The Ultimate Guide to BRC-20 Tokens: Everything You Need to Know

Every now and then there is an innovation in blockchain that is bound to lead to something much bigger. The ordinals protocol is one of them. The Bitcoin protocol is extremely good at what it's designed for, a decentralized and digital form of scarce money, but doesn't allow for much more than that. In contrast, Ethereum and its smart contracts gave rise to new primitives for a digital economy through dapps, tokens and NFTs.

This changed early 2023 with the release of the ordinals protocol. It allows users to add data to a satoshi, which is a fraction of a bitcoin, to turn a satoshi into something unique. While this innovation was initially used to create Bitcoin's alternative to NFTs, some clever minds have found out how to use ordinals to create tokens on top of Bitcoin. This can either be revolutionary or a fad without much merit, but it's definitely time to take a deep dive into a new step for Bitcoin; BRC-20 tokens.

The birth of BRC-20 tokens

Before we get into the BRC-20 tokens, we must first properly understand the ordinals protocol. The Bitcoin ordinals protocol was launched in January 2023 by the developer Casey Rodarmor. It is a system for numbering satoshis, giving each satoshi a serial number and tracking them across transactions. In turn, it also allows users to make individual satoshis unique by attaching extra data to them, a process known as "inscription". Any type of digital files can be added as long as the size is under 4mb. Since its inception, the ordinals protocol has been used to many different digital files to satoshis, mainly texts, images and audio, making them the alternative for NFTs based on and secured by the Bitcoin protocol. To date, over 2 million inscriptions have been created via to ordinal protocol and the growth has been rather exponential.

While it was initially thoughts that ordinals could just be used to add files to satoshis, some clever developers figured out how to use the protocol to create tokens on top of the Bitcoin protocol. On March 8th, 2023, the pseudonymous developer Domo created the BRC-20 token standard. The name is a play on Ethereum's ERC-20 standard, a protocol to create tokens, and enables the creation of Bitcoin tokens. More technically, it "utilizes Ordinal inscriptions of JSON data to deploy token contracts, mint tokens and transfer tokens". Click here to learn more about how the BRC-20 token standard exactly works.

The BRC-20 standard is more limited than Ethereum's counterpart in what you can do with it. It's hence important to note that this is just an experiment, it's still super early and the protocol might be vulnerable and that due to the limited ability to add functionalities to the tokens, so no DeFi or DAOs, they shouldn't have much value. However, the many risk-loving speculators present in the crypto market beg to differ.

What BRC-20 tokens are there?

The creator of the BRC standard created the first BRC-20 token a day later. Above you can see the script for the Ordi token. In similar vain to Bitcoin, the Ordi token has a limited supply of 21 million and could be minted by the 1,000 per transaction. All Ordi tokens have already been minted since and its released inspired the creation of over 5,000 different BRC-20 tokens to date.

Most of these tokens are purely experimental and have no plan or utility behind them. Anyone can create these tokens and they can't be used for much, so be highly cautious before jumping in. So far, we've tokens being created around the most popular ordinal NFT collections such as the Taproot Wizards and Ordinal Punks, and ofcourse around popular memes, because, why not. Here's a guide to minting the tokens.

To get started with BRC-20 tokens, you need either a Unisat wallet or Ordswap wallet (works with both MetaMask and its own wallet system). The Unisat wallet can also be used mint and transfer ordinals. Both Unisat and Ordswap have their own marketplace, of which the latter is currently in the lead in terms of volume. Magic Eden, a popular NFT market place that started on Solana, and Gamma, which started on Stacks, have also enabled ordinals and Binance seems to making its foray into the innovation too. At this rate, accessing ordinals will become a lot more user friendly rapidly, which is a welcome change as the whole user experience is still quite complex and clunky.

The challenges of BRC-20 tokens

It's very early for both the ordinals protocol, ordinals and BRC-20 tokens. This means that it's extremely risky and volatile as everything is an experiment that might go wrong. The founder of the BRC-20 standard himself even stated that a better standard will likely emerge and has expressed interest in helping to create this. If the market decided to switch to another standard, all the tokens on BRC-20 might be abandoned. While BRC-20 tokens are saved to the Bitcoin blockchain, making their transactions highly secure, the tokens themselves are not more secure because of this as anyone can create them, likely leading to many rugpulls.

Then there is the debate over block space and fees. Ever since the ordinals protocol went live, a vocal group of Bitcoin holders has expressed their frustration with the fact that ordinals demand a lot of block space, leaving less room for bitcoin transactions and increasing the fees. In their mind, Bitcoin was designed as a money protocol and nothing else and anything other than bitcoin taking up blockspace shouldn't happen. It's true that bitcoin transactions are now competing with ordinals transactions, however, this has been a boon for Bitcoin miners, who saw their revenues spike due to the increase in fees. With the upcoming Bitcoin reward halving, where miners' revenue is slashed by 50%, this increase in fees might actually help them stay profitable for longer. To date, ordinals users have paid over $5 million in fees.

Closing thoughts

The ordinals protocol has been one of the most important innovations for Bitcoin in a long period. Where many assumed it required sidechains or other layers like Stacks and the Lightning network to add anything more to Bitcoin, ordinals have made it possible to add features to the main chain. For now, it seems to be mostly "for the culture" with little substantial value or functionality and a lot of risk. Then again, this is how most innovations start and the ordinals protocol and BRC-20 token standard could lead to signficant and useful breakthroughs further down the line.

The Bitcoin economy has been rising in recent months and ordinals fit perfectly into that. With Bitcoin's total market value of over $500 billion, any outcome of this that becomes valuable to Bitcoin holders can be worth all the risk and experimentation. We'll be following this closely to see where it is all heading.