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BRC20 Tokens: A Promising Contender or a Mere Flash in the Pan?

· 3 min read
Dora Noda

In recent times, discussions in the Bitcoin realm have seemingly transitioned towards the Bitcoin network itself, with BRC20 tokens emerging as a hot topic. People are contemplating whether the arrival of Bitcoin's Layer 2 (L2) expansion solutions and the BRC20 standard could introduce enhanced functionality and scalability to Bitcoin. However, it's important to tread carefully, as these discussions currently seem to lean more towards market speculation. Let's delve into Bitcoin's L2 architecture, BRC20, and potential security concerns.

BRC20 Tokens: A Promising Contender or a Mere Flash in the Pan?

Understanding Bitcoin’s L2 Architecture

The blockchain ecosystem grapples with a so-called 'impossible triangle'—security, decentralization, and scalability—of which only two can be achieved at the cost of the third. Bitcoin, for example, has prioritized security and decentralization, sacrificing scalability in the process. Bitcoin’s block generation time is approximately 10 minutes, a significant lag compared to other popular blockchains like Ethereum 2.0 or Solana that boast block times on the scale of seconds or even milliseconds. This limitation has spurred demand for Bitcoin scalability solutions, leading to the emergence of Bitcoin's L2 expansion, exemplified by systems such as Stacks.

Stacks is a decentralized application and smart contract network built on top of Bitcoin. This network connects to the Bitcoin blockchain through a cross-chain consensus mechanism, achieving the goal of preserving Bitcoin's security while also offering a rich application scenario for smart contracts. Stacks operates in a layered fashion, where the base settlement layer (Bitcoin) is supplemented by the addition of smart contracts and programmability (Stacks), which further incorporates a scalability and speed layer (Hiro's subnet). This layered approach not only offers functionality akin to blockchains like Ethereum but also avoids many shortcomings of complex public chains.

Explaining BRC20

To understand BRC20, we first need to familiarize ourselves with Ordinals. Ordinals is a protocol that assigns unique identifiers to Bitcoin's smallest unit, satoshis (sats), essentially transforming each sat into a unique non-fungible token (NFT), akin to Ethereum NFTs. Additionally, Ordinals allow for the inclusion of text, images, audio, and video within sats, further accentuating their uniqueness.

The creator of BRC20, leveraging the Ordinals protocol, introduced the concept of fungible tokens on Bitcoin by assigning a unified "format" and "attributes" to sats. BRC20, through Ordinals, inscribes JSON formatted text data into sats, acting as a ledger for BRC20 tokens and tracking token holdings and transfers.

Risks Associated with BRC20

Despite the attention BRC20 tokens have garnered, they currently exist as mere JSON files without practical value or business use-case, and their popularity largely hinges on Bitcoin's popularity and traffic. Further, managing BRC20 tokens is not as straightforward as handling Bitcoin and requires a dedicated wallet. Moreover, participation in BRC20 investment requires third-party tools which often carry an entry barrier.

Several risks surround BRC20 tokens. Firstly, market speculation and hype may create a bubble, overvaluing the tokens. Secondly, similar to other blockchain technologies, BRC20 tokens are susceptible to hacking attempts. Lastly, the lack of regulatory oversight in the blockchain and cryptocurrency markets could lead to fraudulent or illegal activities involving BRC20 tokens.

A common misconception among users is that BRC20 tokens, created using Bitcoin's security, are as secure and stable as Bitcoin. However, the two are fundamentally different. Bitcoin's security is underpinned by cryptographic and consensus algorithms, and it has been running relatively stably for a considerable duration. Conversely, BRC20 relies on the Ordinals