20 tokens are typically minted by multiple wallets, leading to a more decentralized way of distributing the tokens. For ERC-20 tokens this does not hold, as it is possible for one entity to manage the distribution completely. Furthermore ERC-20 tokens are created using EVM compatible smart contract code and utilize the POS consensus mechanism. BRC-20 tokens use Proof-of-Work (POW) and are created via ordinal inscriptions as discussed earlier.
Use cases of BRC-20 tokens
Right now, the use cases of BRC-20 tokens and their integration into ecosystems are still limited; the BRC-20 standard consists of a deploy, mint and transfer function. It can be argued that their functionality overall is lacking since they are not EVM compatible, which makes it harder for developers to access the network, which hinders their adoption. However, BRC-20 tokens have all the benefits that come with a POW consensus mechanism, which is valued highly by many in the crypto-space. They could potentially be integrated into DeFi protocols such as decentralized exchanges (DEXes) or lending and borrowing protocols. Due to their decentralized distribution process, the BRC-20 standard could end up being a good contender for the tokenization of real-world assets over token standards that enable smart contract creation. The properties of these assets could be specified using the JSON code.
Consequences of Bitcoin ordinals
The opinions on ordinal technology differ enormously among the Bitcoin community. The main argument against ordinals, and BRC-20 tokens, has to do with the block space that the inscriptions take up, which has led to increases in network fees and network congestion. Namely, the size of transactions involving ordinal inscriptions can be up to 4MB, whereas traditional bitcoin transactions are typically in the size of KBs. It is likely that this surge in network activity contributed to the bitcoin withdrawal haltings that occurred on Binance on the 7th of May. What’s more, ordinal transactions compete with financial peer-to-peer transactions, which can be argued to be bitcoin’s main purpose. Concerns are shared among community members that longer on-chain confirmation times and higher fees might scare off current potential users from using Bitcoin for payments. Thus, the popularity of Bitcoin ordinals has revived the ever-recurring debate whether Bitcoin’s block size needs to be increased or not. Then there is also the argument by some that Satoshi Nakamoto never intended for Bitcoin to be more than a decentralized payment system, and that developers should strive to keep away from deviations to the original vision as much as possible.
But not everyone has a negative view on Ordinals. Some of the beforementioned downsides are countered by ordinals enthusiasts that argue that the utility that will be brought to the network is worth the higher network activity and transaction fees. Furthermore, the latter will create a bigger incentive for miners to work on the network, since the rewards they receive are reduced every four years due to the halving event. Thus, allowing ordinal inscriptions to take place on Bitcoin might result in a more secure network, since validators should theoretically be more willing to participate. After all, keeping the network secure is vital for all of Bitcoins use cases.
Furthermore, ordinals provide every network participant with the possibility to permanently publish uncensored information on-chain. With censorship resistance being a popular, albeit controversial, topic over the last years, this is not an uninteresting use case at all.
Possible consequences for Ethereum
Even though there are, as discussed earlier, still quite some differences between BRC-20- and ERC-20 tokens, there is no denying that the Bitcoin blockchain became a whole lot more similar to Ethereum’s than it was before. When comparing the top two crypto-projects, Ethereum’s main disadvantage against Bitcoin is less security, but it makes up for it by allowing for a whole lot more applications on the network. With Bitcoins new use cases this no longer holds entirely. Of course, the ERC-20 standard still has numerous advantages over the BRC-20 one. However, due to the possibilities of ordinal inscriptions, the Bitcoin network could potentially take over some of Ethereum’s functions, if the development of ordinals and the BRC-20 standard keeps on increasing. Smart contract functionality on Ethereum has been praised by many at this point, but when the ERC-20 standard just came out, most of the use cases were not yet that significant, and just like with BRC-20 tokens now, it received a lot of criticism initially.
If the Bitcoin network will end up becoming a serious competitor to some of Ethereum’s applications remains to be seen, and will ultimately depend on how both networks will develop themselves. Furthermore, it may depend on whether developers may favor deploying on a POW network (high security and robustness) or a POS one (high flexibility and less environmentally taxing).
Conclusion
Ordinal technology has opened up new possibilities and use cases, bringing forth both excitement and debates within the crypto industry. Ordinals allow for the inscribing of data onto individual Satoshis, making them non-fungible and similar to traditional NFTs. Unlike the latter, these ordinal inscriptions are stored on-chain, and thus leverage the benefits of the Bitcoin network. The BRC-20 token standard introduces fungible tokens that are akin to smart contract tokens on the Bitcoin blockchain. While they are still in the early stages of adoption, they offer potential applications in decentralized finance protocols and the tokenization of real-world assets. But despite these potentials, challenges and concerns remain. The increased block space consumed by ordinal inscriptions has led to network congestion and higher transaction fees. On the other hand, it is argued that the utility and potentially added security, via miner incentives, justify these trade-offs. The ability to permanently publish uncensored information on-chain is another benefit. Furthermore, the rise of ordinal technology on the Bitcoin network presents potential implications for Ethereum. With Bitcoin’s expansion into additional use cases, the competition between the two blockchain networks could intensify. Ethereum’s advantage lies in its flexibility and broad range of applications, but if the development of ordinals and BRC-20 tokens continues to progress, Bitcoin may gain ground in certain areas originally dominated by Ethereum. In conclusion, ordinals on the Bitcoin network and the subsequent introduction of BRC-20 tokens can be regarded as an interesting development in blockchain technology. As these innovations continue to unfold, they have the potential to significantly impact the crypto-industry, but if it will truly play out this way remains to be seen.