Higher and hotter or facing a cold crash? Analyzing the logic behind the explosive surge of BRC-20 tokens and projecting future developments.

Rising up or crashing down? Exploring the reasons behind the dramatic rise of BRC-20 tokens and predicting their future trajectory.

Introduction

The engraved assets represented by the BRC20 series have recently been very hot. It seems to me that this is the second wave of asset bull market since the introduction of the ordinal protocol. I have recently conducted research on the current engraved market. In addition to digesting industry information and data, I have also participated in some online and offline BRC20 thematic exchange activities, forming some phased views on this market. This article attempts to organize and express them.

This article attempts to answer the following questions:

• What are engraved assets? What are the selection criteria for popular BRC20 assets?
• What is the core value proposition of engraved assets represented by BRC20 assets?
• Are engraved assets good business innovations?
• What is the mechanism logic and driving force behind the sharp rise of engraved assets?
• What are the scenarios for the next stage of engraved assets?
• A deduction of the path of the collapse of engraved assets

The following content of this article represents my phased views up until the time of publication. There may be factual errors and biases in the views and opinions expressed, and they are only intended for discussion purposes. I also look forward to corrections from other investment research peers.

Engraved Assets and the Criteria for “High-Quality Assets”

Engraved assets refer to virtual assets that are created by recording information in a specified format on BTC (or other blockchains), and then converting the formatted recorded information on the chain through a specific indexing protocol. These assets can be homogenized assets (such as BRC20 assets) or non-fungible assets (such as Bitcoin Frogs-like NFTs).

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For Bitcoin, its main historical use as a public ledger has been to record transfer transactions on the network. After the Taproot upgrade in November 2021, Bitcoin, as a public ledger, provides more efficient data storage capacity and can upload text and multimedia content at lower cost, providing a technical foundation for engraved assets.

Compared to Ethereum, the issuance and operation of assets are based on smart contracts, while engraved assets on BTC are based on on-chain information + indexing specifications for issuance and operation.

Although the mechanisms are different, both are assets issued based on the blockchain public ledger data.

Token-like engraved assets on Bitcoin, source: BTCTOOL

NFT-like engraved assets on Bitcoin, source: BTCTOOL

Based on different engraved indexing specifications, homogenized assets have different types like BRC20, ORC20, etc.

This article mainly discusses BTC inscription assets, with a focus on BRC20 assets as an example. Currently, most of the highest market value inscription assets are in the BRC20 series.

Although this year has seen significant increases in BRC20 star assets such as Ordi and Sats, as well as moderate increases in assets like Rats, most of the BRC20 assets issued during the same period have experienced a decline and lost liquidity within one to two months after issuance.

Based on several discussions I have participated in about inscription assets and BRC20, the participants have summarized the characteristics of “promising” BRC20 assets as follows:

• Good name: Related to Bitcoin and inscription culture (Ordi, Sats), or animal coins (the Meme trend in 2021 was mainly based on animal names)
• Originality: Not a crude replica of other Memes, but a self-created IP
• Community impact: Does the project have influential leaders? Does it have a proactive, high-profile, and continuous community expansion strategy?
• Token distribution: The proportion of holdings by major investors in the early stages should not be too high, especially pure investors (those who do not engage in promotion and only hold coins)

Of course, the application of these criteria in practice is not simple.

Opinions on the quality of a name may vary, and even within the relatively narrow field of inscription assets, trends have undergone multiple changes. What may be “trendy” in the market for naming today may not be so in a few weeks.

The value proposition and business innovation of BRC20 assets

There are various opinions regarding the value proposition of BRC20 assets in the market. I will summarize the main viewpoints as follows:

• The mechanism of fair launch ensures that everyone can only obtain assets in an equal manner. Unlike mainstream web3 projects that have early-stage investments from VCs, which allows them to obtain tokens at a lower cost and sell them at a higher price to the public
• BRC20’s protocol format is simple and has a single functionality. Therefore, it does not have the related risks of smart contracts, such as rug pulls, blacklisting, or contract hacks by the project team
• BRC20 assets enrich the accounting uses and asset types of the Bitcoin network, generating a significant amount of network fees. This can fill the Bitcoin network’s security budget gap after the continuous reduction in BTC block rewards

In my opinion, all of the above arguments have some validity, but they are not the main source of the current popularity and immense wealth effect of BRC20 assets this year.

So, are inscription assets represented by BRC20 a good business innovation?

This depends on the perspective from which we evaluate “good” in terms of interests.

For trading platforms, asset speculators, and Bitcoin mining professionals, this is certainly a good innovation because the emergence and popularity of such assets directly increase their income.

However, when it comes to whether inscription assets provide broad business value, such as lowering the production costs of goods and services, improving business efficiency, or optimizing resource allocation, based on current observations, I hold a negative view.

BRC20 is essentially just a new form of Meme asset.

I am not opposed to Memes. As a speculative medium, Meme assets may be a negative-sum game in terms of overall wealth (trading platforms and project teams continuously profit from speculation), but they provide a sense of exhilaration that accompanies speculative and gambling behavior, effectively meeting the needs of this type of user. This is also why many people, despite knowing that many forms of gambling are mathematically unprofitable, still occasionally or constantly visit casinos.

The resilience of individuals in terms of gambling and greed often rivals that of physiological needs such as food and sex, which is the underlying reason for the long-term survival of the Meme industry.

Regarding the Meme industry, BRC20 assets can only be considered an enrichment of product categories, and there are not many true innovations brought about by changes in technical mechanisms.

Take the most recognized feature of BRC20, “fair distribution,” for example. As long as it is properly designed, fair distribution based on smart contracts can also be achieved, and it is not an exclusive feature of the Meme industry.

The much-criticized “early-stage VC and late-stage retail investors” model is faced with huge uncertainties when VCs invest in projects based solely on a business plan. Therefore, VCs must use extremely low early-stage investment prices as a hedge against risks. By the time project tokens circulate in secondary markets, many of the previously “uncertain” aspects of the invested projects have become “certain,” such as the availability of usable products, measurable data, a more mature market environment, and seeking listings on trading platforms, among others. At this point, the project is no longer an “early-stage project” that is invisible and intangible, existing only in whitepapers and fundraising PPTs, and the token price naturally reflects this change.

From this perspective, meme projects like Shib and Pepe, which do not have VCs, are the same. In their early stages, they are just concepts, and whether they can attract enough attention and speculative capital or gain the support and recommendation of other KOLs is “uncertain.” Therefore, the tokens bought at that time are extremely cheap. As the number of token holders rapidly increases and resources become more abundant, with more and more people being optimistic, the “uncertainty” turns into certainty, and the secondary market price has already increased by tens or hundreds of times since the early days.

So, as a not-so-new form of Meme, what is the reason behind the firestorm of BRC20 assets, especially in the second half of this year?

The mechanism logic and driving forces behind the surge of Meme assets

We analyze the phenomenon of the wealth frenzy surrounding BRC20 from two perspectives: mechanism logic and driving forces.

Mechanism Logic

As mentioned earlier, BRC20 is essentially a speculative medium, and the only utility for participants in a speculative medium is to “quickly create astonishing wealth.” The law of large numbers states that “people always spread the news when they make a fortune but remain silent when they suffer losses,” which means that even if the majority in a market experience losses, the headlines circulating within the community may still be “investors making a hundredfold comeback.” This greatly amplifies the public perception that “wealthy individuals frequently emerge” in certain types of asset speculation.

And this time BRC20, compared to the conventional ERC20 Meme, has a higher efficiency in creating “wealth effect”.

The core reason is that most early BRC20 assets – even until now – are traded in the form of OTC orders, while the trading venues of ERC20 Meme in the ERC20 format are mainly in AMM DEX or CEX, with the former having much less depth than the latter. This also means that the funds needed for the rise of BRC20 assets are much lower than that of conventional ERC20 assets (especially during the rising period of market sentiment), and the same buying pressure can provide higher gains.

In addition, due to the thin liquidity in the OTC mode, the same purchasing power can generate more exaggerated gains for BRC20 assets compared to ERC20 Meme, creating a more powerful and faster “wealth effect”.

In addition to the difference in the cost of promotion, BRC20 assets that do not trade on CEX also lack shorting mechanisms such as perpetual contracts, which further unleashes the short-term upside potential of the relevant assets.

In addition, core participants of BRC20 have indicated during discussions that the speculative behavior in this field has a high “motherhood rate”. That is, many investors who enter the market in large numbers are not the “old leeks” familiar with Defi and enthusiastic about investing in mainstream cryptocurrency assets, but rather many are large maternal-type investors who are encouraged by “team leaders” and guided by “ground promotion forces”. They are more obedient and easily influenced by the community leaders, and some of them do not even know how to sell, which has led to the formation of a pattern of holding coins without selling in some projects, reducing the short-term selling pressure on the projects.

This year, Okex’s Web3 wallet has provided a good experience for trading BRC20 assets, and its complete wallet infrastructure has further smoothed and shortened the path for “motherhood-speculative investors” to enter and participate in this new market.

Driving Force

The popularity of BRC20-style inscription assets is a rare speculative highlight in the bear market. The various stakeholders have sufficient motivation to drive the continued expansion and development of this trend.

• Mining community: With the popularity of inscription trading, miners and mining pools earn substantial transaction fees, and mining machines are selling better. They are the direct beneficiaries and naturally hope that this “Summer of Inscriptions” will not end early.
• Exchanges: The emergence of new speculative businesses brings in more transaction fees, more new users, and activates strategic products such as wallets. Okex is undoubtedly the big winner of the Summer of Inscriptions, and Binance is also following suit.
• CX team: With the new theme and story, they can monetize their human resources.

The combined push of these three forces may accelerate the heat of inscription assets into the next stage.

The script for the next stage

In the next stage, there must be a script for the next stage in order to make this already sizable market even bigger and hotter. Here are some representative event milestones that could occur:

• Second-tier CEXs continue to list more script assets besides Ordi and Sats, continuing to drive up other Meme assets and attract more traditional crypto investors into the BRC20 speculative market.
• Top CEXs like Binance list more script assets, bringing mainstream crypto funds into the BRC20 market through CEXs.
• Other innovations beyond pure Memes appear, such as BRC20 Memes with Ponzi mechanisms or even more exaggerated wealth effects.

But will the script market successfully move on to a hotter stage or gradually cool down and even crash?

Let’s take a look at the possible paths and conditions for the market crash.

Path Deduction for Script Market Crash

As mentioned earlier, the exaggerated wealth effect of BRC20 assets in the early stage is determined by a combination of factors such as low liquidity of OTC order trading mechanisms, a higher proportion of “mom” investors, and numerous stakeholders.

Low liquidity will cause asset prices to skyrocket during the upward phase and plummet because buyers are not found during the downward phase. Most people don’t understand that 95% of their recorded wealth in their wallets is “virtual market value,” based on the premise of being faster than others and having someone else to provide liquidity for exiting.

The elements of this market crash include:

1. Excessive issuance and rapid exit of sickle-shaped projects. With limited users and funds in the market, the main opponents of each BRC20 project’s market makers are other project teams. When users and funds are attracted to buy other BRC20 projects, a portion of the capital that can support their own chips disappears from the market. Therefore, due to fierce competition for users and funds, the overall time for market makers to withdraw their chips will move forward to ensure their profits. This leads to a shorter window of speculative profit for users. When loss stories overwhelmingly dominate getting rich stories, negative spread and ridicule become mainstream, and users no longer participate, the liquidity of the BRC20 Meme market dries up.
2. User inflow decelerates. Factor 1 may cause some CEXs to become more cautious when listing more BRC20 assets, which further leads to the speed of user and fund inflow being unable to catch up with the market makers wielding their sickles.
3. After BRC20 is listed on CEXs, the main battlefield for liquidity will also transition to CEXs, which increases resistance to upward movement. Coupled with complete short-selling tools such as contracts, unless the mechanism is changed, the wealth effect after listing may significantly diminish.
4. Factors 1, 2, and 3 continuously reinforce each other, forming a crash pattern.

Afterword

Resilient greed and gambling are the most important sources of vitality in the crypto industry. How the summer of scripts will evolve, the author will continue to observe.

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