A new wave of excitement is emerging in crypto-assets. The so-called “BRC-20 tokens” are new tokens deployed on the Bitcoin blockchain, some of which are starting to make big moves in the market. The BRC-20 standard, announced in March by a developer known online as “Domo,” has many interesting possibilities.
Tokens on the Bitcoin Blockchain
Tokens on the Bitcoin blockchain are by no means a new idea. In fact, an early experimental effort, “colored coins,” aimed to do something similar. But like Ordinal’s Bitcoin NFTs, BRC-20 tokens are made possible by new features introduced in its most recent upgrade, Taproot.
The key to the BRC-20 is knowing exactly what this new technology will enable. I contacted Domo and they pointed me to a resource for those interested in learning more about the BRC-20 token.
Basic information for developers explains how to deploy the BRC-20 and discusses questions that have yet to be answered. There is also a detailed technical explanation by Domo. There is also an introductory video with information about issuance and wallets by YouTuber pazNGMI.
However, Domo and many other pundits have issued strong warnings against speculation on BRC-20 tokens. In fact, immediately after announcing the experimental standard BRC-20, Domo called out, “(Tokens using the new standard) will become worthless. Please don’t waste money by issuing a large amount.” ing.
But with many new memecoins using BRC-20 already trading, at least some people seem to have ignored the warning. But it’s hard to criticize them. In crypto, being the first to jump on new trends is a reasonably successful strategy for speculators.
So why are these exciting new technology tokens ‘worthless’?
First of all, BRC-20 is just a proposal at this point. There is no guarantee that it will be widely adopted by wallets, exchanges, etc. General users will probably find it difficult to access BRC-20 tokens for the foreseeable future.
Wallets will need to be equipped with support for Ordinals, or Bitcoin NFTs, as well as special support for BRC-20 tokens. The same goes for exchanges.
As Domo warned in March, “it is unlikely that BRC-20 tokens will be able to be safely traded on existing marketplaces.” Some exchanges are rushing to support BRC-20, but even if BRC-20 tokens become widely accepted, it will take some time for the market to gain sufficient liquidity.
Standardization itself is a long way off. The design of the BRC-20 is not necessarily finalized, and it is still far from being fully tested and deployed. There could theoretically be other ways to deploy tokens on the Bitcoin blockchain, or ways to improve on the current BRC-20. Widespread adoption of competing or improved standards could make current BRC-20 tokens a thing of the past.
Second, and more fundamentally, it remains unclear where the economic value of tokens issued on the Bitcoin blockchain lies.
This is especially true because BRC-20 tokens are not compatible with smart contracts or DeFi (decentralized finance). Despite being named after the Ethereum blockchain’s “ERC-20”, there are no technical similarities between the BRC-20 and ERC-20, and the Bitcoin blockchain itself has no DeFi capabilities. . Even if some sort of workaround emerges, it will require high-risk mechanisms such as bridges to leverage BRC-20 tokens in DeFi.
As it stands, BRC-20 tokens cannot underpin decentralized autonomous organizations (DAOs) or complex systems that generate utility and value.
In addition, BRC-20 tokens also have more direct disadvantages.
Since BRC-20 tokens cannot be used for DeFi, they cannot benefit from the liquidity offered by DeFi services such as trading pools. As such, investing purely for speculative purposes may not result in the significant price appreciation of similar tokens issued on the Ethereum blockchain.
In fact, it is already happening. A BRC-20 token called “Pepe” is currently being traded by risk-savvy traders. Pepe and all other BRC-20 tokens had a fully diluted value (FDV) of $137 million as of May 2nd.
However, there is also a meme coin “Pepe” on the Ethereum blockchain, and FDV is worth $1.2 billion (about 162 billion yen) at the time of writing this article.
Related article: Pepecoin, profit of about 500 million yen for tens of thousands of yen ─ 5 million% increase
The BRC-20 token is a compelling innovation with very interesting potential. But if you’re looking for the sleazy thrill of riding a temporary rise in animal-themed casino tokens, you’re probably better off staying based on the Ethereum blockchain.
｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
| Image: Andre Taissin/Unsplash (edited by CoinDesk)
｜ Original: Pump the BRCs: The Promise and Peril of Bitcoin-backed Tokens