What is BRC-20?

Introduction

BRC-20 is an experimental standard for fungible tokens on Bitcoin that uses the Ordinals protocol to inscribe JSON data representing token information. This standard, which gained significant attention in 2023, allows creating and transferring tokens similar to Ethereum's ERC-20 standard, but natively on Bitcoin using Ordinals. This guide will explain what BRC-20 is, how it works technically, how it uses Ordinals, what its limitations are, and the context of recent hype.

Important: This is an advanced level guide. We assume basic knowledge of Bitcoin, transactions, UTXOs, Ordinals, and token concepts. This guide seeks to be technical and clear, explaining BRC-20 objectively and informatively.

By the end of this guide, you'll understand what BRC-20 is, how it works technically, how it uses Ordinals, what its practical limitations are, and the context of hype and debate around it.

What Is BRC-20?

Basic Concept

BRC-20 is an experimental standard that defines how to create fungible tokens on Bitcoin using Ordinal inscriptions to store token information in JSON format.

Main characteristics:

Based on Ordinals protocol
Uses text JSON inscriptions
Allows deploy, mint, and transfer of tokens
Works natively on Bitcoin blockchain
Doesn't require smart contracts or sidechains
Experimental and unofficial

Simplified analogy:

BRC-20 is similar to Ethereum's ERC-20 standard
But works on Bitcoin using Ordinals
Instead of smart contract, uses JSON inscriptions
Tokens are tracked through off-chain index

Why Was BRC-20 Created?

Context:

Ordinals allowed data inscriptions on Bitcoin
Community began exploring possibilities
Ethereum's ERC-20 standard is very popular
Desire to create tokens on Bitcoin without sidechains

Objective:

Create simple standard for fungible tokens on Bitcoin
Use existing infrastructure (Ordinals)
Doesn't require Bitcoin protocol changes
Explore Bitcoin possibilities

Creation:

Proposed by @domodata in March 2023
First experimental token
Gained rapid attention
Development and debate continue

Tokens on Bitcoin: Context

Why Weren't There Tokens Before?

Bitcoin is limited:

Bitcoin doesn't have native smart contracts
Bitcoin Script is intentionally limited
No complex programmable state
Focused on simple transfers

Sidechains and Layer 2:

Alternative solutions were developed
Liquid Network, Rootstock, Lightning Network
But they're not native to Bitcoin
Require additional infrastructure

Ordinals changed the game:

Allowed storing data on blockchain
Opened possibility to create standards
BRC-20 was first significant experiment
Generated debate about Bitcoin usage

How Do Tokens Work on Other Blockchains?

Ethereum (ERC-20):

Uses smart contracts
State is stored on blockchain
Token logic is programmed
Transfers are function calls

Characteristics:

Contract defines rules
State is persistent on blockchain
Execution is validated by nodes
More complex but more powerful

Bitcoin doesn't have this:

No complex code execution
No programmable state
Ordinals offers creative alternative
But with significant limitations

How Does BRC-20 Work?

General Architecture

Main components:

1. Ordinal Inscriptions:

JSON data is inscribed on satoshis
Each operation (deploy, mint, transfer) is an inscription
Data is public and verifiable
Permanent on blockchain

2. Off-Chain Index:

Off-chain software tracks all BRC-20 inscriptions
Calculates token balances by address
Maintains token state
Necessary because Bitcoin has no state

3. JSON Standard:

Standardized format for each operation
Deploy: creates new token
Mint: creates new tokens
Transfer: transfers tokens

Technical Process

1. Deploy (Create Token):

Creator inscribes JSON with token information
Defines name, symbol, max supply, etc.
Token is created and can be minted

2. Mint (Create New Tokens):

Users inscribe JSON requesting mint
Quantity and token ticker
Off-chain index tracks and calculates

3. Transfer (Transfer Tokens):

User inscribes JSON to transfer
Specifies quantity and recipient
Off-chain index updates balances

BRC-20 Inscription Example

Token Deploy:

{
  "p": "brc-20",
  "op": "deploy",
  "tick": "ORDI",
  "max": "21000000",
  "lim": "1000"
}

Fields:

p: protocol (always "brc-20")
op: operation (deploy, mint, transfer)
tick: ticker/token symbol (4 characters)
max: maximum supply
lim: limit per mint

Token Mint:

{
  "p": "brc-20",
  "op": "mint",
  "tick": "ORDI",
  "amt": "1000"
}

Fields:

p: protocol
op: operation (mint)
tick: token ticker
amt: quantity to mint

Token Transfer:

{
  "p": "brc-20",
  "op": "transfer",
  "tick": "ORDI",
  "amt": "100"
}

Fields:

p: protocol
op: operation (transfer)
tick: token ticker
amt: quantity to transfer

How Are Balances Calculated?

Fundamental problem:

Bitcoin has no state
No place to store balances
Solution: off-chain index

Tracking process:

1. Indexing:

Software scans blockchain
Finds all BRC-20 inscriptions
Processes in chronological order
Calculates balances for each address

2. Balance calculation:

Initial Balance: 0
For each relevant inscription:
  If operation = mint:
    Balance += minted quantity
  If operation = received transfer:
    Balance += received quantity
  If operation = sent transfer:
    Balance -= sent quantity
Final Balance = current balance

3. Index dependency:

Without index, balances can't be calculated
Requires trust in indexer
Technical centralization
Fundamental limitation

Transfers: How Do They Work?

Transfer process:

1. Create transfer inscription:

User creates transfer JSON
Specifies quantity and ticker
Includes recipient (Bitcoin address)

2. Send to recipient:

Bitcoin transaction sends inscribed satoshi
Recipient receives inscribed satoshi
Inscription contains transfer information

3. Index updates:

Indexer detects transfer
Updates sender balance (subtracts)
Updates recipient balance (adds)
State is updated off-chain

Characteristics:

Transfer requires real Bitcoin transaction
Bitcoin fees need to be paid
Can be slow during congestion
Cost can be high

Technical Limitations

Fundamental Limitations

1. Off-Chain Index Dependency:

Balances don't exist on blockchain
Requires indexer to calculate
Technical centralization
Potential single point of failure

2. No On-Chain Validation:

Bitcoin doesn't validate BRC-20 operations
Validation depends on indexer
Errors can happen
No on-chain security guarantees

3. Transaction Order Matters:

Balances depend on processing order
Block reorganizations can cause problems
Timing is important
Additional complexity

4. Throughput Limitations:

Limited by Bitcoin speed
Congestion affects all operations
High fees during peaks
Doesn't scale well

Practical Limitations

1. Operation Costs:

Each operation costs Bitcoin fee
Fees can be high during congestion
Many operations = high cost
Barrier for frequent use

2. Speed:

Bitcoin confirmations are slow
10 minutes average per block
Can be worse during congestion
Not suitable for fast transactions

3. Inscription Size:

JSON needs to be small
Limited by cost and size
Complex operations not possible
Very basic compared to smart contracts

4. Limited Interoperability:

No native wallet support
Requires specialized software
Doesn't work with native DeFi
Limited ecosystem

Comparison with ERC-20

ERC-20 (Ethereum):

✅ Native smart contracts
✅ State on blockchain
✅ On-chain validation
✅ Large ecosystem
✅ Low fees (on layer 2)
✅ Fast transactions
✅ Interoperability

BRC-20 (Bitcoin):

❌ No smart contracts
❌ Off-chain state
❌ Off-chain validation
⚠️ Small ecosystem
❌ High fees (Bitcoin)
❌ Slow transactions
❌ Limited interoperability

Main differences:

ERC-20 is more powerful technically
BRC-20 works on Bitcoin (more secure/decentralized)
Each has different trade-offs
Use depends on objectives

Recent Hype: Context

Why Did BRC-20 Gain Attention?

1. First Significant Token on Bitcoin:

New possibility on Bitcoin
Community curious about potential
Interesting experiment
Natural hype

2. Memecoin Mania:

Tokens like ORDI gained value
Intense speculative trading
Attraction of new users
Hype cycle similar to other tokens

3. "Bitcoin DeFi" Narrative:

Possibility of DeFi on Bitcoin
Despite technical limitations
Attractive narrative
Hopes vs reality

4. Mempool Congestion:

BRC-20 caused significant congestion
Bitcoin fees rose greatly
Debate about Bitcoin usage
Observable real impact

Growth and Numbers

Transaction Volume:

Peak in May 2023
Thousands of BRC-20 transactions
Significant percentage of Bitcoin transactions
Observable mempool impact

Market Value:

Some tokens reached millions in valuation
Intense speculation
Extreme volatility
Similar to other memecoins

Activity:

Many BRC-20 projects created
Significant trading volume
Exchanges began listing
Ecosystem developing

Community Debate

Favorable Arguments:

Explores new Bitcoin possibilities
Attracts new users
Demonstrates creativity
Legitimate blockchain usage

Opposing Arguments:

"Spam" on blockchain
Increases fees for everyone
Diverts Bitcoin purpose
Improper use of block space

Ongoing debate:

Community divided
No clear consensus
Development continues
Real impact still being observed

Advanced Technical Aspects

Detailed JSON Format

Complete deploy:

{
  "p": "brc-20",
  "op": "deploy",
  "tick": "ORDI",
  "max": "21000000",
  "lim": "1000",
  "dec": "18"
}

Fields:

p: protocol (required)
op: operation (required)
tick: 4-character ticker (required)
max: maximum supply (required)
lim: limit per mint (optional)
dec: decimals (optional, default 18)

Validations:

Ticker must have exactly 4 characters
Values must be numeric strings
Format must be valid JSON
Operations must follow standard

Operation Processing

1. Inscription Parsing:

Extract JSON from Ordinal inscription
Validate format
Check required fields
Process operation

2. Rule Validation:

Deploy: verify token doesn't already exist
Mint: verify limits and supply
Transfer: verify sufficient balance
Apply standard rules

3. State Update:

Calculate new balances
Update indices
Maintain history
Sync with other indexers

Tracking and Synchronization

Synchronization problem:

Multiple indexers may exist
Need to agree on state
Block reorganizations complicate
Off-chain consensus necessary

Solutions:

Indexers follow same standard
Process in chronological order
Handle reorganizations
Try to maintain consistency

Practical Usage Limitations

For Token Creators

1. Deploy Cost:

Initial deploy costs Bitcoin fee
Can be expensive during congestion
No success guarantees
Initial investment needed

2. Maintenance:

No control over indexers
Dependency on external infrastructure
No continuous support guarantees
Technical risk

3. Functionality Limitations:

Very basic operations
No complex logic
No advanced control
Very limited compared to smart contracts

For Users

1. Specialized Wallets Needed:

Normal wallets don't support
Requires specialized software
UX can be complicated
Entry barrier

2. Transaction Costs:

Each operation costs Bitcoin fee
Can be prohibitive during peaks
Not suitable for microtransactions
High cost for frequent use

3. Technical Risks:

Experimental standard
May have bugs
Index may fail
No guarantees

For Bitcoin Ecosystem

1. Congestion:

BRC-20 increases traffic
Competes with normal transactions
May increase fees for everyone
Potential negative impact

2. Usage Debate:

Community divided
Tension about Bitcoin purpose
Philosophical debate
Community impact

3. Development Resources:

Focus may be diverted
Limited resources
Feature prioritization
Development trade-offs

Frequently Asked Questions

Is BRC-20 official?

No. BRC-20 is an experimental standard proposed by a community member. It's not officially supported by Bitcoin Core or most of the Bitcoin community.

Is BRC-20 safe?

It has risks. Depends on off-chain indexers that may fail or be compromised. No guaranteed on-chain validation. It's experimental.

Will BRC-20 work in the future?

Depends. It's experimental and may evolve, change, or disappear. No guarantees of continuity or support.

Why did fees get high?

BRC-20 created many transactions, congesting mempool. This increased competition for block space, raising fees.

Is BRC-20 better than ERC-20?

Not necessarily. ERC-20 is more powerful technically. BRC-20 works on Bitcoin but with significant limitations. Each has trade-offs.

Can I create my own BRC-20 token?

Technically yes, but requires technical knowledge, specialized software, and costs. Not as simple as on Ethereum.

Conclusion

BRC-20 is an experimental standard for fungible tokens on Bitcoin that uses the Ordinals protocol to store token information in JSON format. It's a creative innovation that explores Bitcoin possibilities, but comes with significant technical limitations and depends on off-chain infrastructure.

The main points you need to understand are:

BRC-20 uses Ordinals - Based on JSON data inscriptions on satoshis using Ordinals protocol
Depends on off-chain index - Balances are calculated off-chain, don't exist on blockchain
Fundamental limitations - No smart contracts, off-chain validation, and dependency on external infrastructure
Cost and speed - Limited by Bitcoin fees and speed
Experimental - Unofficial standard, experimental, and may change or disappear
Hype context - Gained attention for being first significant token on Bitcoin, but came with debate and mempool impact

Understanding BRC-20 is understanding how tokens can be created on Bitcoin using existing technologies creatively, but also understanding fundamental technical limitations that make it a less powerful solution than alternatives on other blockchains.

Despite limitations, BRC-20 demonstrates community creativity and exploration of Bitcoin possibilities. It's an example of how protocols can be built on Bitcoin without changes to base protocol, but also shows trade-offs involved in such approaches.

If you want to understand tokens on Bitcoin, how Ordinals are used practically, or what are the limitations of creating tokens on Bitcoin without smart contracts, understanding BRC-20 is essential. It's technical knowledge that helps understand possibilities and limitations of current Bitcoin ecosystem.