Is the BRC-20 that cuts through the night sky a nova or a meteor?

Is the BRC-20 a nova or meteor that streaks across the night sky?

Summary

The introduction of the Ordinals protocol has brought new narrative space to the BTC ecosystem. Recently, the recreation of the BRC-20 token standard based on Ordinals has pushed the market FOMO sentiment to a climax. Huobi Research discusses the origin of the Ordinals protocol, the opportunities of BRC-20 tokens and current data, and the future development of the BTC ecosystem in this research report.

• The Ordinals protocol gives BTC’s smallest unit, satoshis, higher trading and collecting value, opening up new doors for the development of the Bitcoin ecosystem. The Ordinals NFT market continues to grow in size, and its infrastructure will become an important track.
• The attempt to create the BRC-20 token standard has triggered a new wealth effect, with over 18,279 BRC-20 projects minted on the chain. The trading market has expanded rapidly, with the Unisat dark horse taking over 50% of the trading volume.
• Risks and opportunities coexist for BRC-20 tokens. BRC-20 still has many flaws, but it also creates possibilities for the future development of the BTC ecosystem. The BTC ecosystem is still in its very early stages and requires developers and communities to continuously repair standard designs and establish perfect infrastructure.

The cryptocurrency market is never short of hot topics, and recently, the heat of BRC-20 has gradually surpassed that of the issuance and airdrop effects of Arbitrum. BRC-20 is an experimental Bitcoin replaceable token standard proposed by domo@domodata based on the Ordinals protocol. Ordinals has opened up a new narrative for the BTC ecosystem and decentralization.

Since its inception, the core value of BTC has been decentralization and free trading, and it is also the only cryptocurrency recognized by the US Securities and Exchange Commission (SEC) with commodity properties. The BTC network is not Turing complete, but there have always been developers who want to develop the BTC ecosystem and establish a more powerful ecological empire similar to Ethereum. For example, BTC’s Layer 2 network project and Jack Dorsey’s proposed Web5 network are both projects that hope to develop a more powerful decentralized ecosystem based on BTC.

1. The Ordinals Protocol: The Renaissance of BTC

Since Casey Rodarmor created the Ordinals protocol on December 14, 2022, more than 6.41 million NFTs or tokens have been minted as of May 14, 2022, opening up new doors for the development of the Bitcoin ecosystem. BTC NFTs are defined based on the smallest unit of the BTC network, satoshis (sats). The Ordinals protocol assigns a unique identity, i.e., a number plus a comment, to each satoshi, making each originally homogenized satoshi a unique “NFT.” The Ordinals protocol gives satoshis higher trading value and collecting value.

• Deep observation of the NFT market in 2023
• Opinion | When Bitcoin prices plummet in the next few years, gold will "land on the moon"
• Institutional investors boost Bitcoin to $ 7,000

Figure 1. Ordinals-Inscriptions (overtime) (Source: dune, @dgtl_assets)

BTC NFTs minted on the Ordinals protocol are fundamentally different from ETH NFTs. Users can inscribe information on the chain, including text/images/audio/video, but each block has a storage capacity of only 4MB, which is the upper limit of Bitcoin inscriptions.

• ETH NFTs are issued and traded using smart contracts based on the ERC-721 or ERC-1155 standard, with the only information stored on-chain being the Token ID, a string of integers. This string of numbers is mapped to a URL that retrieves metadata (name, description, image address) about the NFT. NFT metadata is typically stored on IPFS or centralized servers.
• The information in BTC NFTs is entirely on the chain, and there is no need for off-chain storage of metadata. An NFT includes a serial number, starting from 0 in the order of mining, ensuring the uniqueness of each satoshi. Because NFTs are truly stored on the chain, the information they contain is limited in size and cannot be modified. This is also why BTC enthusiasts are so fond of them.

More and more blue-chip NFT projects are joining the BTC NFT ecosystem, and they have been successful. Yuga Labs’ “Twelvefold” was auctioned off for a high of 7.115 BTC. According to a Galaxy research report, the Ordinals NFT market is expected to reach $4.5 billion by 2025, and the market infrastructure for Ordinals NFTs will become more complete by the second quarter of 2023. Developers will also continue to explore new decentralized software or Bitcoin scaling technologies.

2. BRC-20: The Evolution of the Ordinals Protocol

On March 9th, the informal proposal of the BRC-20 protocol by founder domo triggered a FOMO effect. According to ordspace.org, as of May 14th, there are already over 18,279 BRC-20 token projects with a total market value of over $500 million. Currently, the transaction volume of BRC-20 protocol on the BTC network has surpassed that of non-Ordinals protocol. On May 7th and May 14th, the transaction volume of BRC-20 protocol once accounted for more than 65% of the total, and the market sentiment seems to be continuing.

Figure 2. Proportion of BTC network transaction volume by category (Source: dune, @cryptokoryo)

The BRC-20 protocol is a technology for creating and trading fungible tokens (FT) on the Bitcoin blockchain using the Ordinals protocol. It uses JSON data to represent token contract information, including the token’s name, symbol, total supply, decimal places, and so on. The name “BRC-20” is a derivation of the Ethereum ERC-20 token standard, but BRC-20 tokens cannot interact with smart contracts and cannot perform any automated actions.

Figure 3. BRC-20 ordi deployment code (source: Twitter, @domodata)

2.1 The price miracle of Ordi tokens

Ordi is the first token issued under the BRC-20 standard, with a limit of 1,000 tokens per mint and a total of 21,000,000 tokens. Unisat and other Ordinal wallets quickly deployed tools for the BRC-20 standard, and all 21,000,000 ordi tokens were minted in less than 18 hours. The price of Ordi also rose from $0.1 to $29.04 in just three weeks, achieving a hundredfold increase.

2.2 The rapid expansion of the Ordinals trading market

The BRC-20 token mechanism is somewhat complex and requires additional steps for storage and trading. Specifically, users need to run a full node when minting Ordinals, and there is no on-chain automated market maker on Bitcoin, requiring a secure secondary market for trading. User demand and the potential for huge fee revenue have accelerated the emergence of the Ordinals trading market, even leading to fierce competition. These infrastructures and auxiliary tools mainly serve Ordinals NFTs, BRC-20 tokens, and BTC domains.

After a two-month period of dormancy, Ordinals emerged, and during this period, Magic Eden recovered from Solana’s trauma and moved to the BTC NFT trading market, becoming the top trading volume. With the subsequent appearance of BRC-20, Unisat became the dark horse of the trading market. Currently, Unisat has become the first in trading volume, with over 50% market share. The emergence of these tools and trading markets has promoted the multiple of more BRC-20 tokens, resulting in over 30,000 ordinal inscriptions minted in a single day.

Figure 4. Comparison of BTC transaction market transaction volumes (source: dune, @domo)

3. Bullish hype on multiple fronts

BRC-20 tokens have greater speculative potential than BTC NFTs, and this is a carnival between retail investors, exchanges, developers, and miners.

Victory of BTC Miners

The minting and trading of BRC-20 and other tokens has brought unprecedented pressure to the BTC network. The minting and trading of BRC-20 and other tokens have significantly increased BTC transaction fees. According to glassnode data, the number of on-chain BTC transactions on May 1 and May 10 reached 680,000 and 670,000, respectively. On May 7, Bitcoin’s total network fee was 403.91 BTC, compared to just 21.89 BTC a month ago, an increase of nearly 18 times. The high transaction fees and block rewards have created stunning profits for miners.

Figure 5. Bitcoin miner fee income ratio (source: glassnode)

Joining of Head Ecologies and Institutions

Blue-chip Ethereum NFT projects such as Yuga Labs, Crypto Punks, and BAYC have already joined the Bitcoin ecosystem and issued NFTs. Magic Eden and other NFT markets, as well as many top exchanges, also support the Ordinals ecosystem. For exchanges, they can have more opportunities to manage assets and collect fees. In order to enter the BTC ecosystem early, and establish relationships with the community and developers, many exchanges are more willing than investment institutions to be the first to eat crabs.

Support from the BSV Community

According to observations, a large number of ecological applications of BRC-20 currently come from original BSV community developers, including the Chinese development team behind the BRC20 wallet Unisat, which previously developed the Sensible Contract smart contract solution on BSV. Members of the BSV community have once again gained wealth on the BRC-20 track. The explosion of BRC-20 also provides development opportunities for developers focusing on POW chains.

4. Risks and Opportunities

The current development of BRC-20 tokens is still in its early stages, with strong meme attributes and innovative concepts, but no practical use cases. Moreover, the BRC-20 standard is not as comprehensive and rigorous as the ERC token standard, which is not considered a standard for the fungibility of Bitcoin and ordinals. As the founder domo said, this is just an experiment, and it is encouraged that the Bitcoin community repair the standard design and optimize it until a universal consensus is reached on the best practices. Subsequently, ORC-20 and BRC-721 token standard protocols appeared one after another. These token standards have been improved in terms of scalability, adaptability, and security.

BRC-20 may be an interesting social experiment, but it cannot be ignored that it has many flaws: (1) The ecological infrastructure of BRC-20 tokens is almost zero, and the tokens are mostly meme attributes without use value; (2) The BTC ecosystem does not provide a trading platform with liquidity, which cannot guarantee the security of token transactions; (3) As BRC-20 introduces more complex mechanisms for managing assets, additional tools or platforms are needed, which leads to security being tied to the platform and vulnerable to malicious attacks, which violates the decentralization of BTC; (4) Regulatory risks. BTC is more like a commodity, but BRC-20 tokens may promote an unregistered securities market on the Bitcoin blockchain.

In addition, the FOMO sentiment caused by BRC-20 tokens has led to severe congestion in the Bitcoin network, and a rare phenomenon of 1 hour without blocks occurred on May 8th. At the same time, when Bitcoin transaction fees continue to exceed the block reward, time-bandit attacks may occur, and miners will choose to process transactions with higher fees and ignore transactions with lower fees. Currently, the number of unconfirmed transactions on the BTC network has exceeded 300,000. Many BTC supporters are dissatisfied with the ecology of Ordinals or BRC-20, and believe that this is an attack and harm to the BTC network.

4.1 Future Development of the BTC Ecosystem

Any new attempt will cause controversy and bring new thinking. We can see more possibilities for the Bitcoin narrative through BRC-20, and prepare for the next wave of wealth passwords. With more and more developers focusing on the BTC ecological track, solutions to on-chain congestion issues continue to emerge, and we believe that the BTC ecosystem will gradually prosper.

• Better Token Standards and Smart Contract Market

Currently, some exchanges and wallets have joined the discussion of BTC-based alternative token standards, including alternative JSON data structures to reduce block space consumption. Ordinals protocol or other protocols require better tools to index and manage these tokens. Industry developers and leaders need to participate in the discussion.

• Attracting more investors

Currently, the launch of BRC-20 and other tokens is more of a boost to the secondary market, and investment institutions are not very interested in participating. The main reason is that there are still too many controversies surrounding the emergence of BRC-20 and other token standards. However, the innovation brought by the Ordinals protocol is also a new attempt to the future development of the BTC ecosystem. The renaissance of BTC will reshape investors’ stereotypes of the BTC ecosystem.

• BTC Layer 2 or Welcoming a Second Spring

BTC’s Layer 2 network has attracted many developers under the prosperity of Ethereum’s Layer 2. The more well-known ones in the early days include the Lightning Network, which includes use cases such as social platforms reward payments, cross-border remittances, merchant payments, transfer transactions, etc., which can meet a variety of payment scenario needs. It is also one of the best ways to solve the current network congestion. In addition, there are also Liquid, RSK, Stacks projects, and the BTC ecosystem is still in its early stages.

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