On April 29th, 19.3579 million Bitcoins have been supplied, representing 92.18% of the total supply and accounting for 45.81% of the global market value, still holding half the territory in the cryptocurrency market. The recent emergence of BRC-20 has further increased discussions about Bitcoin within the community.

Ordinals Protocol: A technology for creating and trading non-fungible tokens (NFTs) on the Bitcoin blockchain, which allows users to inscribe data on a Satoshi (the smallest unit of Bitcoin), thus generating an Ordinal.

BRC-20 Protocol: A technology for creating and trading fungible tokens (FTs) on the Bitcoin blockchain using the Ordinals Protocol. It uses JSON data to deploy token contracts, mint tokens, and transfer tokens.

In the discussion of this topic, critics have denounced it as a "scam" and "a gold derivative of the dollar era," while supporters have praised it as a "significant innovation in crypto token protocols following Ethereum's ERC20/REC721". So, what exactly is BRC-20, and what is a Bitcoin NFT? Regarding these emerging concepts that have recently appeared, let Go2Mars Research guide you to find out.

Laying the Groundwork: Bitcoin's Two Protocol Upgrades

The total supply of Bitcoin is 21 million coins, with its smallest unit being satoshis. 1 BTC equals 100 million satoshis, meaning one Bitcoin can be subdivided into a hundred million satoshis, but no further. Every Bitcoin is identical, completely fungible.

So why do we have the so-called Bitcoin NFTs? This begins with Bitcoin's soft fork. Since Satoshi Nakamoto released it in 2008, the operation of Bitcoin has been adjusted and updated many times. There have been both permanent hard forks and backward-compatible soft forks. Bitcoin undergoes a network soft fork from time to time, which updates it through improvement proposals.

One of the Bitcoin scalability solutions was implemented in 2017 with the SegWit (Segregated Witness) upgrade. In the SegWit scheme, by storing signature data outside of the related blocks, i.e., segregating the signature data from the block records while still ensuring that it can be verified, Bitcoin can package more transactions into any individual block while maintaining the integrity of the transactions. This expands the effective capacity within Bitcoin blocks and improves transaction speed. The most significant role of SegWit thereafter is that it relaxed the limitations on signature size, which helped increase the scale of Bitcoin's information.

The soft fork Taproot upgrade implemented in 2021 included three BIPs: Schnorr Signatures, Taproot, and Tapscript. Their goal was to enhance transaction privacy and efficiency on the Bitcoin network, as well as address security issues.

Schnorr Signature is a digital signature algorithm proposed by Claus Schnorr. They can aggregate multiple signatures into one, thereby improving efficiency and privacy.

Taproot is a scheme that uses Merkle Abstract Syntax Trees (MAST) to hide complex transactions under ordinary public keys, thus improving efficiency and privacy.

Tapscript is a new scripting language used to write conditional branching logic in Taproot. It optimizes Schnorr signatures and adds some new opcodes.

The core of this upgrade lies in the Schnorr signatures. The signature algorithm can bring more performance and better use cases to Bitcoin. The size of Bitcoin blocks is limited to 1MB, but because additional data can be added to each transaction contained in the Bitcoin network block, each block can store up to 4MB of data. These two upgrades have facilitated the arrival of the Ordinals protocol and BRC-20 tokens on Bitcoin. The Taproot upgrade reduces transaction costs, enhances privacy, and gives Bitcoin flexibility, making transactions on the Lightning Network cheaper, more flexible, and more private.

Innovation Attempts: Ordinals Protocol

At the beginning of 2023, Bitcoin core contributor Casey Rodarmor released the Ordinals Protocol, which is the theoretical framework that makes the implementation of Bitcoin NFTs possible.

In ordinal theory, serial numbers are assigned to Bitcoin's smallest unit, satoshis, giving them individual identities. Each one is numbered according to the mining order, thereby obtaining an ID that can be assigned content. These satoshis are allowed to be tracked, transferred, and assigned meaning, thus acquiring non-fungible characteristics. Ordinal theory doesn't require side chains or tokens outside of Bitcoin, and it can be used without making any changes to the Bitcoin network.

The Ordinals Protocol allows for the attachment of various forms of content (such as images, videos, etc.) to satoshis, meaning that individual satoshis can be inscribed with any content, creating unique Bitcoin-native digital artifacts. These can be stored in a Bitcoin wallet and transferred using Bitcoin transactions. The inscriptions are as permanent, immutable, secure, and decentralized as Bitcoin itself.

The process of Inscription is essentially binding the uploaded data to a specific satoshi, accomplished by sending the satoshi to be inscribed into a transaction. This process is similar to the NFT minting process on Ethereum, forming such Bitcoin NFTs. This allows for specific tracking, transfer, storage, purchase, and sale of the satoshi, which is unique and has a quantity limit.

Because it assigns specific numbers to satoshis according to the order of mining, even if the same content is uploaded, it forms individuals with different serial numbers. Of course, there are many differences between this and the functionality of NFTs based on the Ethereum ERC-721 standard. Casey also emphasized that the Ordinals Protocol is not an NFT protocol.

Continuing Exploration: The Experiment of BRC-20.

BRC-20 is an experimental Bitcoin fungible token standard proposed by @domodata, based on the Ordinals Protocol. Of course, it was directly declared as "an interesting experimental standard" in its statement. The BRC-20 token standard uses Ordinal inscriptions to deploy token contracts, mint tokens, and transfer tokens.

From the above, we know that attaching any information to each satoshi generates non-fungible token characteristics. However, ERC-20 is actually designed for issuing standardized fungible tokens, so the BRC-20 on the Ordinals Protocol generates standardized fungible tokens.

The first token generated in this way is ORDI, with a total quantity of 21 million, minted according to the order of on-chain confirmation time. Thus, the Ordinals Protocol + BRC-20 implemented asset issuance and accounting based on the Bitcoin main net. By the way, the unit price of ORDI exceeded 1 USD at the time of writing this article.

According to the article 'Basic Design and Principles of BRC-20' published by @domodata, it is evident that they are experimenting to see whether ordinal theory can help realize new use cases for Bitcoin, as follows:

Currently, compared to Ethereum NFTs, Bitcoin NFTs pose no risk of content loss, contract risk, and have lower minting costs. After all, fundamentally, it is an asset issuance behavior based on the Bitcoin mainnet. This behavior can expand the application scenarios of the blockchain, but at the same time, it may occupy the already scarce storage space of the Bitcoin network to a certain extent. Regardless of whether it ultimately holds value, both the Ordinals Protocol and BRC-20 have shown us the potential for innovation in Bitcoin.

References

• @domodata《brc-20：experiment》https://domo-2.gitbook.io/brc-20-experiment/

• MYTH.BTC：《What are BRC-20 tokens on Bitcoin?》https://mythbtc.xyz/brc-20-token-standard-bitcoin/

• Casey Rodarmor：《Ordinals：Handbook》https://docs.ordinals.com/