With the emergence of the new Ordinals Bitcoin protocol, users can create non-fungible tokens (NFTs) on the Bitcoin blockchain by inscribing data onto Satoshi units.
In recent years, blockchain technology and the cryptocurrency industry have garnered significant attention. Bitcoin, as the first decentralized digital currency globally, has led the way among cryptocurrencies for over 10 years. However, with the rise of Ethereum and its smart contract capabilities, new standards such as ERC-20 and similar protocols have emerged.
Recently, there has been widespread discussion about a new standard on the Bitcoin network called BRC-20, which has also turned the Bitcoin network into a new destination for meme coins and the creation of fungible tokens. In addition, alongside BRC-20, another standard called BRC-721 has been introduced, which allows for the creation of NFTs on the Bitcoin network. The commonality between these standards is that both are connected to the Bitcoin Ordinals protocol.
One of the significant phenomena of spring 2023, which has been particularly beneficial for Bitcoin miners and has considerably increased demand for block space on the Bitcoin network, is the phenomenon of “Inscriptions” and the rise in BRC-20 transactions on the Bitcoin network, initiated through the Ordinals protocol and the use of data inscribed on Satoshis. To better understand these concepts, continue reading this article.
What is the BRC-20 standard?
The BRC-20 standard is an experimental token standard on the Bitcoin blockchain, modeled after the Ethereum token issuance standard known as ERC-20, and was introduced to the market in early March this year.
With the introduction of the new Ordinals Bitcoin protocol, for the first time in the history of cryptocurrencies, users can create NFTs on the Bitcoin blockchain by inscribing data onto Satoshis. This positive development has attracted NFTs, which have a special popularity and appeal in the industry, to the Bitcoin ecosystem.
It is important to note that the BRC-20 token standard requires a Bitcoin wallet to mint and trade these tokens. Most cryptocurrency enthusiasts are familiar with ERC-20 tokens created on the Ethereum network. However, BRC-20 tokens are stored on the Bitcoin-based blockchain and are created using two concepts: Ordinals and Inscriptions, which will be explained later.
Despite significant advancements in blockchain and cryptocurrency technology, the BRC-20 token standard has become one of the most important token standards on the Bitcoin network. It is worth noting that BRC-20 tokens differ from their Ethereum counterparts, and we will explore some of these differences below.
The first major difference between BRC-20 and ERC-20 tokens is their primary platform. BRC-20 tokens are created on the Bitcoin network, while ERC-20 tokens emerged from Ethereum’s platform. Additionally, BRC-20 tokens require a Bitcoin wallet for minting and trading, while ERC-20 tokens are minted and traded in Ethereum wallets.
Moreover, while BRC-20 tokens are created using the Proof of Work (PoW) mechanism, the Ethereum Virtual Machine (EVM) is responsible for producing ERC-20 tokens. Additionally, since the Bitcoin blockchain does not support smart contracts, it offers fewer features than ERC-20 tokens. However, with the release of the Ordinals protocol, Bitcoin has also gained some of Ethereum’s attractive decentralized token features.
The release of the Ordinals protocol has transformed Bitcoin into a complete blockchain network with NFT capabilities, and the BRC-20 standard allows Bitcoin users to offer products based on NFTs, drawing more users to the network.
NFTs, even at their peak of popularity, were unable to integrate into the Bitcoin blockchain due to limitations, the most important of which was the lack of smart contract support. Therefore, one of the motivations for developing the Ordinals protocol was to support NFTs on the Bitcoin network. The development path of this protocol dates back to 2021 when ERC-721 standard NFTs gained attention from many in the field. The protocol was officially launched on January 12, 2023.
The launch of the Ordinals protocol marked a turning point for the Bitcoin network, resulting in thousands of NFTs being introduced on the network in a short period.
Interestingly, over 14,000 tokens based on the BRC-20 standard have been minted on the Bitcoin network, many of which are meme coins. While some of these projects have more serious use cases, the majority are meme coins. Many popular BRC-20 tokens include meme coins like PEPE, which, due to its recent explosive growth, has brought even more attention to the Ordinals protocol and BRC-20 tokens.
How does the Ordinals protocol work?
The Bitcoin network’s lack of support for smart contracts led the Ordinals protocol to adopt an innovative approach to creating and issuing NFTs. The protocol assigns each Satoshi, the smallest unit of Bitcoin, a unique identity, enabling these Satoshis to not only store data but also be traceable and transferable.
The process of inscribing data on Satoshis in the Ordinals protocol is called “Inscription.” Simply put, inscription refers to the engraving and recording data on Satoshis.
Since the launch of the Ordinals protocol, the number of inscriptions in the Bitcoin network has increased significantly. This surge in BRC-20 transactions has led to network congestion and operational limitations. It has also resulted in higher transaction fees and unusual transaction queues. As a result, many users and exchanges turned to alternatives like the Lightning Network for their transactions, which increased the network’s activity. This issue became more pronounced when the Bitcoin network experienced blocks filled with BRC-20 transactions with fees of $20 per transaction, an 800% increase from the typical $1-$2 fee recorded in 2022.
Despite the many advantages attributed to the Ordinals protocol, some individuals have reacted negatively to it. One reason for this opposition is concern about the increased processing burden on the Bitcoin blockchain network. Given the scalability limitations of this blockchain, some supporters of the cryptocurrency are worried about the performance of the Ordinals protocol on this network. In their view, Ordinals might lead to increased costs of using the Bitcoin network by generating spam and junk data. Some critics also believe that the Bitcoin blockchain should be used for the network’s primary purposes—value transfer and digital transactions—and should not be cluttered with worthless data like JPG images.
What are the benefits of the Ordinals protocol?
Despite all these opinions and criticisms, many believe that BRC-20 tokens and the Ordinals protocol bring significant benefits to the Bitcoin network. Supporters of this protocol argue that as the applications of the Bitcoin network increase, so will the number of users and global adoption. Unlike some experts and market participants who view Bitcoin solely as a decentralized peer-to-peer payment method, Ordinals enthusiasts believe that this protocol enhances Bitcoin’s utility.
Another important advantage of this protocol is that inscriptions are stored on the main Bitcoin blockchain, which provides a strong security argument compared to NFT projects on other blockchain networks like Ethereum. Additionally, the activity of inscriptions on the Bitcoin network helps reduce the cost of usage and transaction fees.
It is also essential to note that, although BRC-20 tokens are still in the experimental phase, users view these projects as exciting opportunities in the Bitcoin blockchain. They believe that BRC-20 tokens offer a notable and important solution to address the limitations of the Bitcoin network, particularly the lack of support for smart contracts.
