On May 6, when Binance suspended deposits and withdrawals due to extreme congestion on the Bitcoin network, the price of Bitcoin immediately dropped by about 5%.
The cause is the recent emergence of BRC-20 based tokens. This is because their growing popularity has led to a surge in transaction volume on the network, which in turn led to skyrocketing fees.
As the volume of transactions on the network increases, fees increase overall since transactions that pay higher fees are processed first. If the fee rises excessively, this will inevitably negatively impact exchanges that have to pay Bitcoin deposit and withdrawal fees.
Starting in April, BRC-20-based tokens have become very popular, and the number of inscriptions has seen explosive growth. By May 8, more than 400,000 unfinished transactions accumulated on the Bitcoin network, and transaction fees soared.
This in turn caused crypto mega-exchange Binance to suspend its deposits and withdrawals twice. The suspension drew concern from the market because Bitcoin’s core function of sending and receiving coins was disrupted, and sent the Bitcoin price plummeting in the short-term.
What is BRC-20?
To a cryptocurrency investor ERC-20 will be a familiar concept. ERC-20 is a cryptocurrency production standard for creating tokens compatible with the Ethereum network. BRC-20 is essentially the Bitcoin equivalent of ERC-20.
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The original Bitcoin network is a layer 1 solution with the strongest security among existing blockchain networks, which made it extremely difficult to create a complex smart contract. The BRC-20 token was first conceived in January 2023 when Casey Rodarmor unveiled his ordinal theory. With this technology, it is possible to issue and transmit tokens by recording (inscribing) any file (image, text, video, etc.) of up to 4 MB in Satoshi (sat), the smallest unit of Bitcoin. This innovation spurred the issuing of various non-fungible tokens (NFTs), just like on the Ethereum network.
In March 2023, an anonymous developer named Domo used Ordinal to release a new standard called BRC-20. BRC-20 is a new standard that allows issuing and transferring tokens by recording certain types of text on sat. Anyone can issue and transfer Fungible Tokens (FT) by entering text (inscription) through Ordinal on the Bitcoin network.
However, the drawback is that the BRC-20 protocol has very limited functions compared to ERC-20. Unlike ERC-20, where tokens can be issued and transferred immediately upon deploying a smart contract, BRC-20 is not an actual token. All it does is assume that a token based on a specific format recorded on sats has been created.
Therefore, just like Sats Names, a separate indexing operation is required to know the status or balance of BRC-20 tokens. Also, unlike ERC-20, BRC-20 is not an approved standard, but is still in the proposal stage. This means that BRC-20 tokens are currently not easily tradable on exchanges.
There is already a long history of attempts to raise tokens other than BTC using the Bitcoin network. As far back as 2012, Colored Coin attempted to insert stocks, real estate, and other metadata into Bitcoin transactions, while Rootstock (RSK) or Blockstream’s Liquid Network created sidechains supporting various FT and NFT issuing besides BTC. The most recent such project to emerge is Taro, which was created through a Taproot upgrade.
Against this background, the BRC-20 token takes a fresh approach by using Ordinals with simple text to create tokens. The text format suggested by one person became the standard, resulting in various BRC-20 tokens, and various marketplaces supporting it.
Will the popularity of BRC-20 based tokens continue?
BRC-20 presents a new way to handle FT (Fungible Tokens) in the Bitcoin network and is receiving a lot of attention mirroring the recent trend of Memecoin (PEPE) on the Ethereum network. The number of text-based inscriptions on Ordinal is exploding, with the consequence of significantly increased average transaction fees on the Bitcoin network.
The sudden fame of BRC-20 tokens is also leading to a price surge for tokens utilizing the standard. The unit price of the ordi token, the first token using the BRC-20 standard, started at $0.1, but has since surged to the $14 range as of May 17.
However, the challenge remains as to how far applications for using the BRC-20 token can be expanded. As described, it is basically impossible to implement complex smart contracts on the Bitcoin network and BRC-20 tokens also do not materially exist like ERC-20 tokens, but simply constitute a promise that tokens exist through inscriptions recorded in sats. Whether there is a greater variety of service use cases beyond trading meme tokens remains questionable.
There are also the issues of fees and usability. Increased activity from Ordinals and BRC-20 (a cryptographic technology that allows users to mint fungible and non-fungible tokens on the Bitcoin blockchain) is causing spikes in transaction fees, resulting in congestion on the Bitcoin network. BRC-20 is not sustainable because the value of Bitcoin lies in its use as a store of value technology and medium of exchange, and not in the ability create a JPEG and store it on the chain. Samson Mow, JAN3 CEO, told Cointelegraph that “the latest hype around Bitcoin Ordinals and BRC-20 tokens is unsustainable and will fade away in a matter of months”.
