"Memecoins" on Bitcoin is probably not what Satoshi Nakamoto envisioned when he released the Bitcoin whitepaper in 2008, but it just might be the mass adoption Bitcoin deserves.
TL;DR
- Bitcoin Ordinals utilized the fact that each individual satoshi can be uniquely identified, akin to serial codes on dollar bills, through inscription by the Ordinals protocol.
- Amid the current memecoin frenzy, BRC-20 tokens emerged as a new "token standard" on Bitcoin, building on the concept of marking single satoshis.
- While Ordinals tagged individual satoshis as NFTs, BRC-20 tokens involve "minting" satoshis containing information about an entire collection of tokens using JSON data.
- BRC-20 tokens have already piqued interest of the crypto community, with the market cap of BRC-20 tokens reaching near $1 billion. However, it has caused transaction fees to spike on the network, which did not click well with some Bitcoiners.
BRC-20 tokens have caused a legitimate storm in the Bitcoin community and beyond. Let's dive into what exactly are Bitcoin memecoins and the impact on BTC.
What Are BRC-20 Tokens and How Do They Work?
You may recall Bitcoin Ordinals or "Bitcoin NFTs," which, a few weeks ago, caused a bit of an uproar in the otherwise-reserved Bitcoin community. Let's remember how Bitcoin Ordinals work:
As explained here:
"Imagine two one-dollar bills. Both are completely fungible but have a serial code, which allows us to identify each dollar bill as unique. But if one bill was signed by Muhammed Ali and George Foreman, it becomes a "dollar NFT" of sorts. You could still spend it as a regular dollar, but the signatures make the bill's value skyrocket.
Ordinals work in the same manner. They take advantage of the fact that each individual satoshi can be uniquely identified by its equivalent of a serial code.
With the recent memecoin craze, which caused a tsunami of memecoin attention on Crypto Twitter, one thing led to another: someone had the idea to create a new "token standard" on Bitcoin — and BRC-20 tokens were born.
BRC-20 tokens build upon the concept of marking single satoshis, as seen in Bitcoin Ordinals. While Ordinals tag individual satoshis to serve as NFTs, BRC-20 tokens involve "minting" satoshis so they hold information about a whole collection of tokens.
For example, if you wanted to create a collection of 100 hypothetical $RANDO BRC-20 tokens, you'd mint the collection by inscribing one sat with the relevant JSON data. JSON data can be used to define the token name, symbol, supply and other properties. Users can also use JSON data to mint new tokens or transfer existing tokens to other addresses.
Or to use the dollar/sats metaphor again: you mark one dollar bill with information about 20 $RANDO stickers, which are not dollar bills. You always need a dollar bill to transfer stickers. But the bill does not back the stickers themselves, nor can they do anything.
If this sounds complicated and not intuitive, that's because it is. Bitcoin was not created for this workaround, as many on Crypto Twitter have pointed out:
How Did BRC-20 Tokens Start?
The most likely explanation is "opportunity makes the thief." The taproot upgrade allows for these workarounds to be implemented on Bitcoin. And memecoin season just happened to come around, so... one thing led to another.
Eric Wall explained in detail how the idea of BRC20-tokens is an imitation of XEN tokens on Ethereum:
In other words, the taproot upgrade made it possible to add an amount of data to the blockspace on Bitcoin that allows for "minting tokens," even though those tokens do not have the same properties as ERC-20 tokens on Ethereum:
This hunger for blockspace surprised the Bitcoin community, and the effect on Bitcoin transaction fees has been significant.
The Effect of BRC-20 on Bitcoin Transaction Fees
Just when Ordinals were going back to being a niche phenomenon, BRC-20 tokens started rocking the transaction count boat. And rock they did: BRC-20 transactions currently make up a majority of all Bitcoin transactions.
Transaction fees surged to previously unthinkable levels:
Incredibly, transaction fees made up a higher share of miner revenue than the block subsidy for some blocks:
This is music to the ears of those who never doubted that adoption would save the Bitcoin security model:
However, not everyone was amused by this surprising spike in activity on Bitcoin.
The Fallout of BRC-20 Tokens in the Bitcoin Community
For one, BRC-20 tokens caused centralized exchanges to launch their trading markets and nifty developers to start liquidity pools for them:
But it has also caused a new round of infighting between different factions of the Bitcoin community. Eric Wall and Udi Wertheimer both support the second-order effects of the unexpected appetite for Bitcoin blockspace:
The Lightning Network may have finally stumbled on a source of significant demand. However, the surge in fees doesn't sit well with those who were comfy with low-fee Bitcoin:
This sentiment was shared by Anita Posch, a Bitcoin educator focused on bringing Bitcoin to financially underdeveloped regions in the world:
But again: it may not be the adoption Bitcoiners wanted, but it's the one they deserve (or so Ethereum people would argue).
Nic Carter outlined in the past that Bitcoin is more akin to Fedwire than to Visa: it isn't meant to be a high-speed settlement layer. But he got quite a bit of flak himself from the community for suggesting Ethereum's burn fee was a smart move and implying Bitcoin may want to consider something else. Cue the reply section:
Some members of the community realize BRC-20 tokens could provide a much-needed impulse for the community to work on the necessary infrastructure improvements:
Future Outlook for Bitcoin
As with Ordinals, the question is whether this is a sustainable new asset class or merely a flash in the pan that will subside when the memecoin train inevitably derails. Regardless, the BRC-20 hype pointed out weaknesses the community will have to address, such as the lack of layer-2 infrastructure and diverging views over how much and what kind of adoption is desirable.
Now, who said that Bitcoin is boring?
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