In the scorching summer of inscriptions, a phased perspective on BRC20

Author: Alex Xu, Mint Ventures

Introduction

The inscription assets represented by the BRC20 series have recently become very popular. It seems that this is the second wave of major asset appreciation since the launch of the ordinal protocol this year. The author has recently conducted research on the current inscription market, and in addition to digesting industry information and data, has also participated in some online and offline BRC20 themed exchange activities, forming some phased views on this market, which are attempted to be organized and expressed in this article.

This article attempts to answer the following questions:

• What are inscription assets? What are the selection criteria for popular BRC20 assets?
• What is the core value proposition of inscription assets represented by BRC20?
• Are inscription assets a good commercial innovation?
• What are the mechanisms and driving forces behind the explosive growth of inscription assets?
• What scenarios might the next phase of inscriptions entail?
• What are the potential paths for the collapse of inscription assets?

The content of this article reflects the author's phased views as of the time of publication, which may contain factual errors and biases, and is intended for discussion purposes only. Corrections from other research peers are also welcomed.

Inscription Assets and the Standards for "Quality Assets"

Inscription assets refer to virtual assets created by recording information in a specified format on BTC (or other blockchains) and then converting this on-chain recorded information into virtual assets through specific indexing protocols. These assets can be homogeneous (such as BRC20 assets) or non-homogeneous (such as NFTs like Bitcoin Frogs).

For Bitcoin, its primary past use as a public ledger was to record transfer transactions on the network. After the Taproot upgrade in November 2021, Bitcoin, as a public ledger, provided more efficient data storage capabilities, allowing for lower-cost uploads of text and multimedia content, which laid the technical foundation for inscription assets.

In contrast to Ethereum, where asset issuance and operation are based on smart contracts, BTC's inscription assets are issued and operated based on on-chain information and indexing specifications.

Although the mechanisms differ, both are assets issued based on data from the blockchain public ledger. Token-like inscription assets on Bitcoin, source: BTCTOOLNFT-like inscription assets on Bitcoin, source: BTCTOOL

Based on different indexing specifications for inscriptions, homogeneous assets include various types such as BRC20 and ORC20.

This article mainly discusses BTC inscription assets, focusing on BRC20 assets, which currently have the highest market capitalization among inscription assets.

Despite the emergence of BRC20 star assets like Ordi and Sats, which have seen significant price increases this year, and others like Rats that have also appreciated, most BRC20 assets issued during the same period have trended towards zero, completely losing liquidity within a month or two after issuance.

From the discussions I have participated in regarding inscription assets and BRC20, participants have summarized the characteristics of "promising" BRC20 assets as follows:

• Good names: Related to Bitcoin and inscription culture (Ordi, Sats), or animal coins (many of the meme trends in 2021 were also named after animals)
• Must be native: Should not be a crude copy of other memes; it should create its own IP
• Look at the community: Does the project have influential leaders? Are there aggressive, high-profile, and sustained community expansion efforts?
• Look at the chips: In the early stages, the proportion of chips held by large investors should not be too high, especially the proportion of pure investors (those who do not participate in promotion and just hold coins) should not be too high

Of course, the application of the above standards in practice is not simple.

The quality of a name is subjective; even within the relatively small field of inscriptions, trends have undergone multiple changes. The "naming logic" that the market currently accepts may become "unpopular" in a few weeks.

Value Proposition and Commercial Innovation of BRC20 Assets

There are various claims regarding the value proposition of BRC20 assets in the market, and I summarize the main viewpoints as follows:

• The mechanism of fair launch ensures that everyone can acquire assets in an equal manner, unlike mainstream web3 projects where VCs make early investments, acquiring chips at a lower cost and then selling them at a high price to the public in the secondary market.
• The protocol format of BRC20 is simple and has a single function, thus avoiding risks related to smart contracts, such as rug pulls, blacklisting, or contract hacks.
• It enriches the accounting uses and asset categories of the Bitcoin network, creating substantial network fees that can fill the security budget of the Bitcoin network as BTC block production continues to decrease.

In my view, while the above claims have some validity, they are not the primary sources of the popularity and significant wealth effect of BRC20 assets this year.

So, are inscription assets represented by BRC20 a good commercial innovation?

This depends on what perspective "good" is evaluated from.

For trading platforms, asset speculators, and Bitcoin miners, this is certainly a good innovation, as the emergence and popularity of these assets have significantly increased their income.

However, whether inscription assets provide broad commercial value, such as reducing production costs for goods and services, improving business efficiency, and optimizing resource allocation, based on current observations, I hold a negative view.

BRC20 is essentially just a new form of meme asset.

I do not reject memes; meme assets, as speculative mediums, although they represent a negative-sum game for the overall wealth of speculators (trading platforms and project parties continuously extract profits from speculative behavior), provide a sense of exhilaration that accompanies speculative gambling behavior, genuinely satisfying the needs of such users. This is also one reason why many people, despite knowing that many forms of gambling are mathematically unprofitable, still occasionally or continuously visit casinos.

The resilience of human greed and gambling tendencies often rivals physiological needs such as food and sex, which is the root of the long-term survival of the meme sector.

However, in terms of the meme sector, BRC20 assets can only be said to have enriched the variety of products, with little true innovation brought about by changes in technical mechanisms.

Taking the most recognized "fair distribution" of BRC20 as an example, as long as it is designed properly, fair distribution based on smart contracts can also be achieved, and is not a unique feature of the inscription sector.

The criticized model of "VC investing early, retail investors picking up the pieces later" involves VCs investing in projects when they have nothing but a business plan, facing significant uncertainty, and thus requiring extremely low early investment prices to hedge against risks. By the time the project's tokens circulate in the secondary market, many of the "uncertainties" that were present earlier have transformed into "certainties," such as having a usable product, observable data for evaluation, a more mature market environment, and trading platforms seeking to list the tokens. At this point, the project is no longer the "early project" that was invisible and intangible, existing only in white papers and fundraising PPTs, and the token price is naturally not comparable.

From this logic, meme projects like Shib and Pepe without VCs are similar. In their early stages, they were just concepts, and whether they could gain enough attention and speculative funds, or whether they would receive attention and recommendations from other KOLs, were all "uncertain," which is why their tokens were extremely cheap at that time. As the number of holders rapidly increased and resources became richer, more people became optimistic, and "uncertainty" turned into certainty, their secondary prices had already multiplied by dozens or hundreds of times compared to the initial price.

So, as a not-so-new form of meme, what is the reason for the explosive popularity of BRC20 assets this year, especially in the second half of the year?

Mechanisms and Driving Forces Behind the Explosive Growth of Inscription Assets

We will analyze the phenomenon of wealth frenzy in BRC20 from the perspectives of mechanism logic and driving forces.

Mechanism Logic

As mentioned above, BRC20 is essentially a speculative medium, and the only utility of speculative mediums for participants is to "quickly create astonishing wealth." The law of large numbers states that "people always share their success stories when they get rich, but remain silent when they incur losses," which means that even if most people in a market are losing, the headlines circulating in the community may still be "a friend's story of a hundredfold investment return." This disproportionately amplifies the public impression that "wealthy individuals frequently emerge" in certain asset speculation.

In this instance, BRC20 has a higher efficiency in creating "wealth effects" compared to conventional ERC20 memes.

The core reason is that most BRC20 assets were traded through OTC orders in the early stages—even until now—while the trading grounds for ERC20 format memes are mainly on AMM DEX or CEX, where the former's depth is far less than that of the latter. This also means that the funds required to pump BRC20 assets are much lower than those for conventional ERC20 assets (especially during periods of rising market sentiment), allowing the same buying pressure to yield greater price increases.

In other words, due to the thin liquidity of the OTC model, the same purchasing power can produce more exaggerated price increases for BRC20 assets compared to ERC20 memes, creating a stronger and faster "wealth effect."

In addition to the difference in pump costs, BRC20, which does not trade on CEX, also lacks short-selling mechanisms like perpetual contracts, further liberating the short-term upward potential of related assets.

Moreover, core participants in BRC20 have indicated that there is a high "mom factor" in the speculative behavior in this field. Many of the investors entering the market are not the familiar "old hands" who are well-versed in DeFi and enthusiastic about investing in mainstream crypto assets, but rather many "mom-type" investors who are encouraged by "team leaders" and guided into the market by "ground-pushing forces." They are more likely to follow instructions and be influenced by community leaders, with some even unaware of how to sell, creating a situation in some projects where holders do not sell (3,3), reducing short-term selling pressure on the project.

Additionally, the good experience of BRC20 asset trading promoted by OKX's Web3 wallet this year, along with the complete infrastructure of the wallet, has further smoothed and shortened the entry path for "mom-type speculators," allowing them to smoothly enter this new market.

Driving Forces

The popularity of BRC20 inscription assets is a rare speculative highlight in a bear market. Many stakeholders have ample motivation to promote the continued development and expansion of this trend.

• Mining community: The booming inscription trading has led to substantial income from miner and mining pool fees, and mining machines are also easier to sell. They are direct beneficiaries and naturally hope that this "summer of inscriptions" does not end too soon.
• Exchanges: The new speculative business has brought more fees, more new users, and effectively activated this strategic product, the wallet. OKX is undoubtedly the big winner of the summer of inscriptions, and Binance has also begun to follow suit.
• CX teams: New themes, new stories, and the ability to monetize their human resources again.

The synergy of these three forces may accelerate the heat of inscription assets into the next phase.

Scripts for the Next Phase

The next phase must have a script for the next stage to make this already sizable market larger and hotter. The following may represent some significant event nodes:

• Second-tier CEXs continue to list more inscription assets beyond Ordi and Sats, further driving up other memes and attracting more traditional crypto investors into the BRC20 speculative market.
• Leading CEXs like Binance list more inscription assets, bringing mainstream crypto funds into the BRC20 market through CEX.
• Other innovations beyond pure memes emerge, such as BRC20 memes incorporating Ponzi mechanisms, leading to even more exaggerated wealth effects.

But will the inscription market successfully transition to a hotter phase, or will it gradually cool down or even crash?

Let’s look at the possible paths and conditions for its collapse.

Pathways to the Collapse of the Inscription Market

As mentioned earlier, the exaggerated wealth effect of BRC20 assets in the early stages is determined by a combination of factors such as the low liquidity of the OTC order trading mechanism, the high proportion of mom-type investors, and the numerous stakeholders involved.

Low liquidity can cause asset prices to soar during rising periods and plummet during declines due to the inability to find buyers. Most people do not understand that 95% of the wealth on their wallets may be "virtual value," predicated on their ability to exit quickly with other participants providing liquidity.

The elements contributing to the collapse of this market include:

1. Scythe-like projects over-issuing and quickly exiting. Given the limited users and funds in the market, the main opponents of the market-making forces of various BRC20 projects are other project parties. When users and funds are attracted to buy other BRC20 projects, the funds available to absorb their chips diminish. Therefore, due to fierce competition for users and funds, the overall time frame for market makers to exit with their chips will become increasingly earlier to ensure their profits. This leads to a shorter window for users to speculate on profits, and when the stories of losses in the market overwhelmingly exceed those of wealth, negative narratives and ridicule become mainstream, causing users to stop participating, leading to a liquidity drain in the BRC20 meme market.
2. A slowdown in user inflow. Element 1 may lead some CEXs to be cautious when listing more BRC20 assets, further causing the speed of user and fund inflow to lag behind the pace at which market makers are exiting.
3. After BRC20 is listed on CEX, the main liquidity battleground will also transition to CEX, increasing resistance to price pumps. Coupled with the availability of short-selling tools like contracts, if the mechanism is not changed, the wealth effect after listing may significantly diminish.
4. Elements 1, 2, and 3 continuously reinforce each other, forming a collapse pattern.

Postscript

The resilient greed and gambling tendencies are the most vital sources of vitality in the crypto industry. How this experiment of the summer of inscriptions will evolve, I will continue to observe.

For related articles on memes, you can also read “Bottom Fishing in a Bear Market: Don't Choose Meme”.