May 6, 2023, marked a historic moment for the Bitcoin blockchain as it ground to a halt, with unconfirmed transactions hitting an all-time high. Fees skyrocketed, prompting leading crypto exchange Binance to suspend withdrawals, not once but twice. What triggered this unforeseen event that set crypto Twitter abuzz? A novel protocol known as BRC-20 (Bitcoin Ordinals).
Understanding BRC-20
BRC-20, short for Bitcoin Request for Comment 20, was introduced in March 2023 by an anonymous developer known as Domo. Modeled after Ethereum's widely accepted ERC-20 (Ethereum Request for Comment), BRC-20 serves as Bitcoin’s response to ERC-20s, with some major caveats like the lack of smart contracts.
Though named BRC-20, there have been no other “BRC” numbers, as Bitcoin's alterations usually go through a process known as BIP, or Bitcoin Improvement Proposals. Hence, BRC-1, BRC-2, etc., don’t exist. The ERC-20 protocol permits developers to create tokens that are compatible with the broader Ethereum network and have built-in smart contracts. These tokens can represent a wide range of transferable assets or rights, such as ownership interests, access rights, or even different cryptocurrencies – many cryptocurrencies, including Tether and Shibu Inu coin, are ERC-20 tokens.
BRC-20 mirrors this model, made feasible by Bitcoin’s November 2021 Taproot upgrade, which enabled ordinal inscriptions, the underlying technology that powers BRC-20 tokens. Ordinals inscribe a serial number onto a satoshi, the smallest currency unit of Bitcoin. This serial number, along with the ordinal’s data, are inserted into a part of the bitcoin transaction known as the witness signature field. This data authenticates the legitimate ownership of the BTC ordinals being used and ensures they are not double spent.
Impact of BRC-20 on Bitcoin Transactions and Fees
Compared to traditional peer-to-peer transactions, creating and transferring BRC-20 tokens is a more complex process and demands more space on the blockchain. A conventional Bitcoin transaction might only be a few kilobytes, while an ordinal inscription – the foundation of a BRC-20 token – can be as large as 4MB.
An important differentiation between ordinal inscriptions often considered as bitcoin NFTs and traditional non-fungible tokens (NFTs) on Ethereum or other blockchains lies in data storage. With ordinals, all the data is stored directly on-chain, meaning any picture or token instructions added to the inscription become part of the transaction. In contrast, traditional NFTs usually contain a link or data that points to an external service where the art is stored.
This increased data requirement escalates the competition for block space, potentially leading to higher transaction fees for users seeking faster confirmation times. Meanwhile, the mempool (short for memory + pool), a collective storage space for unconfirmed transactions including those from Bitcoin ordinals marketplace, balloons in size.
The Binance Incident and the Role of Transaction Fees
The two withdrawal pauses that Binance had to implement during this peak were a result of a mismatch between the transaction fees the exchange typically pays to facilitate transactions and the heightened transaction fee needed to get picked up by the blockchain. These transaction fees are paid to the nodes on the blockchain, primarily miners, to facilitate the transaction. As nodes are a finite resource and demand for their time fluctuates, fees will rise in tandem with demand. These nodes are pivotal to the functioning of Bitcoin's blockchain, incentivized by block rewards and transaction fees.
The Controversy Surrounding BRC-20 Tokens and Ordinals
BRC-20 tokens and ordinals have attracted controversy for two primary reasons. The first is their role in congesting the network and driving up fees. The second issue, raised by some, is that BRC-20 tokens and ordinals "pollute" the blockchain with data that doesn't align with Satoshi’s original vision of a peer-to-peer system for money transfer. Bitcoin maximalists argue that any deviation from this fundamental purpose is an inappropriate use of the Bitcoin blockchain.
Unlike NFTs on Ethereum that store files on an outside server, Bitcoin ordinal NFTs hold the entire data file within the witness signature field of Bitcoin transactions, ensuring all information remains on the blockchain. This guarantees greater immutability than other NFTs, enhancing the integrity of the asset, but it also means that they are large. Exceptionally large.
The Other Side of the Coin: Possible Benefits of BRC-20 Tokens and Ordinals
Contrarily, others have argued that the miners – despite facing challenges on multiple fronts due to the bear market, including high-profile bankruptcies – have benefited enormously from the BRC-20 boom. As Dan Held, an ex-Kraken executive and long-time Bitcoin enthusiast, tweeted, "Ordinals = NFTs on Bitcoin. This is good for Bitcoin."
For the first time since 2017, some Bitcoin miners are earning more from processing transactions on the blockchain than from mining new BTC, with the shift partly attributed to BRC-20 tokens and Bitcoin ordinals. Analysts suggest this could offset the declining profitability of Bitcoin mining due to the designed halving of mining rewards.
In a recent interview, MicroStrategy’s Michael Saylor said, "What happened with Bitcoin ordinals and NFTs is we crossed this chasm from what was a bearish scenario to a bullish scenario. If I were a miner, I would be ecstatic.”
TL;DR
The advent of BRC-20 tokens and their ensuing controversy illustrates the complex, dynamic nature of the crypto sphere. It's an evolving world where innovation can drive both significant benefits and severe challenges. While the BRC-20 tokens are seen by some as a distortion of Satoshi's vision, they also represent a promising development that may potentially shape the future of Bitcoin.
As the BRC-20 token saga continues to unfold, the broader implications for the Bitcoin blockchain and the world of cryptocurrencies remain to be seen. One thing is certain – the BRC-20 tokens and their impact on the Bitcoin network have made them a topic of hot debate within the crypto community, a debate that is likely to continue for some time.
