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What is BRC-20 Token? How Is It Different From ERC-20?

By May 24, 2023May 30th, 20235 minute read
Note: This blog is written by an external blogger. The views and opinions expressed within this post belong solely to the author.

BRC-20 is an experimental token standard; it allows the minting and transferring of fungible tokens using the Ordinals protocol on the Bitcoin blockchain.

Taking inspiration from Ethereum’s ERC-20 tokens, BRC-20 tokens have their own mechanisms and functionalities. Despite being extremely popular in the first half of 2023, BRC-20 tokens are still in their early stages, and users should proceed with the utmost caution.

In this article, let’s have an overview of BRC-20 tokens and how they are different from ERC-20 tokens.

Overview of the BRC-20 token and its working

BRC-20 tokens were proposed in March 2023 by an anonymous developer named Domo, and they are designed to follow the model of Ethereum’s ERC-20 token standard. BRC-20 tokens utilize Ordinal inscriptions to facilitate the creation and transfer of fungible tokens on the Bitcoin blockchain. A token standard consists of a set of rules that govern the operation of the tokens it creates. For example, ERC-20 is the token standard for creating tokens on the Ethereum blockchain. However, unlike ERC-20, the Bitcoin BRC-20 standard is still in its early stage and has not yet been officially approved.

Initially, Bitcoin was created as a decentralized peer-to-peer currency, lacking the ability to deploy smart contracts or other decentralized applications. However, the Bitcoin Taproot upgrade in 2021 introduced the capability to include additional data in Bitcoin block space using the Ordinal protocol. This development paved the way for the emergence of Bitcoin NFTs (Nonfungible Tokens) and the development of BRC-20 tokens. The Ordinal protocol involves assigning a serial number to each Satoshi (the smallest unit of Bitcoin) and including them in Bitcoin transactions along with Ordinal data.

BRC-20 tokens incorporate JavaScript Object Notation (JSON) within the Ordinal inscriptions to define and initialize the functionality of token smart contracts. This enables users to deploy, create, and transfer tokens on the Bitcoin network.

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Now, let’s see some of the advantages and disadvantages of BRC-20 tokens.

What are the advantages and disadvantages of BRC-20 tokens?

Advantages

There are several advantages of BRC-20 tokens that have contributed to their popularity in such a short time.

  • Compatibility with the Bitcoin network:

The compatibility with the Bitcoin network is a key advantage of the BRC-20 standard, as it allows seamless integration of Bitcoin Ordinals and BRC-20 tokens into the Bitcoin blockchain. This feature enables the standard to leverage the robustness and wide acceptance of the network, facilitating its widespread adoption within the Bitcoin community. Additionally, it leverages the network’s existing infrastructure, including wallets and exchanges, further contributing to its rapid acceptance.

  • Simplicity:

The BRC-20 token standard employs a simplified mechanism for tokenization, making it user-friendly and easy to use. Unlike other token standards that rely on complex smart contracts, the BRC-20 standard avoids the need for intricate configurations. This simplicity empowers users to mint and transfer BRC-20 tokens without requiring specialized technical expertise.

  • Security:

The BRC-20 token standard ensures exceptional security by leveraging the inherent robustness of the Bitcoin blockchain. Bitcoin’s decentralized nature, algorithmic technologies, and proof-of-work consensus mechanism contribute to the system’s overall security. By utilizing the Bitcoin blockchain, the BRC-20 standard capitalizes on these security mechanisms, safeguarding the integrity of its tokens.

  • Better potential for growth:

With increasing adoption by various projects, the BRC-20 standard is poised to drive innovation and introduce novel use cases. This, combined with the extensive and diverse network user base, is likely to attract the attention of developers, investors, and users, promoting the expansion and maturation of the BRC-20 token standard over time.

Disadvantages

Since the BRC-20 tokens are still in their early stage, there are possibilities that they also have some limitations. So let’s check them out.

  • No smart contract functionality:

In contrast to token standards like Ethereum’s ERC-20, the BRC-20 standard doesn’t support smart contracts. Smart contracts are blocks of code that expand the range of capabilities on compatible blockchains. They can be configured to enhance automation, transparency, security, and asset management. The absence of smart contract support in the BRC-20 standard may limit its potential in certain areas where smart contracts are beneficial.

  • Dependency on the Bitcoin blockchain:

The BRC-20 standard relies on the Bitcoin blockchain, which exposes it to the inherent limitations of the network. These limitations include low scalability and slow transaction speeds. As the utility of the BRC-20 blockchain increases and congestion worsens, these issues are likely to become more prominent. Network congestion has worsened since the standard’s launch, leading to a significant increase in Bitcoin Ordinals. This influx has caused longer transaction processing times and higher network fees. Consequently, the efficiency and cost-effectiveness of BRC-20 token transfers may be negatively affected as the problem persists.

  • Limited interoperability:

The BRC-20 token standard is specifically designed to operate within the Bitcoin blockchain ecosystem. This characteristic presents challenges in terms of interoperability, especially for users who intend to utilize alternative blockchain systems. The absence of this feature on the BTC network limits seamless token transfers across different blockchain networks within the crypto ecosystem. This restriction hinders users from leveraging cheaper and more efficient networks when it is convenient.

  • Limited utility:

The BRC-20 standard is primarily suited for the tokenization of fungible assets. It is not well-suited for tokenizing nonfungible assets or implementing complex token features like tokenized ownership rights or conditional transfers. Projects that require more specialized tokenization functionalities beyond the capabilities of the BRC-20 standard are likely to seek more comprehensive token standards that offer richer features.

Until now, you must have got a fair idea of how BRC-20 tokens differ from ERC-20 tokens. But below is a comparison between the two in tabular form.

Difference between BRC-20 and ERC-20 tokens

BRC-20 TokensERC-20 Tokens
They are related to the Bitcoin network.They are related to the Ethereum network.
They have limited functionality as they aren’t smart contract compatible.They can interact with other chains and protocols because of their smart contract compatibilities.
The market cap is close to $450 million.The market cap is above $150 billion.
They follow the Proof-of-Work (PoW) consensus mechanism.They follow Proof-of-Stake (PoS) consensus mechanism.
Ordiscan is used to track the movement of BRC-20 Ordinals and inscriptions.Etherscan is used to track the movement of ERC-20.

Final thoughts

In conclusion, BRC-20 tokens may unlock new doors for DeFi projects and applications in the Bitcoin ecosystem with future development and integrations. However, the technology is still in its experimental stages; therefore, there are chances of potential challenges. Consequently, market liquidity should be regularly monitored, portfolios should be diversified, and risk management techniques should be used.

Frequently Asked Questions

What Is The Meaning Of Crypto?

A cryptocurrency is a digital currency that is secured by the process of cryptography, making counterfeiting and double-spending almost impossible to happen. Blockchain technology is used to produce cryptocurrencies ( a distributed ledger enforced by a distributed network of computers). Cryptocurrencies are distinct in that a centralized authority does not issue them.

Is Cryptocurrency Safe To Invest In?

Cryptocurrency investments are subject to market risks, but if sufficient security measures are not taken, trading accounts can be maliciously accessed. Investments come with risks and uncertainties, and we cannot claim that any digital currency investment is risk-free. Buying and selling cryptocurrencies can be risky even if the trader is knowledgeable about the market and treats their coins carefully.

Is Crypto Legal In India?

Cryptocurrencies are legal in India, and anyone can purchase, sell, and exchange them. It is currently uncontrolled, as India lacks a regulatory structure to oversee its operations. Per the Ministry of Corporate Affairs, companies must now record their crypto trading/investments within the financial year. In cases where a person receiving the gains is an Indian tax resident, or the cryptocurrency is regarded as domiciled in India, cryptocurrency transactions have been taxable in India

What Is Virtual Currency?

Virtual currency is a type of uncontrolled digital currency that can only be used online. It is exclusively stored and transacted using designated software, mobile or computer applications, or unique digital wallets, and all transactions are conducted through secure, dedicated networks. Because digital currency is just currency issued by a bank in digital form, virtual currency is not the same as a digital currency. Virtual currency, unlike ordinary money, is based on a trust structure and cannot be issued by a central bank or other banking regulatory organization.

How To Invest In Cryptocurrency In India?

There are two ways of investing in cryptocurrency, mining and via exchanges. Cryptocurrency mining is the process of verifying and adding transactions between users to the blockchain public ledger. Purchasing cryptocurrency in India is a straightforward procedure where investors simply participate by registering with a crypto exchange such as WazirX. After registering for an account, citizens can trade multiple cryptocurrencies, store cryptocurrency in wallets, and more.

What Is The Safest Cryptocurrency To Invest In?

Bitcoin has had the highest market capitalization, has been around the longest, has the most experienced development team, and has enormous network impact and brand recognition. As a result, while trading cryptocurrencies, the rate of return on Bitcoin is commonly used as a benchmark. However, the risks associated with cryptocurrencies remain, and the safest cryptocurrency for you depends on your analysis.

Is Mining Cryptocurrency Legal?

Cryptocurrency mining can be time-consuming, expensive, and sporadically profitable. Mining has an appeal for many cryptocurrency enthusiasts as miners are paid directly with crypto tokens for their efforts. The legality of cryptocurrency mining is dependent on where you live. In India, there is no restriction on crypto mining.

Is Ethereum Safe To Invest?

The Bitcoin market is unquestionably more volatile than the stock market. This may not be the market for you if you are incredibly risk-averse. Ethereum, on the other hand, may be a terrific investment for you if you're a diamond-handed investor who won't lose sight of short-term losses. Ethereum is a relatively safe investment as it is also based on blockchain.

Who Invented Cryptocurrency?

Satoshi Nakamoto invented cryptocurrencies and the technology that makes them function in 2009. The presumed pseudonymous individual or persons who invented Bitcoin used this identity. In addition, Nakamoto created the first blockchain database. Even though many people have claimed to be Satoshi Nakamoto, the person's identity remains unknown.

How Many Cryptocurrencies Are There?

There are over 5000 other digital currencies available on the internet in addition to Bitcoins. The only problem is that they haven't gotten the users' attention. Besides Bitcoins, a few other digital currencies have gained popularity among users. It's been more than ten years since Bitcoins were first released, and now they've achieved new heights thanks to their phenomenal success.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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Harshita Shrivastava

Harshita Shrivastava is an Associate Content Writer with WazirX. She did her graduation in E-Commerce and loved the concept of Digital Marketing. With a brief knowledge of SEO and Content Writing, she knows how to win her content game!

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