Over the course of February, one could not scroll crypto Twitter without encountering the Bitcoin Odinals debate. Ordinals enable the creation of Bitcoin-native non-fungible tokens (NFTs). Ordinals, developed by Casey Rodarmor, use the input field in Taproot transactions to embed image-related data into the Bitcoin blockchain. The Taproot upgrade, which was activated in November 2021, allows for the cheaper storage of arbitrary data and permits users to store as much data as they want in a single transaction, provided they pay for it and the total block size remains under 4MB. Prior to Taproot, users needed to use multiple transactions or inputs to store large amounts of data. The introduction of NFTs on Bitcoin has also resulted in an increase in fees, which can be a positive for the long-term security of the network.
Introduction to BRC-20 Tokens
Now, in May, one cannot scroll Crypto Twitter and not see the discussion around BTC fees and BRC-20 adoption. BRC-20 is a groundbreaking token standard on Bitcoin that enables users to inscribe token data onto individual satoshis (the smallest unit of a bitcoin). The token creation mechanism stems from the emergence of Ordinals, which introduced the ability to inscribe arbitrary data and connect them to individual satoshis. This development gave rise to immutable digital collectibles that reside on the blockchain. Ordinals and BRC-20 tokens share similar frameworks, as creating a token involves inscribing text files in JSON format in the witness field of a transaction. The primary difference between the two lies in the type of inscribed arbitrary data, which typically involves JPEG files in the case of Ordinals.
BRC-20 tokens come with a default hard cap set by the creator, rendering any minted tokens beyond the specified cap invalid. To address the issue of exceeding the token cap, the BRC-20 indexing scheme automatically invalidates such tokens, making them non-tradable according to the token standard.
Supporting Infrastructure and Marketplaces
Since the BRC-20 token standard's launch in March, developers have swiftly constructed wallet and marketplace infrastructure to accommodate these tokens. While any Taproot-compatible Bitcoin wallet can hold BRC-20 tokens, Unisat and Ordinal Wallet are the pioneers in providing a user interface that recognizes these tokens in wallets. It is worth noting that the BRC-20 token purchasing process differs from that of ERC-20 tokens, as BRC-20 tokens are sold in batches priced in satoshis, with token offers comprising a fixed price attached to a set number of tokens ranging from 100 to 20,000 units.
Impact on Bitcoin Transaction Fees
The recent surge in Bitcoin transaction fees stems from users minting BRC-20 tokens. To mint a BRC-20 token, users must execute a standard Bitcoin transaction and pay the prevailing sat/vbyte fee rate. As a result, the growing demand for block space to mint BRC-20 tokens has led to a spike in Bitcoin transaction fees. On May 1, BRC-20 mints constituted 50% of Bitcoin transactions.
Assessing the BRC-20 Phenomenon
The advent of BRC-20 tokens marks a significant milestone for Bitcoin, as it is the first time users can seamlessly create fungible tokens on Bitcoin's native chain. Previous token-launching options included Omni, Counterparty, and Stacks, but these were primarily sidechains or second-layer solutions that never gained widespread adoption. The BRC-20 token standard's long-term viability and potential to gain traction remain to be seen, but it appears to be gaining momentum following Ordinals' introduction.
Regardless of their potential long-term impact, BRC-20 tokens have garnered massive support from Bitcoin's mining community. Miners are reaping substantial revenue from increased transaction fees due to the high volume of BRC-20 transactions entering mempools. Although fees have risen significantly since the beginning of the year, the past few days have seen an extraordinary spike in fees following heightened BRC-20 activity. Increased transaction fees are advantageous for miners, especially after a year of struggling to maintain profitability.
