Ordinals and Inscriptions: the fundamentals of BRC-20 tokens

The terms “Ordinals” and “Inscriptions” are closely related to the BRC-20 token standard, which is gaining popularity in the cryptocurrency ecosystem. Thus, BRC-20 and the Ordinals protocol allow the issuance of Bitcoin-based fungible and non-fungible tokens (NFTs).

With Ordinals, launched in early 2023, one can tie data/digital assets/NFTs to satoshi, the smallest fractional part of BTC (0,00000001 part of the coin). Bitcoin NFTs issued in this way are also called Ordinals or Inscriptions.

What are Ordinals and Inscriptions?

The Ordinals protocol was launched in January 2023 by bitcoin developer Casey Rodarmor. It allows users to directly inscribe text, images, or videos into the Bitcoin blockchain.

Regardless of the divided opinions, the development has certainly captured the cryptocurrency world since its inception. According to Dune Analytics, as of January 12, there are more than 54 million Ordinals on the Bitcoin network, with total creation fees totaling 5508 BTC (~$252,36 million).

The Ordinals protocol is a way to record data such as text, images, videos, and smart contracts directly into the Bitcoin blockchain. The data is tied to satoshi and each inscription generates a bitcoin NFT.

Bitcoin NFTs came into existence with the SegWit and Taproot upgrades, which aim to increase the privacy and efficiency of the network and allow inscriptions to be attached to satoshis.

Inscriptions are a new method of storing large amounts of data in the Bitcoin blockchain. Simply put, it is a numbering mechanism that allows individual satoshis to be tracked and transferred across the network. It provides an easy way to link to individual satoshis without requiring official blockchain records.

What is BRC-20?

Originally launched by anonymous developer domo on March 9, 2023, BRC-20 tokens use an experimental standard to create fungible Bitcoin-based tokens. BRC-20 resembles the ERC-20 token standard used on the Ethereum network. However, unlike the latter, BRC-20 tokens do not use smart contracts.

Instead, users store a script file on Bitcoin and use it to link tokens to individual satoshis. BRC-20 embeds JSON data in the tokens so users can issue, mine, and transfer tokens.

BRC-20 tokens are considered “semi-fungible” because users can only exchange BRC-20 tokens in set amounts. In addition, users need to create an NFT in JSON format to mine the tokens. Selling BRC-20 tokens requires users to create “transfer NFTs” for exchange.

BRC-20 tokens have limited functionality compared to ERC-20 tokens. The latter can be used as collateral in various decentralized applications (DApps), while BRC-20 can only be mined and transferred.

How to develop and launch BRC-20 tokens

Creating and issuing BRC-20 tokens on the Bitcoin network consists of the following steps:

• Developing the token structure. First, you need to define the properties of the coin, such as the name, the total supply, and the maximum amount to be mined. This data is usually stored in JSON format.
• Placing the token on the Bitcoin network. By structuring the token data in JSON format and using the Ordinals protocol, it can be bound to a satoshi, thereby creating a BRC-20 standard asset.
• Token issuance. Once the BRC-20 token is entered into the registry, new coins can be mined if their volume does not exceed the limit.
• Transacting with BRC-20 tokens. Transactions with BRC-20 tokens are done using standard methods on the Bitcoin network. It is important to use a Bitcoin wallet compatible with BRC-20 assets.

BRC-20 vs traditional NFTs

BRC-20 tokens can be used as either fungible or non-fungible on the Bitcoin network. The preservation of the distinctive features depends solely on the decisions of the holder. BRC-20 tokens can be converted into fungible objects that can be used for payments.

In turn, in the Ethereum network, interchangeable tokens and NFTs are treated strictly as different objects. Each individual Ethereum NFT has no counterpart and cannot be used for payments.

BRC-20 vs ERC-20

While the BRC-20 token standard shares some common features with ERC-20, there are the following differences between the two:

• Smart Contracts. BRC-20 tokens do not use smart contracts, while ERC-20 coins rely on them for their functionality. BRC-20 tokens use tokens to store a script file on the Bitcoin network, allowing users to bind them to individual satoshis.
• Blockchain. BRC-20 tokens are created on the Bitcoin network, while ERC-20 tokens are created on the Ethereum blockchain.
• Fungibility: BRC-20 tokens are considered “semi-fungible” because they can only be exchanged in certain portions. Unlike ERC-20 tokens, which are fully fungible and can be exchanged in any quantity.

Does BRC-20 affect fees and transactions on the Bitcoin network

Yes, creating and transmitting a BRC-20 is more complex and requires more space compared to simple peer-to-peer transactions. A traditional Bitcoin transaction is measured in kilobytes, while a bitcoin NFT can take up to 4MB.

One of the reasons Bitcoin NFT is different is that all information is stored directly on the network. With conventional NFTs, a token usually consists of a link or data that is sent to an external service where the digital object is stored.

This increases competition for space on the blockchain and potentially leads to higher transaction fees for users requiring faster confirmation. Meanwhile, the mempool, which is a combined storage area where unverified transactions are stored before they are processed, continues to expand.

Top BRC-20 tokens

ORDI

ORDI is a government token for the Ordinals protocol. Holders have the right to vote on proposals and parameters that affect the Ordinal’s ecosystem. The issue of the asset is limited to 21 million tokens, similar to bitcoin.

ORDI’s market capitalization exceeds $1,53 billion, the asset is ranked 55th in the cryptocurrency ranking and is trading at $72,98 as of January 12.

PEPE

PEPE’s mascot is the character Pepe the Frog, created by cartoonist Matt Furie. The asset allows users to generate and exchange NFTs featuring Pepe’s images for BTC. PEPE also has a limited supply of 21 million tokens.

The coin has a market capitalization of $576 million, it is ranked115th and is trading at $0,00000137

MEME, PIZA И DOMO

There are several other noteworthy BRC-20 tokens such as MEME, which allows users to generate and exchange NFTs based on memes; PIZA, which serves to buy pizza; and DOMO, named after the creator of BRC-20.

MEME, PIZA, and DOMO have a combined market capitalization of $248,98 million, $5,84 million, and $9,34 million.

Where to store BRC-20

UniSat Wallet

The wallet, in the form of an open-source browser extension, provides a number of services in the BTC ecosystem, including deployment, buying and selling tokens and NFTs, mining, and querying BRC-20 token information. After deploying the wallet, users can explore information about BRC-20 tokens on UniSat’s official marketplace. The platform also launched trading of “sat” and “.unisat” domain names last May.

Ordinals Wallet

This is a non-custodial wallet available on any internet-connected device. It is also open-source and available for verification, making bitcoin NFT management and storage more secure.

Xverse Wallet

Another non-custodial web wallet whose users can store, transfer, receive, and generate bitcoin NFTs, BRC-20 tokens, and native coins of the Layer 1 (L1) blockchain solution Stacks (STX) to transfer smart contracts from DApps to the Bitcoin network. Xverse is also open-source.

OKX Wallet

This is a multichain Web 3.0 wallet from the OKX crypto exchange that uses multi-party computation (MPC) technology to protect funds. Allows users to trade and issue BRC-20 tokens and bitcoin NFTs. Supports the Lightning Network bitcoin payment protocol, as well as BRC-20 and STX token staking.

In addition, BRC-20 can be stored on hardware wallets and in the Ledger Live application of the Ledger manufacturer. The Nano S Plus and Nano X models support this token standard. Ledger Stax for BRC-20 storage and transactions is also expected to be released.

Why BRC-20 is controversial?

BRC-20 tokens and bitcoin NFTs have caused controversy for two main reasons. First, they overload the network and increase transaction fees. Second, some argue that they fill the blockchain with information that does not fit Satoshi’s vision of a peer-to-peer money transfer system. Bitcoin maximalists consider this a misuse of the blockchain.

Late last year, Bitcoin Core client developer Luke Dashjr said that the ability to issue bitcoin NFTs was the result of the blockchain’s vulnerability. According to him, Ordinals allows users to bypass user-set limits on the amount of additional data in transactions by disguising it as program code.

Based on his thesis, the US Department of Commerce later recognized bitcoin NFTs as a cybersecurity threat.

At the same time, it became known early in the new year that Dashjr’s proposal to eliminate the possibility of NFT creation on the Bitcoin network did not receive support from other developers.

Unlike Ethereum NFTs, which store the entire data file on an external server, Bitcoin NFTs store the entire data file in the signature field of BTC transactions. This makes them more immutable than other NFTs, increasing the integrity of the asset, but it also means they are large. Because of the large file size, ordinals are considered an “attack” on the Bitcoin network.