The Promise and Peril of Bitcoin-Backed Tokens

A new frenzy is sweeping cryptoland – so-called “BRC-20s” are fungible tokens deployed on the Bitcoin blockchain, and some are starting to see major market activity. The proposed new standard was introduced in March by a coder known online as Domoand it has a lot of interesting potential.

Tokens on Bitcoin are not a radically new idea – in fact, one of the earliest major experiments in crypto, “colored coins”, was an attempt to do something very similar. But BRC-20s, like Ordinal non-fungible tokens (NFTs), were enabled by new features introduced in Bitcoin’s recent Taproot upgrade.

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That is the main point of the BRC-20 experiment – ​​to see exactly what the new technology can do. When I reached out, Domo generously recommended some resources for techies looking to dig deeper into BRC-20s. This basic intro for builders explains how to deploy BRC-20s and discusses some of the broader questions that have yet to be resolved. This is a more in-depth technical overview from Domo. And this is a video introduction by YouTuber pazNGMI, which includes information about coinage and wallets.

But Domo, and most other experts, have issued strong warnings against financial speculation in the new token format. In fact, soon after the experimental standard was launched, Domo declared that “these will be worthless. Please don’t waste money on mass minting.”

With a flood of new BRC-20 memecoins being traded for real money, at least some people are clearly ignoring that warning. And it’s hard to blame them: in crypto, being first to something new tends to be a decent strategy for speculators.

So why would the first assets created with this exciting new technology be “worthless?” There are two clues to the explanation.

On the one hand, the BRC-20 standard is only a proposal at this point, and there is no guarantee that it will be widely integrated into blockchain tools such as wallets and exchanges. Average users will likely have a hard time accessing BRC-20s for the foreseeable future. Wallets must have special features to read ordinals, and even more special features to read the new BRC-20s. The same goes for exchanges — as Domo warned in March, “It is unlikely that balances will be safely tradable using existing marketplace infrastructure.” Some exchanges are certainly preparing to integrate BRC-20s, but markets will not be fully liquid for some time, even if BRC-20s become a widely accepted standard.

But even that standardization may be a long way off: the design of the BRC-20 is not necessarily finalized, much less fully reviewed or adopted. In theory, there could be other ways to distribute tokens on Bitcoin, or further improvements to BRC-20 in its current form. If a competing or improved standard ends up becoming more widespread, the current wave of BRC-20s may become little more than digital museum pieces.

But secondly, and more fundamentally, it remains unclear where the economic value of tokens issued on Bitcoin might come from.

Above all, this is a question because BRC-20s are not widely compatible with smart contracts or decentralized finance (DeFi) systems. Despite borrowing their nomenclature from Ethereum’s ERC-20s, they are not technically parallel, and in any case Bitcoin itself does not have DeFi capabilities. So if and when solutions emerge, getting BRC-20s on DeFi will likely involve bridges or other higher risk structures.

For now, this means that BRC-20s cannot serve as the backbone of decentralized autonomous organizations (DAOs) or other more complex systems that would provide them with utility and value. There are certainly possible use cases for simple tokens on Bitcoin, but their structure could end up being radically different from tokens on Ethereum – a topic for a deep dive at another time.

There is a much more immediate downside to BRC-20’s current limitations, even for developers happy to play the decentralized Ponzi game with memecoins. The lack of DeFi compatibility means that BRC-20s cannot benefit from liquidity provided by DeFi services such as trading pools. So even pure speculation in tokens may not have the frothy upside of a similar token issued on Ethereum.

In fact, we are seeing it play out right now. A BRC-20 known as “Pepe” is among those now traded by a few daring basement dwellers. BRC Pepe and all the other BRC-20s currently in existence had a combined fully diluted value (FDV) of $137 million as of May 2.

But there is also a “Pepe” memecoin on Ethereum, which was launched in April. Its FDV now stands at $1.2 billion.

In short, the BRC-20 is a fascinating innovation with seriously interesting potential. But if you’re looking for the low-key thrill of running volatile pumps in animal-based casino tokens, it looks like Ethereum should still be your home base.