Should people use Bitcoin only as digital gold, or can it do more? Introducing ordinal NFTs has renewed interest in Bitcoin, leading people to explore its potential for storing unchangeable data.
One innovative experiment involves creating fungible tokens on Bitcoin using a standard called BRC-20. BRC-20 tokens cleverly work around Bitcoin’s programming limits to create semi-fungible tokens using ordinal inscriptions.
In this post, we’ll explore what BRC-20 tokens are, how to use a BRC-20 token, and their potential as a token standard on Bitcoin. Let’s get started!
What are Bitcoin Ordinals?
First, let’s quickly go over what ordinals are. You can embed data into individual satoshis on Bitcoin using ordinals. Ordinal theory gives each satoshi a unique number, allowing you to inscribe data.
You can inscribe data such as images, videos, audio, text, and even simple applications like a basic version of the video game DOOM. BRC-20 tokens use ordinal inscriptions with specific text that sets rules for creating and managing the tokens. While inscribing text has been a popular early use for Bitcoin NFTs, new uses may develop as the technology evolves.
What is a BRC-20 Token?
BRC-20 tokens use an experimental standard to create fungible tokens directly on Bitcoin. Unlike popular token standards on EVM blockchains, the BRC-20 standard does not rely on smart contracts. Instead, it allows users to store a script file on Bitcoin to assign tokens to individual satoshis. BRC-20 tokens embed JSON data into ordinal inscriptions, enabling users to deploy, mint, and transfer tokens.
Even though BRC-20 tokens are experimental, they have generated significant interest in the Bitcoin community. Enthusiasts have started creating their own BRC-20 tokens. Wallet services and marketplaces have also begun integrating BRC-20, allowing users to mint and trade these tokens.
BRC-20 tokens showcase the power of open-source communities and collaborative development. When a developer introduces a new concept and shares it openly, others can build on it, pushing the experiment further. This open, collaborative approach can lead to significant advancements in technology.
How to Use a BRC-20 Token
Using a BRC-20 token in cryptocurrency involves several steps, similar to using other tokens on blockchain networks. Here’s a simplified guide on how to use BRC-20 tokens:
Set Up a Bitcoin Wallet
Ensure you have a Bitcoin wallet that supports BRC-20 tokens. Some popular wallets may have integrated support or you may need a specialized wallet.
Obtain BRC-20 Tokens
Acquire BRC-20 tokens through exchanges that support them, or participate in token distributions such as airdrops or sales.
Store BRC-20 Tokens
Once acquired, store your BRC-20 tokens in your Bitcoin wallet. Ensure your wallet can properly manage and display these tokens.
Verify Transactions
When sending or receiving BRC-20 tokens, verify the transaction details, including the recipient address and token amount.
Use Tokens for Transactions
Finally, you can use BRC-20 tokens to pay for services and trade on exchanges. Additionally, you can also participate in decentralized applications (dApps) that accept them.
Pros and Cons of BRC-20 Tokens
While BRC-20 tokens are called fungible, it’s more accurate to describe them as semi-fungible. This is because you can only trade them in specific amounts.
Firstly, to mint BRC-20 tokens, a user must create a mint JSON NFT that specifies the number of tokens to be minted. Then, they compete with others in a priority gas auction to complete the minting process.
Next, to trade BRC-20 tokens on Bitcoin, the seller needs to create transfer NFTs to split their original mint NFT into smaller pieces. This allows them to sell specific batches of tokens. Consequently, buyers must find sellers offering the exact amount of tokens they want to purchase.
Additionally, to check the BRC-20 balance of a wallet, users must rely on an off-chain indexer that follows the rules for interpreting inscriptions. A Bitcoin full node alone cannot do this.
Tips for Using BRC-20 Tokens
Here are some tips for effectively using BRC-20 tokens:
Choose a Compatible Wallet
Ensure you use a Bitcoin wallet that supports BRC-20 tokens. Some wallets may have specific features or integrations for these tokens.
Stay Updated on Standards
Keep up with the latest developments and updates in the BRC-20 standard. This helps in understanding any changes or improvements that could affect how you use the tokens.
Participate in Minting
When minting BRC-20 tokens, carefully follow the process of creating a mint JSON NFT. Be prepared for the priority gas auction to finalize the mint, and understand the competition involved.
Understand Token Exchange
To trade BRC-20 tokens, know how to create transfer NFTs to split your tokens into smaller, tradable units. Make sure you find buyers who need the exact amount of tokens you’re selling.
Use Reliable Indexers
To track your BRC-20 token balance, use trusted off-chain indexers that interpret the inscription rules correctly. This ensures accurate balance and transaction records.
Be Aware of Transaction Fees
Bitcoin network fees can affect your transactions. Monitor these fees to avoid high costs when minting, transferring, or exchanging BRC-20 tokens.
Secure Your Wallet
Protect your wallet with strong passwords and keep your private keys secure. Consider using hardware wallets for added security.
Engage with the Community
Join forums, social media groups, or other community platforms focused on BRC-20 tokens. Engaging with the community can provide valuable insights, support, and updates.
Test with Small Amounts
When starting, test minting, transferring, and exchanging BRC-20 tokens with small amounts to get comfortable with the process without risking significant assets.
Watch for New Use Cases
Stay informed about emerging use cases and applications for BRC-20 tokens. The technology is evolving, and new opportunities may arise.
Following these tips can help you effectively use BRC-20 tokens while navigating the complexities of this experimental standard.
Final Thoughts
While BRC-20 isn’t the first attempt to represent assets on Bitcoin—preceded by early experiments like Colored Coins and more recent ones like Taro. It offers a new approach to creating semi-fungible tokens natively on Bitcoin.
Although its creator is uncertain about the long-term viability of BRC-20 as a token standard, there are prospects. The open-source developer community might embrace and evolve this concept. Consequently, they could push the limits of Bitcoin’s scripting capabilities further.
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