Bitcoin's New Era: Opportunities and Risks of BRC-20.

23-05-29 11:23
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Original author: @Jesse_meta, SUSS NiFT, SUSS NiFT Security Alliance, Global FinTech Academy, Biteye Builder, Chartered Fintech Professional
@EatonAshton2, Beosin Security Researcher, 0xCUHK, 0xCUHKSZ member


Bitcoin's value will rebound in 2023, leading the global risk asset market. Meanwhile, MEME coins in the digital currency asset class have skyrocketed by hundreds or even thousands of times, igniting FOMO sentiment in the market. The most talked-about and controversial MEME coin is the BRC-20 token based on the Bitcoin network. In this article, we will introduce the development process of BRC-20, objectively analyze its value and risks, and provide interested readers with a comprehensive understanding of this new type of token.


1.BRC-20's predecessor: Ordinals Protocol


Before the appearance of the Ordinals protocol, there was already a history of experimentation with non-fungible tokens (NFTs) on the Bitcoin network. As early as 2012, an asset called "Colored Coins" appeared on the Bitcoin network, representing all types of non-Bitcoin assets on the network. In 2014, the emergence of Bitcoin derivative Counterparty provided users with a platform to create and trade digital assets. In 2016, the "Rare Pepes" NFT, which later inspired the Pepe meme, was born on Counterparty. Although Bitcoin NFTs were born earlier than Ethereum, today, mentioning Colored Coins and Counterparty is very rare due to market choices. Bitcoin is considered a store of value, while Ethereum is developing an innovative ecosystem and has become a consensus.


However, this trend has changed this year. The Ordinals protocol, created by Bitcoin core contributor Casey Rodarmor, introduces new concepts of Ordinals and Inscriptions, injecting new vitality into the Bitcoin NFT ecosystem.


1.1 Ordinals


Ordinals refer to a numbering scheme that assigns a number to each Satoshi (the smallest measurable unit of Bitcoin) on the Bitcoin network based on the order in which they were mined. Satoshi is abbreviated as sat and represents one hundred millionth of a cryptocurrency, named after the founder of Bitcoin, Satoshi Nakamoto.


In the Ordinals protocol, the ordinal identifier of sat remains unchanged regardless of its transfer between different wallets. A Bitcoin full node running the open source software ORD developed by Rodarmor can track these numbered satoshis. This provides us with a precise mechanism to track and independently verify each satoshi.


1.2 Inscriptions


Another key concept in the Ordinals protocol is Inscriptions. Inscriptions are created by engraving information on a smart contract, creating native digital collectibles on the Bitcoin network. The implementation of this concept is due to two important soft fork upgrades in Bitcoin in recent years: SegWit and Taproot.


SegWit introduces the concept of witness data, which reduces the amount of information (witness data) in a transaction and therefore reduces the amount of block space used per transaction. This means that a block can contain more transactions, indirectly increasing the network's processing capacity. Although theoretically SegWit-upgraded blocks can reach 4MB, this requires all transactions to be SegWit transactions and have specific forms, so the actual block size is usually around 2MB.


Taproot upgrade encodes all possible payment conditions (such as multisig, timelocks, etc.) into a single public key, making all transaction data requirements the same, improving privacy and efficiency. Taproot improves on the SegWit upgrade by eliminating the size limit on witness data. By allowing Taproot scripts to be used in witness data, it makes it possible to store 4MB-sized inscriptions.


By combining SegWit and Taproot, the Ordinals protocol can record a file, called an inscription, on a Bitcoin block for each satoshi that is less than 4MB in size. Inscriptions can contain various forms of information, such as text, images, videos, and more.


Simply put, the ordinal numbering scheme provides each satoshi with a unique and traceable identifier, giving satoshis non-fungible characteristics. Inscriptions can add indivisible data information to the ordinal, similar to creating art on a blank piece of paper. The combination of the two creates a new NFT standard for Bitcoin, opening up the imagination space for creating BTC native NFTs.


Using Ordinals allows for use without changing the underlying Bitcoin, without the need for Bitcoin's second layer or sidechains. Famous BTC NFT collections include Bitcoin Frogs, DogePunks, Bitcoin Punks, TwelveFold, BTC DeGods, Taproot Wizards, Ordinal Punks, Bitcoin Rocks, and more. These inscriptions are highly sought after in the market, with individual collections trading for tens of thousands of dollars. Currently, trading is mainly concentrated on Magic Eden, and Binance and OKX plan to support Ordinal NFT trading at the end of May or early June.


In addition, Ordinals also assigns rarity to these sats, for example, sats with integer sequences and legal tender with special serial numbers (such as 000001 or 999999) have similar appeal and scarcity value. Based on specific events that occur in the Bitcoin network as a reference, the sats numbers are divided into the following levels:


普通:不是其块的第一个聪;

Translated to English:

Ordinary: not the first child of its block;


Rare: the first Cong of each block;


Rare: the first satoshi of each difficulty adjustment period.


Epic: The first smart contract of each halving period;


Legend: the first Satoshi of each cycle;


Myth: The first "cong" of the genesis block.


2.BRC-20 Opportunity


Since the Ordinals protocol can create Bitcoin NFTs by giving each Satoshi different "attributes", it can also create Bitcoin FTs, which are homogeneous tokens, by giving them a unified "format" and "attributes". Inspired by the Ordinals protocol, Twitter user @domodata created the experimental Bitcoin replaceable token standard BRC-20 on March 8, 2023, using JSON data ordinal inscriptions to deploy token contracts, mint and transfer tokens.


Although the name is similar to ERC-20 tokens, BRC-20 cannot be programmed to achieve more applications. BRC-20 deploys token contracts, mints, and transfers tokens by writing a JavaScript Object Notation (JSON) text into Bitcoin NFT through the Ordinals protocol. The key to deploying BRC-20 is the token name, total supply, and maximum minting amount per transaction. For transactions such as transfers or buying/selling, additional NFTs are engraved to track off-chain balances.


BRC20 implements a "first come, first served" mechanism. Once a BRC20 token is deployed, the same name token cannot be deployed again. Even if a token with the same name is deployed, the off-chain accounting platform has already recorded the previously deployed token during the parsing process, so the second deployment will be considered invalid and will not be recorded.


Domodata has deployed its first BRC-20 token, Ordi, with a total supply of 21,000,000 tokens. Each minting is limited to 1,000 tokens and they were all minted within 18 hours.


2.1 BRC-20 Development Status


Although demodata classifies BRC-20 as an interesting social experiment and opposes speculators making financial decisions based on its design, cryptocurrency experiments often have their own lifecycles, and BRC-20 is no exception. The funds from the meme coin craze have begun to flow into the Bitcoin ecosystem over the past month, and BRC-20's minting and trading activities are thriving. As of May 18, 2023, there are 24,677 BRC-20 tokens with a total market value of 466 million USD. Ordi has the highest market value, accounting for 66.7% of the total market value of BRC-20.


The content you provided is:

Source: brc-20.io


Due to the low cost of Ordi token minting, it has created a myth of thousand-fold returns, attracting widespread attention from the market. In addition, the relatively incomplete infrastructure of the Bitcoin ecosystem and a certain learning curve, coupled with low liquidity, make it easy for BRC-20 tokens to be boosted. The wealth effect has attracted savvy market players to enter the BRC-20 market. As shown in the figure below, there were 25,717 transactions when BRC-20 was launched on March 9th, followed by a period of silence at the end of March. The activity reached a small peak in early April, with a maximum of 60,516 transactions. In mid-April, it experienced a period of undervaluation, with less than 10,000 transactions per day. After the end of April, BRC-20 began to be understood and recognized by more people, and its activity continued to surge. On May 7th, it reached a record high of 396,763 transactions in a single day. Although the number of transactions has fallen recently, there is still significant activity compared to April, with most daily transactions in May remaining above 200,000.


Source: https://dune.com/cryptokoryo/brc20


2.2 BRC-20's Impact on the BTC Ecosystem


2.2.1 Active on-chain activity increases demand for miner income


The halving event of Bitcoin, which occurs every four years, reduces the return on Bitcoin mining by half. After 21 million Bitcoins are mined, miners can only receive income from transaction fees. If this income cannot cover the mining cost, some miners may shut down and exit the market, which will greatly reduce the security of Bitcoin. The activity of BRC-20 brings more income from transaction fees to Bitcoin miners, incentivizing them to continue mining and safeguarding the Bitcoin network. As shown in the figure below, the transaction demand from Ordinals (including BRC-20 and non-BRC-20) brings considerable income to miners, even exceeding the normal Bitcoin transfer fee on May 7th. On May 8th, miners earned $17.4 million in transaction fees, making it the third-highest fee-generating day in Bitcoin history. In addition to the additional income from Ordinals, normal transfer transactions from non-Ordinals also pay more fees to miners because they need to occupy block space. It is worth noting that whether the surge in Bitcoin transaction fees promoted by BRC-20 will continue remains to be seen, which also raises concerns about the accessibility of the Bitcoin blockchain.


Source: https://dune.com/cryptokoryo/brc20


2.2.2 The increase in transfer fees has reduced the accessibility of Bitcoin


The original intention of Bitcoin's creation was to provide a decentralized peer-to-peer transfer solution, which is currently the main use case for Bitcoin. Bitcoin is a popular financial solution in areas without banks or with a lack of secure and efficient banks. However, if transaction costs rise, existing and potential users may choose to abandon or temporarily suspend the use of Bitcoin. According to Block's data, the seven-day average number of active addresses on the Bitcoin network has actually decreased since the BRC-20 token became active in late April.



2.2.3 Congestion and expansion of block space trigger heated discussions in the community


According to Kunal Goel's report, Bitcoin's blocks were congested during the peak periods of the bull market in 2017, the revival in 2019, and the first bull market in 2021 due to an increase in BTC transactions, and the price of Bitcoin is expected to collapse soon. Some investors have speculated that this is a speculative bubble. As shown in the chart below, the 7-day moving average of Bitcoin's daily on-chain transaction volume has surged recently, reaching a historical high of 587,100 transactions on May 12. Although Bitcoin has experienced congestion again, this time it is due to the activity of BRC-20 tokens, and the market story has changed.


Source https://www.theblock.co/data/on-chain-metrics/bitcoin/transactions-on-the-bitcoin-network-daily


Because BRC-20 activities occur on the Bitcoin network, this means that they will also occupy block space, causing delays in normal Bitcoin transfers. In addition, according to Glassnode data, in the weeks following the launch of Ordinals, the upper limit of the average block size of Bitcoin increased from 1.5-2.0 MB to 3.0-3.5 MB. Congestion and bloated block space have sparked intense discussions in the Bitcoin community.


On May 8th, Ali Sherief, a core developer of Bitcoin, initiated an email discussion, stating that BRC-20 is almost worthless and that the harmony of Bitcoin transactions has been disrupted. Developers should consider taking action.


Aleksandr believes there are two solutions. One is to limit non-standard transactions to a maximum of 10% of the block capacity, and the other is to increase the transaction fees for Ordinals and promote its adoption of the Lightning Network.


F2Pool's Chief Marketing Officer, Li Qingfei, believes that "Ordinals are a beneficial exploration of Bitcoin applications and help unlock greater value in the Bitcoin network."


The author believes that the reason why Bitcoin can be popular worldwide today is due to its inclusive, free, permissionless, and censorship-resistant characteristics. We should not attempt to censor transactions, and it is not acceptable for centralized judges to define the validity of transactions.


2.3 Potential Opportunities and Application Value of BRC-20


2.3.1 ORDI will be the first MEME coin to break out of the MEME BTC ecosystem?


MEME coin is an important part of the cryptocurrency ecosystem, and BTC is a social experiment that started with free distribution. As banks continue to prove that they cannot help people manage their money and constantly create credit bubbles that shrink personal wealth, more and more people recognize the value of Bitcoin and use it to store their assets. According to the network effect, an increase in the number of participants in the system leads to an increase in the value and utilization of the underlying network and its services. This supports the value of Bitcoin, which has now become the world's twelfth largest asset, ranking behind Tesla.


Bitcoin is not the only successful MEME. The birth of DOGE, on the other hand, originated from a joke and quickly developed into a large and passionate cryptocurrency community, supporting some great causes and charitable endeavors. After going through multiple bull and bear cycles, DOGE is now the third largest payment token by market capitalization, ranked in the top ten after BTC and XRP.


Data source: Chaineye, Coingecko, Ethscan, Blockchair, May 18, 2023
Production: SUSS NiFT, Beosin


Despite a significant increase in a short period of time, the current market capitalization of the entire BRC-20 market is only $589,003,867, which is lower than the market value of a MEME coin PEPE in the ETH ecosystem. As shown in the above figure, the number of holding addresses of the BRC-20 leader ORDI is much lower than that of other MEME coins, indicating that the number of participants is still small and it is still in the early stage. Based on the number of holding addresses/chain addresses, it can be seen that ORDI's chips are more dispersed among MEME coins, with less risk of whale dumping, but also lacking strong manipulation. Based on the circulating market value/chain market value, SHIB is 4.74%, PEPE is 0.3%, while ORDI is only 0.05%. There are multiple MEME coins in the ETH ecosystem, and ORDI is the only MEME coin based on the largest MEME coin BTC, which may enjoy a higher premium, although its current market value ranking is still outside the top 100.


Currently, the low market value of BRC-20 is due to two factors. On one hand, it has only been around for a short period of time, whereas DOGE and SHIB both experienced amazing price performances after a period of community building. On the other hand, the infrastructure of BRC-20 is relatively incomplete. Bitcoin currently has 47,606,484 addresses, while Ethereum has 231,862,278 addresses. Bitcoin has long been used only for storage and transfer functions, while the Ethereum ecosystem is more prosperous and diverse, making it more convenient for users to purchase MEME coins. If the price of BRC-20 can maintain a healthy and benign development, it will attract more Ethereum ecosystem players to enter the Bitcoin ecosystem, increase the usage rate of the Bitcoin network, and be beneficial to the long-term development of Bitcoin.


In addition, BRC-20 is a new technology and currently there are few exchanges that have listed BRC-20 tokens. Currently, the largest amount of funds in the cryptocurrency industry is still on centralized exchanges. If the BRC-20 ecosystem continues to develop steadily, listing on centralized exchanges at the appropriate time may lead to a situation where supply exceeds demand, establishing BRC-20's position in the world of cryptocurrency. However, on the other hand, early participants in BRC-20 have already gained considerable profits in the short term, and caution is needed to avoid profit-taking due to liquidity brought by centralized exchanges.


2.3.2 BRC-20 是否有应用价值?
2.3.2 Does BRC-20 have any application value?


BRC-20 is an alternative token engraved on Cong, which some investors consider as a digital gold Bitcoin accessory to be held as a collectible. Therefore, the current BRC-20 token price is mainly supported by the consensus culture and MEME culture of the crypto community. Intrinsic value refers to the discounted value of cash that can be generated during the product or enterprise lifecycle, so BRC-20 has no intrinsic value. However, the psychological value of BRC-20 is determined by the subjective emotions of the holder, similar to the emotional value brought by other collectibles or raising pets. Moreover, based on the BRC-20 being a replaceable token standard, its liquidity is better than that of other categories of non-replaceable collectibles.


BRC-20 is currently only deployed on the Bitcoin network, but in the future, BRC-20 tokens can be cross-chained to other chains with smart contracts to play a role in DeFi. The cross-chain protocol Map Protocol proposed the BRC-201 cross-chain standard on May 19th, aiming to achieve this vision. However, this depends on the subsequent development of BRC-20, and only a few BRC-20 tokens with strong consensus can play a role in DeFi.


In addition to utilizing BRC-20 tokens in other ecosystems, there are also plans to develop based on the Ordinal protocol, attempting to introduce the BTC network into the LP mode to provide liquidity for the BRC-20 ecosystem. However, the feasibility and market acceptance of this idea remain to be observed.


One application scenario of the BRC-20 protocol is to provide a more fair issuance mechanism. Anyone can participate in token minting, which is a rebellion against the existing token sale method that allows VCs to obtain chips at a low price. Anyone can easily deploy tokens, making it an option for issuing community consensus tokens.


Web3 culture is more open, inclusive, and dynamic compared to traditional industries. When Bitcoin was created, no one thought about adding smart contracts, and during the ICO of ETH, few people encountered the prosperity of DeFi and NFT. The ultimate success of new things is achieved step by step. Although BRC-20 currently does not have practical application value, it is still worth our attention.


3 BRC-20 Risks 


3.1 Security Risks of BRC-20


3.1.1 Centralized Risk


For the BRC-20 protocol, it treats the plaintext as a ledger for recording the deployment, minting, and transfer of BRC-20 tokens. As smart contracts cannot be executed on Bitcoin, BRC-20 tokens cannot query the relevant information of the current tokens through smart contract execution. Therefore, BRC-20 uses off-chain queries, that is, using centralized servers to retrieve Bitcoin blocks, to record all deployment, minting, and transfer operations of BRC-20 tokens, and thus query the final balance of BRC-20 tokens for each user.


In simple terms, the ledger of BRC-20 is decentralized and recorded on the Bitcoin chain, but the settlement process is centralized. Currently, there are two websites, brc-20.io and unisat.io, that support BRC-20 token-related queries.



Centralization in the settlement process may lead to different platforms having different results when querying the balance of a certain account. Although all operations are recorded on the chain, the verification of these operations is the responsibility of a single client. If these centralized service providers do not disclose their verification rules, then the entire BRC-20 ecosystem is essentially unsecured.


3.1.2 Fake Recharge/Double Spending Attack Risk


On the evening of April 23rd, UniSat launched the BRC-20 trading platform, but due to vulnerabilities in the codebase, it suffered a large number of double-spending attacks. The address bc1pwturekq4w455l64ttze8j7mnhgsuaupsn99ggd0ds23js924e6ms9fxyht initially forged the transfer of Ordinals NFT and attempted to transfer 5000 ORDI and 35000 ORDI to its own address, as well as attempting to sell the forged ordi to other users. UniSat subsequently suspended website access and conducted an investigation, ultimately discovering that 70 transactions were affected.


https://unisat.io/brc20?q=bc1pwturekq4w455l64ttze8j7mnhgsuaupsn99ggd0ds23js924e6ms9fxyht&tick=ordi


In other BTC browsers, we can see that the user minted Ordinals NFT in this transaction at 9pm on April 23 and forged a transfer of 5000 ORDI according to the BRC-20 protocol.




If Unisat did not retrieve any errors that night, the expected loss from this double-spending attack would exceed 1 million US dollars. Ensuring error-free retrieval and verification by centralized servers is the most pressing issue in the development of BRC-20.


3.2 Policy Risks of BRC-20


Due to the popularity of BRC-20, many exchanges have joined in an attempt to capture this wave of traffic. However, centralized exchanges are vulnerable to attacks and have opaque internal operations. When ORDI was listed on a certain exchange, it fell all the way to 7.5U. Some users accused it of smashing the market through data and absorbing chips.


After the participation of exchanges, users face even more complex risks, but blockchain technology cannot restrict risks such as BRC-20. If more and more users participate in BRC-20 in the future, the importance of regulation and compliance may increase. At that time, how will the BRC-20 community and developers respond to regulatory policies?


3.3 BRC-20 Related Speculative Risks


The current BRC-20 token is in a very early stage, and its speculative value far exceeds its actual value. According to the data from the chaineye tool, there are currently about 10,000 users participating in BRC-20. The actual number of users is much lower than the surface heat. Many BRC-20 tokens have poor liquidity and no market value. Therefore, users need to control their FOMO emotions and be aware of the speculative bubble of BRC-20.


ChainEye - Free and open source omni-chain analytical tools


From the chart of ORDI below, it can be seen that after domodata launched the BRC-20 protocol and deployed the ORDI token on March 9th, the ORDI token remained dormant for a month. It wasn't until late April when a series of meme coins such as $PEPE and $Aidoge became popular that some players began to pay attention to ORDI and it started to rise. It can be said that the popularity of BRC-20 was actually due to the funds of meme season speculating on tokens on BTC.


BRC-20.io | ordi price today, market cap and chart



BRC-20 rose to its all-time high of $123 on May 10th, with the help of the hype generated by the meme season and the previous Ordinals protocol, as well as the release of the BRC-20 research report by Grayscale on May 8th. Its market capitalization exceeded 2.5 billion. However, its price quickly fell and dropped to $6.7 on May 25th.


BRC-20.io | ordi price today, market cap and chart


4. Summary


BRC-20 is currently quite controversial. Some Bitcoin supporters believe that BRC-20 only exacerbates the congestion of the Bitcoin network and stores worthless data. Some investors believe that BRC-20 is similar to meme coins because Bitcoin cannot run smart contracts, and these tokens have no value. Most BRC-20 tokens will return to zero after the hype. However, supporters of BRC-20 believe that BRC-20 has created a fairer token distribution mechanism on the Bitcoin network, adding new application scenarios and demand for Bitcoin. In the future, the Bitcoin ecosystem may become a long-term hotspot and narrative. The development of new things is difficult to predict and judge, and the determination and execution of the community have played a key role. We will continue to pay attention to the development of BRC-20.


SUSS NiFT Blockchain Ecological Security Alliance


The SUSS NiFT Blockchain Ecological Security Alliance, jointly initiated by Beosin, a leading international blockchain security company, and SUSS NiFT, is composed of units with diverse industry backgrounds, including universities, blockchain security companies, industry associations, and financial technology service providers. The first batch of council members includes Beosin, SUSS NiFT, NUS AIDF, BAS, FOMO Pay, Onchain Custodian, Semisand, Coinhako, ParityBit, and Huawei Cloud. The members of the security alliance will work together and cooperate with ecological partners to continuously leverage their technical advantages to provide security value for the global blockchain ecosystem. At the same time, the council welcomes more knowledgeable individuals in the blockchain-related fields to join and jointly defend the security of the blockchain ecosystem.


This article is from a submission and does not represent the views of BlockBeats.




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