The operating mechanism and market prospects of BRC-20, everything you need to know is here

On January 30, 2023, Bitcoin core developer Cassie Rudomer created the NFT protocol Ordinals** and officially launched it on the Bitcoin mainnet. Ordinals is a scheme for numbering satoshis, allowing for the tracking and transfer of individual satoshis. These numbers are called Ordinals. Satoshis are numbered in the order they are mined and transferred from transaction inputs to transaction outputs in a first-in, first-out manner. The numbering scheme relies on the order in which satoshis are mined, while the transfer scheme depends on the order of transaction inputs and outputs. Hence the name Ordinals. This data can be text, images, audio, or any other type of information. In this way, the Ordinals protocol introduces a concept similar to non-fungible tokens (NFTs) in the Ethereum network to the Bitcoin network. The key point here is the ordinal numbers system, which provides a way to track and identify each satoshi. This means that each satoshi with attached data can be uniquely identified and tracked on the Bitcoin network.

Ordinals Protocol, Inscriptions, Segregated Witness, and UTXO Model

What are Ordinals?

Ordinals assign a unique ordinal number to each satoshi in the Bitcoin network, breaking their original fungibility. In the traditional Bitcoin system, all satoshis are the same, with no distinction. However, through the Ordinals system, each satoshi is given a unique identity, allowing them to be tracked and identified individually. It's akin to the serial numbers on Renminbi. By assigning a serial number to each satoshi and then attaching additional data (text, images, videos, audio, code, etc.), which is commonly referred to as "metadata" in NFTs, each satoshi becomes a unique NFT. This process is called "inscribing" or "minting."
This method is similar to the concept of non-fungible tokens (NFTs), where each token is unique and can represent a specific asset or project. In the case of Ordinals, each satoshi can now represent a unique digital asset, such as digital artwork, collectibles, or any other form of data.
The introduction of this technology brings new possibilities to the Bitcoin ecosystem, allowing users to create and trade unique digital assets on the Bitcoin blockchain, which was previously only achievable on smart contract-supported blockchains like Ethereum.

What are Inscriptions?

Because the Ordinals protocol allows content to be written into the SegWit area (text, images, videos, audio, code, etc.), the Ordinals protocol and the subsequent concept of inscriptions have brought revolutionary changes to this field. The introduction of the Ordinals protocol not only enhances the functionality of Bitcoin but also provides users with the ability to create and trade unique digital assets on the Bitcoin network. Here are the key steps and features of this process:

1. Embedding (Inscription): Achieved by embedding data (such as text, images, code, etc.) into the SegWit portion of the Bitcoin blockchain. SegWit is a mechanism that expands blockchain capacity by separating certain information (such as signatures) from the main part of the transaction. The Ordinals protocol allows users to embed up to 4MB of content in this area.
2. Inscribing: This is the process of binding the uploaded inscription to a specific satoshi on the Bitcoin network. This process is similar to minting an NFT on Ethereum. Each satoshi becomes unique through inscribing because it now contains a specific inscription.
3. Creating Satoshis with Inscriptions (Ordinals): Once the inscription is bound to a satoshi, a unique digital asset called an ordinal is created. These ordinals can contain various types of information, from simple text to complex images or even small programs.

What is Segregated Witness?

Since the Ordinals protocol allows content to be written into the SegWit area (text, images, videos, audio, code, etc.), we also need to understand what Segregated Witness is.
Segregated Witness (SegWit) is an important upgrade to the Bitcoin network aimed at addressing Bitcoin's scalability issues and improving transaction processing efficiency and security. The core idea of SegWit is to separate the signature information (witness data) from other data in transactions, achieving several main objectives:

1. Increase Block Capacity: By separating signature data from transactions, a single block can accommodate more transactions. Although SegWit does not change the block size limit (1MB), it effectively increases the "capacity" of the block by adjusting how block size is calculated.
2. Reduce Transaction Fees: As blocks can accommodate more transactions, the fees required for each transaction decrease relatively.
3. Reduce Transaction Delays: Increasing block capacity means the network can process transactions faster, thereby reducing transaction confirmation times.
4. Address Transaction Malleability Issues: Before SegWit, Bitcoin transactions were susceptible to so-called "transaction malleability" issues, a vulnerability that could modify transaction IDs without changing the transaction itself. By isolating signature data, SegWit effectively resolves this issue, enhancing transaction security.
5. Compatibility and Backward Compatibility: SegWit is a soft fork upgrade, meaning nodes that do not support SegWit can still participate in the Bitcoin network, maintaining the integrity and consistency of the network.
6. Paving the Way for Further Upgrades: SegWit paves the way for future upgrades to the Bitcoin network (such as the Lightning Network), allowing these technologies to be implemented more efficiently and securely on the Bitcoin network.

What is the UTXO Model?

The UTXO model is a specific transaction processing and ledger structure widely used in Bitcoin and some other blockchain systems. UTXO stands for "Unspent Transaction Outputs." In this model, a user's "balance" is not stored as a single number but is calculated by tracking all unspent transaction outputs.
How the UTXO model works:

1. Transaction Structure:
2. Each transaction contains inputs and outputs. Inputs refer to unspent outputs from previous transactions, while outputs create new unspent outputs.
3. When a user wants to send Bitcoin, their transaction inputs reference the UTXOs they previously received as the source of funds.
4. Creating New UTXOs:
5. The outputs of a transaction become new UTXOs. These UTXOs can be used as inputs in future transactions by the recipient of the transaction.
6. Consuming UTXOs:
7. When a UTXO is used as an input in a new transaction, it is considered "spent" and cannot be used again as a transaction input.
8. Calculating Balance:
9. A user's Bitcoin balance is the sum of all their unspent UTXOs. This means that to determine the balance, the system needs to add up all of the user's unspent transaction outputs.

For example, if Alice has a 5 BTC UTXO and needs to pay 3 BTC to Bob, her transaction will use this 5 BTC UTXO as input, creating two outputs: one for 3 BTC paid to Bob (the purpose of the transaction) and another for 2 BTC returned to Alice herself (the change). In this way, the original 5 BTC UTXO is consumed, resulting in two new UTXOs: one belonging to Bob and one belonging to Alice. In the UTXO model, a user's "balance" is the sum of all their unspent UTXOs, and the transaction process is essentially about consuming old UTXOs and generating new UTXOs.

What You Need to Know About BRC20

What is BRC20? How does the BRC20 protocol enable token issuance on the Bitcoin network?
First, we all know that Bitcoin, often regarded as digital gold, has always been known for its high security and stability. However, compared to other blockchains like Ethereum, Bitcoin has been relatively slow in developing innovations and new use cases (such as DeFi and NFTs). However, with the advancement of the Taproot upgrade and other innovations, the Bitcoin network has begun to explore new application areas, including token issuance.
The BRC-20 standard is an important extension of the Bitcoin network's functionality, providing a framework for creating and managing tokens on Bitcoin. This standard primarily relies on the latest technological developments of the Bitcoin network, especially those related to the Ordinals protocol. Let’s delve into how BRC-20 works and how it enables token issuance on the Bitcoin network:

The First BRC-20 Token (ordi)

The first token contract deployed in BRC-20 is the "ordi" token, with a minting limit of 1,000 tokens and a total supply of 21,000,000 tokens.

 

How BRC-20 Works

• Based on the Ordinals Protocol: The creation of BRC-20 tokens relies on the Ordinals protocol, which allows additional data (such as text, images, audio, etc.) to be attached to individual satoshis on the Bitcoin network.
• Inscription Process: Through the inscription process, individual satoshis are transformed into BRC-20 tokens with unique attributes and functionalities. These inscriptions can contain different types of information.
• Use of JSON Data: BRC-20 tokens typically carry JSON (JavaScript Object Notation) data. This code gives the ordinal more functionality, such as defining the token's characteristics and properties.
• Functionality and Limitations: Although the BRC-20 standard has functional limitations, it still allows users to deploy, mint, and transfer tokens on the Bitcoin network.

Significance of BRC-20

• Opening New Possibilities: BRC-20 brings unprecedented new functionalities and applications to the Bitcoin ecosystem, such as creating and managing tokens on the Bitcoin network.
• Encouraging Innovation: This new standard encourages more innovative explorations on the Bitcoin network, potentially leading to new applications and services.
• Expanding Bitcoin's Application Scope: The emergence of the BRC-20 standard helps extend Bitcoin's use from traditional monetary transactions to a more diverse range of digital assets and applications.

The Ordinals protocol makes it easier to attach additional data (such as text, images, or audio) to individual satoshis, a process known as inscription. Essentially, these are satoshis with inscribed information. This is the essence of BRC-20 tokens: a type of ordinal inscription.
However, not all ordinals are BRC-20 tokens. Standard Bitcoin ordinals can be inscribed with any information, but BRC-20 tokens are always inscribed with JSON data. It is this code that gives ordinals additional functionality. While the BRC-20 standard remains limited, this small amount of code allows you to deploy, mint, and transfer tokens on the Bitcoin network.
In summary, the BRC-20 token standard is an important milestone in the innovation of the Bitcoin network, showcasing the adaptability and flexibility of Bitcoin technology while opening a new chapter for Bitcoin in the realm of digital assets and blockchain applications.

The Technical Logical Relationship Between Bitcoin's UTXO Model, Ordinals, and the BRC20 Standard

When considering the UTXO model of Bitcoin, the innovations of Ordinals, and the BRC20 standard, one cannot help but marvel at the complex and intricate interactions between these technologies. The UTXO model of Bitcoin, as the underlying infrastructure, not only supports the value transfer mechanism of the entire network but also paves the way for higher-level innovations. The emergence of Ordinals cleverly utilizes a key feature of the UTXO model—the capacity for additional data in transactions—embedding the concept of non-fungible tokens (NFTs) into the most famous blockchain in the world, Bitcoin. Subsequently, the introduction of the BRC20 standard further expands this field, providing a more standardized and efficient framework for creating and managing NFTs on Bitcoin. The technical logical relationship among these three not only demonstrates the diversity and adaptability of blockchain technology but also reveals a fact: in the world of digital currencies and blockchains, innovation is an endless journey.
Here is an overview of the technical logical relationship between Bitcoin's UTXO model, Ordinals, and the BRC20 standard.

1. Bitcoin's UTXO Model:
2. The core of Bitcoin is based on the UTXO model, meaning each transaction relies on previously unspent transaction outputs. This model provides a way for Bitcoin to track the flow of value without an account system. Each UTXO is unique, can contain a specific amount of Bitcoin, and can only be consumed in its entirety.
3. Innovative Applications of Ordinals:
4. Ordinals leverage a key feature of Bitcoin's UTXO model: transactions can carry additional data. By adding extra data (such as images, text, etc.) to transactions, Ordinals enable the creation and transfer of non-fungible tokens (NFTs) on the Bitcoin chain. This method is essentially an innovative application that utilizes Bitcoin's infrastructure to store and manage NFT data.
5. Introduction of the BRC20 Standard:
6. The introduction of the BRC20 standard is an extension of the Ordinals concept. It provides a more formal framework for creating and managing NFTs on the Bitcoin chain. The BRC20 standard utilizes Bitcoin's UTXO model and transaction scripts (public key scripts) to define the characteristics and behaviors of NFTs without relying on smart contracts like those on Ethereum.
7. Integration and Interaction:
8. In this framework, UTXOs provide the basic transaction and value storage mechanism; Ordinals add the capability to embed data (such as NFT content) into Bitcoin transactions; and the BRC20 standard builds on this to provide a standardized method for creating and managing NFTs on the Bitcoin chain. This integration allows the Bitcoin network to support more complex applications and transaction types, surpassing its original design purpose.

In this way, Bitcoin's foundational transaction architecture is used to support emerging digital assets and token applications, demonstrating the ability of blockchain technology to continuously innovate and adapt to new demands.

Practical Application Scenarios in the BRC20 Ecosystem

The application and development of the BRC20 standard in the Bitcoin ecosystem indeed face some unique challenges and limitations. Currently, the BRC20 ecosystem is still in its early stages, and its market situation is not mature, primarily reflected in the following aspects:

1. Reliance on the Inscription Market: The current BRC20 ecosystem relies heavily on the inscription market, mainly concentrated in the non-fungible token (NFT) space. Projects like Bitcoin Punks and Ordinal Punks are more about community consensus than technical consensus.
2. Emotional and Speculative Nature: Since BRC20 is still in its early stages, its token market is largely driven by speculative demand and emotional trading, lacking deep and widespread practical application scenarios.
3. Technical and Ecological Limitations: The Bitcoin network does not have a mature ERC20 standard and smart contract protocol like Ethereum, which limits the development of complex financial applications. Additionally, Bitcoin's second-layer network is not as mature and robust as Ethereum's, which somewhat restricts its potential for advanced applications.
4. Need for Native Innovation: Simply replicating Ethereum's ecological model may not be suitable for Bitcoin. The development of the Bitcoin ecosystem needs to be rooted in Bitcoin's own characteristics and advantages, seeking native innovation paths that fit its "genes."

In summary, the development of BRC20 in the Bitcoin ecosystem requires more practical application scenarios and technological innovation, as well as a deep understanding and utilization of Bitcoin network characteristics. As time goes on and technology develops, we may see more native innovations emerge in the Bitcoin ecosystem, driving the maturity and popularization of the BRC20 standard.

Current Infrastructure in the BRC20 Ecosystem

The infrastructure of the BRC20 ecosystem is crucial for its overall growth and development. Although the BRC20 standard is relatively new and the existing infrastructure is not yet mature, some key components have begun to emerge, providing support for users and developers. This infrastructure mainly includes:

1. Wallets: Providing users with the ability to store and manage BRC20 tokens. For example, the Unisat wallet supports the BRC20 protocol, allowing users to securely store, send, and receive BRC20 tokens.
2. Decentralized Exchanges (DEX): These platforms allow users to trade BRC20 tokens without a central authority. For instance, the AMM DEX integrated into the Unisat wallet provides liquidity and trading opportunities for BRC20 tokens.
3. DeFi Platforms: Some projects, like ALEX, are attempting to develop decentralized finance (DeFi) on the Bitcoin network and launch decentralized exchanges for trading BRC20 tokens, increasing the availability and liquidity of the tokens.

This infrastructure is significant for the development of the BRC20 ecosystem:

• Contribution to Users: It provides more storage and trading options, increasing the flexibility and convenience for users operating BRC20 tokens. Users can more easily access and trade these tokens, enhancing their practicality and appeal.
• Contribution to Developers: It provides the necessary tools and services for developers to create and deploy BRC20 tokens. The existence of this infrastructure lowers the entry barrier and encourages more innovation and experimentation.

However, since the BRC20 ecosystem is still in its early stages, its infrastructure has considerable room for development. With technological advancements and growing user demand, we can expect more infrastructure to emerge, driving the maturity and expansion of the BRC20 ecosystem.

The Speculative Frenzy of BRC20 & Ecological Transformation After the Hype

The speculative frenzy surrounding BRC20 has indeed had a significant impact on this ecosystem, with both positive aspects and risks that need to be heeded.
Positive Impacts

1. Increased Attention and Liquidity: The speculative frenzy has raised the visibility of the BRC20 ecosystem, attracting more users and investors. This increased attention can bring more capital inflow and market liquidity, which can be crucial for new projects and startups.
2. Encouragement of Innovation and Experimentation: High market enthusiasm can encourage developers and entrepreneurs to engage in more innovation and experimentation on the BRC20 platform. This trial-and-error process is an important part of technological advancement.

Negative Impacts

1. Increased Market Volatility: Excessive speculation may lead to price volatility, which can be detrimental to users and developers seeking long-term investments.
2. Bubble Risks: Like all speculative markets, there is a risk of bubbles, and when a bubble bursts, it can lead to sharp price declines, severely damaging investors and the health of the ecosystem.
3. Neglect of Long-term Value: In the midst of speculative frenzy, the market may overly focus on short-term price performance while neglecting the long-term value and sustainability of projects.
4. Uneven Resource Allocation: Speculation may lead to resources (such as funding and developer attention) concentrating on a few popular projects while neglecting other potentially valuable but less noticed projects.

The speculative frenzy in the BRC20 ecosystem is a double-edged sword. It brings attention and funding to the ecosystem but also introduces instability and bubble risks. For investors and participants, it is important to consciously identify these risks and make prudent decisions. For the ecosystem itself, developing a more mature and diverse ecological environment and reducing reliance on a single speculative frenzy will be key to long-term sustainable development.

Future Prospects of BRC20

The introduction of BRC-20 tokens on the Bitcoin network is indeed a development worth noting, sparking widespread discussion within the Bitcoin community about the uses and future direction of Bitcoin. The emergence of this new technology has generated differing viewpoints between traditional Bitcoin users and those seeking more innovation.

New Directions for the Bitcoin Network

1. Store of Value vs. Functional Diversity: Traditionally, Bitcoin has been viewed as a decentralized store of value, but with the introduction of BRC-20 and similar technologies, the potential uses of the Bitcoin network are expanding to include DeFi applications, smart contracts, and more.
2. Debate Within the Community: The emergence of the Ordinals protocol and BRC-20 tokens has sparked intense debate within the Bitcoin community regarding the network's uses and future development. Some prefer to maintain Bitcoin's original vision, while others see the potential for expanding its functionalities.

Development and Challenges

1. Infrastructure Development: Initially, the development of BRC-20 has been limited by insufficient infrastructure. However, with the maturation of technology and the involvement of major institutions like Unisat wallet, OKX, and Binance, the ecosystem is gradually being established.
2. Market Dominance: Currently, the BRC-20 market may still be dominated by highly speculative projects like MemeCoins, indicating that the ecosystem is still in its early stages.
3. Risks and Speculative Bubbles: Research data shows that the current market sentiment is high, indicating volatility risks and speculative bubbles. This requires investors to remain cautious when participating.

In Conclusion

With technological advancements and the maturation of the ecosystem, we may see more practical applications of BRC-20 on the Bitcoin network in the future, such as DEX/DEX aggregators, cross-chain aggregators, stablecoins, and blockchain games. These advancements could further drive the development of the Bitcoin network, transforming it from merely a store of value into a more functionally rich decentralized network.
Overall, the introduction of BRC-20 to the Bitcoin network is a complex and challenging process involving technological innovation, shifts in community perspectives, and the management of market risks. As the ecosystem continues to evolve, we will witness changes and growth in the Bitcoin network in the future.