BRC-20 is an experimental token standard that enables the minting and transferring of fungible tokens via the Ordinals protocol on the Bitcoin blockchain. 

Taking a cue from Ethereum's ERC-20 tokens, BRC-20 tokens feature different mechanisms and functions. Despite gaining massive popularity during the first half of 2023, BRC-20 tokens are still experimental, and users should exercise extreme caution.

How Were BRC-20 Tokens Created?

After the Bitcoin Ordinals protocol launched in January 2023, enabling NFTs (non-fungible tokens) to be inscribed on satoshis (sats), there has been curiosity about whether fungible tokens could be created on Bitcoin. BRC-20 token standards were created in March 2023 by a pseudonymous programmer named Domo to make minting fungible tokens on Bitcoin possible. 

The first BRC-20 token deployed was called "ordi." Bitcoin wallets quickly deployed tooling to support BRC-20 tokens. Numerous other BRC-20 tokens, many of which are meme tokens, were launched in the months after. As of May 2023, some BRC-20 tokens have experienced astronomical price increases and obtained significant market caps. The demand for BRC-20 tokens caused Bitcoin transaction fees to surge and caused significant congestion on the Bitcoin network.

How Do BRC-20 Tokens Work?

It's important to know how Bitcoin Ordinals work to better understand BRC-20 tokens. The Ordinals protocol is a system for numbering satoshis and allows users to attach extra data to satoshis in a process known as "inscription."

BRC-20 tokens utilize Ordinals inscriptions of JSON (JavaScript Object Notation) data to deploy token contracts, mint, and transfer tokens. Currently, the BRC-20 token standard allows creating a BRC-20 token with the deploy function, minting an amount of BRC-20 tokens with the mint function, and transferring an amount of BRC-20 tokens via the transfer function.

The BRC-20 token standard is new and the process of deploying, minting, and transferring BRC-20 tokens isn't user-friendly. There are also a limited number of tooling and supporting services.

Differences Between BRC-20 and ERC-20 Tokens

Despite the similarity in their names, there are significant differences between the two tokens.

BRC-20 tokens exist on the Bitcoin network, while ERC-20 is a standard on the Ethereum network. BRC-20 tokens don't use smart contracts and, therefore, have much less functionality. On the contrary, ERC-20 tokens can interact with other protocols and applications to enable a wide range of services, including borrowing and lending.

ERC-20 is a mature token standard with a massive number of ERC-20 tokens already created and widely used. Conceived in 2015 and officially recognized in 2017, ERC-20 tokens have been battle-tested and proven to function stably. That's not the case with BRC-20 tokens, whose future has a high degree of uncertainty.

Risks of BRC-20 Tokens

The BRC-20 token standard is currently an experiment by programmers to facilitate fungibility on the Bitcoin blockchain. As it's still being tested, many things could go wrong.

Despite the hype, BRC-20 tokens have little utility at present. The outlook is also highly questionable. Due to the ease of minting BRC-20 tokens, it's possible that most could end up being worthless. Users and investors should be cautious and conduct proper research before engaging with this new token type. 

Also learn: What Are Ordinals? An Overview of Bitcoin NFTs