The Bitcoin network has been whipped into a frenzy by a new token standard known as BRC-20. But amid the hype and excitement it has unleashed, I’m deeply concerned that this new breed of crypto assets is going to drag Bitcoin deep into the mud.
If you’re unfamiliar with BRC-20, here’s a quick explainer: It’s an experimental new token standard built on the Bitcoin blockchain network. Designed by a pseudo-anonymous developer who goes by the name of Domo on Twitter, BRC-20 is said to be a Bitcoin-based solution for the creation and transfer of new digital assets.
BRC-20 is loosely modeled on Ethereum’s ERC-20 standard, but its architecture is quite a bit different, using a concept known as “ordinals” that’s built into Satoshis, the smallest units of Bitcoin. Just as ERC-20 enables users to create their own cryptocurrencies on Ethereum, BRC-20 makes it possible for anyone to deploy their own tokens on the Bitcoin blockchain.
Although it was started as an experiment, BRC-20 has spread like wildfire with hundreds of new tokens minted in the past couple of months. Their collective market cap has exploded and now sits at a startling $760 million.
It’s an incredible rise that tells us how millions of people are embracing the experiment, but there are many reasons to be wary of BRC-20’s emergence. Its experimental and completely unregulated nature poses an acute danger to Satoshi Nakamoto’s vision of Bitcoin as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”
The frenzy around BRC-20 has already caused problems for Bitcoin as transactions rise to drown out those of BTC itself. Between April 29 and May 2, BRC-20 token swaps accounted for greater than 50% of all network transactions. That isn’t something I believe Bitcoin users will be happy to hear about. Bitcoin’s network was already notoriously congested even before BRC-20 emerged, and with the addition of so many new tokens, it has only gotten worse, with some users reporting that they have to wait hours for regular BTC transactions to be processed.
As a result, Bitcoin’s transaction fees have increased too. According to Dune Analytics, BRC-20 transactions have already numbered more than 3.5 million in total, generating an additional 493 BTC (around $14 million) in miners’ fees. What’s more, due to the stacked nature of the user interfaces on which these tokens are built, transactions involving these tokens cost users twice as much, as they’re required to pay gas fees not only with their BRC-20 coins but also in BTC.
Congestion became so bad that the world’s largest crypto exchange, Binance, this week briefly halted Bitcoin withdrawals, not once, but twice within a 24-hour period. According to Bloomberg, the exchange was forced to take action due to a “backlog” of withdrawals that occurred because its fees fell short of what miners were charging. Binance has since restarted withdrawals, after increasing the fees it charges users.
It’s almost inevitable that the majority of BRC-20 coins will turn out to be “shitcoins”, AKA cryptocurrencies that have no value. Head over to YouTube and search for BRC-20 and you’ll find dozens of “influencers” with their eyes bulging, screaming excitedly about this or that token going to the moon, with graphs depicting their meteoric rise in value. Make no mistake, most of these guys are making $$$ by promoting worthless tokens that are going to leave a lot of people burned.
If BRC-20’s association with these showboaters doesn’t put you off, consider that its creator Domo has already warned his Twitter followers that most of the tokens are worthless. The fact is, BRC-20 tokens have nothing to do with the real Bitcoin other than the fact that they use the same network. BRC-20 is simply a JSON script file that makes it possible for almost anyone to add metadata to Bitcoin’s blockchain, create a new token in the process, and transfer it between users by sending Satoshis. But they’re not creating anything with inherent value.
Domo also warned that the inscription tools of some BRC-20 tokens are built to mint new assets in an intermediary’s wallet, meaning that users will lose control of those coins at the time they are minted.
I’m quite convinced that most BRC-20 tokens are simply taking advantage of Bitcoin’s legitimacy as the world’s best-known and most trusted cryptocurrency. By masquerading as something that’s associated with Bitcoin, they’re able to lure in unsuspecting users, who might assume that BRC-20 tokens are just as trustworthy as BTC is. That is not the case though, as BRC-20 tokens have neither the same level of security, decentralization, or recognition.
One of Bitcoin’s major benefits is that, compared to other cryptocurrencies, it is incredibly straightforward and user-friendly, especially with modern wallets. That isn’t so with BRC-20 tokens, which markedly increase the complexity of managing crypto assets. For instance, a separate wallet is required to hold them, and they require a different protocol together with additional steps to transact.
It’s an added headache that will cause more confusion among new users, raising the risk of human error during transactions. Users risk losing their assets as they could make mistakes with the unfamiliar transaction process and wallets, and this will likely mean that more people simply rely on a custodian instead.
As a result, the vast majority of BRC-20 token users will look to centralized exchanges to manage their assets for them. Rather than set up a new wallet, they’ll leave their tokens in the custody of whatever CEX they purchased them from.
However, smart crypto users know to be wary of keeping too much value on an exchange. As the recent FTX debacle showed us, not to mention Mt. Gox long before, it’s not only the risks of hacking that we need to worry about, but also gross mismanagement, as you can never be sure what such platforms will do with your funds. Due to their complex nature, BRC-20 tokens encourage the use of CEXs, which undermines Bitcoin’s founding principle of decentralization and ownership.
BRC-20’s misleading association with Bitcoin may well end up causing all sorts of regulatory headaches too. The danger is that by obfuscating the difference between these random tokens and BTC itself, new investors might be misled into believing they’re acquiring a secure and established digital asset, when in fact they’re exposing themselves to extreme risk.
One of my major concerns is the potential of BRC-20 to facilitate the trade of unregistered securities on Bitcoin itself. Scammers could create tokens that are claimed to represent shares in a company, crypto project or some other venture, skirting all regulatory oversight. This would put investors at considerable risk and could ultimately expose Bitcoin itself to increased regulatory scrutiny, simply because of a few bad actors.
BRC-20 is best avoided
BRC-20’s creator Domo may well have had good intentions when he or she first created the standards. The ability to create new assets and trade them on Bitcoin’s network might seem attractive to many, but as we’ve seen with the frenzy that followed, most of these tokens are designed to make their creators rich. Meanwhile, they divert capital that would otherwise stay within Bitcoin itself. Very few, if any, BRC-20 coins represent genuine projects.
Whatever the benefits of BRC-20 tokens may be, they are far outweighed by the risks I’ve outlined above. In reality, BRC-20 is just the latest implementation of fool’s gold, dressed up in an attractive wrapper that belies its lack of value.
Of course, there will be some who are willing to gamble on the prospects of BRC-20 anyhow, and they’re free to ignore all of the red flags I’ve listed. But for anyone who’s risk-averse and believes that Bitcoin is truly where the future of money lies, BRC-20 is clearly something best avoided.
Steer clear of BRC-20 and focus on Bitcoin instead and you’ll not only protect yourself from unnecessary risk but also contribute to the stability and growth of the one true crypto asset that’s sure to outlive anything trying to hijack its success.
When you hold Bitcoin, you’re helping to make Satoshi Nakamoto’s vision become a reality and create a more equitable financial future for the world. Hold some BRC-20 shitcoin, and all you’re doing is feeding the scammer or joker who created it.
Don’t be the next victim, steer clear of the fool’s gold that BRC-20 shitcoins most certainly are.