Bitcoin Ordinals and BRC-20

The Ordinals protocol allows Bitcoin to make NFTs (non-fungible tokens). Bitcoin Ordinals write raw file data to the blockchain, unlike other NFTs, which create new tokens. This new approach is revolutionary and adds new dimensions to Bitcoin asset management. Bitcoin Request for Comment 20 (BRC-20) tokens became popular shortly after their March 2023 introduction. The network saw more transactions since Bitcoin became popular so quickly. Unconfirmed transactions reached a record high in May 2023, halting the Bitcoin blockchain. This occurrence showed how BRC-20 currencies affect Bitcoin‘s network speed. Digital currency and blockchain enthusiasts should know about Bitcoin Ordinals NFTs and BRC-20 coins. Beginning with what we know:

What are Bitcoin Ordinals NFTs?

Bitcoin Ordinals, developed by Casey Rodarmor, let users post words, photos, and videos on the Bitcoin blockchain. The smallest unit of Bitcoin, satoshis, is used to write data. Each writing creates a Bitcoin non-fungible token, or Ordinal. Bitcoin required SegWit and Taproot updates in 2017 and 2021 for this technology to work. Ordinal NFTs have sparked debate in the Bitcoin community regarding using the blockchain for non-monetary purposes.

How Does BRC-20 Impact Tokens?

The BRC-20 token standard on Bitcoin is a new mechanism to produce and transfer fungible coins, like Ethereum’s ERC-20. This standard places token data on the blockchain using Bitcoin ordinal inscriptions. ERC-20 coins require smart contracts, but BRC-20 tokens don’t. Their operation is simpler but less feature-rich. Long-term utility and viability of BRC-20 are being researched as an experimental system. This advances the Bitcoin platform’s digital asset business.

Why Ordinals Theory is Relevant for BRC-20

The Taproot update enabled ordinals theory, which is essential to the BRC-20 token standard on Bitcoin. The lowest unit of Bitcoin, the satoshi (sat), may be uniquely identified with this new approach. The Ordinals protocol assigns each sat a number to identify them by creation order. This is a huge step forward because text, photos, audio, and video can now be created and saved on the Bitcoin network. Because it doesn’t require side chains or tokens, this technique boosts blockchain power. The Ordinals protocol mentions “Ordinal Inscriptions.” These are digital records stored on-chain. The texts are stored with taproot script-path spend scripts, a specific Bitcoin transaction. You must invest output to read an inscription. This shows the blockchain inscription details. This writing is initially placed in an envelope. This envelope is decorative solely and does not affect the script. Bitcoin Ordinals are based on naming. Sats are numbered by mining order. Ordinals functions mostly like a Bitcoin NFT system. Traditional NFTs create asset tokens for each item. However, Bitcoin Ordinals write raw file data to the blockchain.

New Bitcoin NFTs and Sats Names

The Ordinals protocol enabled Bitcoin NFT-like assets. Many call these BTC NFTs. Bitcoin Ordinals write raw file data to the blockchain instead of creating a new asset token like most NFTs. The Bitcoin ecosystem’s digital asset management has changed drastically with this new approach. Additionally, Sats Names, which works like Ethereum Name Service, has emerged. Sats Names lets users claim unique Bitcoin address nicknames or identities. The Satoshi who originally registered a moniker owns it. This utility makes the Bitcoin network more configurable and helpful, improving user experience.

BRC-20 Token Safety Concerns

There are risks with BRC-20 coins. These tokens lack Bitcoin‘s security, making them exposed easily to attacks and putting owners at risk. BRC-20 Pinning Attack is a famous illustration of this weakness. The attacker transfers their whole account balance to an exchange in this attack. This hinders exchange transactions. On December 7, 2023, Binance was forced to stop ORDI withdrawals for three hours due to this issue.

Risks of Centralization

Using indexers and custodians increases centralization risks. Concentration risks should be considered. ERC-20 token balances are stored on the blockchain. A centralized indexer that reads JSON inscriptions and stores BRC-20 token balances off-chain. This reliance on a single indexer increases the danger of token balance errors due to indexing program errors. Complex BRC-20 tokens mean traders and managers rely increasingly on custodians and centralized exchanges (CEXs) for dealing and management. This makes them easy prey. If the writing service mints tokens for itself first, they may be distributed unfairly. Due to indexer logic issues, you may record the wrong amount or spend money twice. This was seen in the April 24, 2023, Unisats attack, which cost over $1 million.

Risks to Performance

Inefficiency and network congestion endanger performance. Many think BRC-20 currencies are useless since they employ JSON instead than binary for storage and blockchain resource utilization. BRC-20/BTC NFT tokens may increase transaction fees and hinder the network. The Bitcoin network had approximately 270,000 delayed transactions, raising transaction prices. Inscription transactions are larger than typical transactions, hence memory utilization has skyrocketed. On December 15, the Ethereum layer-2 network Arbitrum One fell offline for 78 minutes due to this demand. Writing generated a huge spike in network traffic. These writings slowed the network, so each block had just two transactions during the downtime. Users could move assets to Ethereum once the sequencing halted, but it took longer. The network is back online after the patch.

Scam Risks

Due to their ease of production and lack of mining, BRC-20 tokens have low entry barriers. Add a file to a transaction and use future transactions to shift the tokens’ UTXO to produce these tokens with the ordinal wallet. Because tokens are easy to produce, there may be many low-quality ones and scams, making it impossible to differentiate real projects from phony ones.

Bottom Line

Bitcoin Ordinals and BRC-20 tokens are reshaping Bitcoin’s functionality. Ordinals allow NFTs on Bitcoin, while BRC-20 enables fungible tokens. These innovations boost digital asset management but raise concerns about security, centralization, and network congestion. Despite challenges, they drive Bitcoin’s evolution. As adoption grows, their impact on blockchain technology will expand.

Bitcoin Ordinals and BRC-20