The BRC-20 Grift Explained

Every cycle, a new financial product on a blockchain is pushed out to investors attracted to the excitement and potential for quick profits. The markets are open 24 hours a day, seven days a week, and prices fluctuate wildly. This can be a thrilling experience for some investors, but it can also lead to losses if they are not careful, but this is a “risk-on environment.”

The goal of these market participants is to find a token that is illiquid, take a position and then hope that they can exit through 3rd party promotors or promote it themselves.

These tokenised Ponzis have been running as long as you could fork Bitcoin, and it’s birthed an entire industry of altcoins in the process.

Block space is the new killer use case.

The latest iteration of pump-and-dump scams is closely tied to the Bitcoin ecosystem in the form of the BRC-20 token. These tokens, pretend to be similar to Ethereum’s ERC-20 tokens, offer a standard for creating and issuing new assets on the Bitcoin network. 

While BRC-20 tokens and ERC-20 tokens aren’t the same from a technical standpoint, but the end goal is the same. Selling one user something you created for next to nothing and enjoying the seignorage premium. The investor who created the token or got in early gets to exit the trade and pass the risk on to someone else.

BRC-20 tokens are marketed as a fun experimental standard demonstrating that you can create off-chain balance states with inscriptions. A demonstration that you can create secondary on-chain balance states with inscriptions instead of single NFTs.

So you’re making Bitcoin fun again, are you? Fun for whom? It isn’t fun for me since I am not into trading or gambling. I had my ICO tokenise everything phase back in 2016 and learned my lesson. 

• Now I want to stack sats and ensure I can secure as many of those satoshis on-chain without taking custody risk, should I be using a custodial exchange. 
• Now I want to stack sats and not add another massive premium on the high premium paid when I stack sats P2P.  

I am not here to have fun; I am here to protect myself against currency devaluation. 

But I can’t do that as often and cost-efficiently as I would like because someone refuses to spend their money on a Nintendo Switch or PS5 and would rather play games on the blockchain. So yes, I am biased against this kind of use case because it affects my use of Bitcoin.

I am honest about that. 

Sure, you paid the fees and are free to use the chain, but is this a viable use of your resources? 

Critics would claim I’m a salty maxi who “doesn’t get it?” But I’ve taken the time to look into the whole BRC-20 “economy” and lost a few brain cells along the way so that I can give you a detailed illustration of what the promoters are trying to sucker you into and why bidding up block space won’t end well for most of you.

What are BRC-20 tokens?

BRC-20 tokens are a new type of token that can be minted on the Bitcoin blockchain through serial numbers on satoshis tethered to a JSON file stuffed into the Bitcoin blockchain. 

While the name gives you the impression that they are similar to ERC-20 tokens on Ethereum, these tokens don’t have any consensus rules enforced on them, the issuer sets the parameters in the initial mint phase, and that’s as far as it goes. 

There is no smart contract, and third-party indexers provide most of the infrastructure to pull this data from the chain and then relay it in a way that resembles an on-chain token market. 

BRC-20 tokens are fungible with limitations; while they are all identical and can be exchanged for one another, only satoshis inscribed with these tokens are fungible; satoshis that are not inscribed are separate assets.

Think of a 1 dollar bill, but instead of the dollar bill’s worth set to 1 dollar, I draw a serial number on it with a ticker, and now I claim this 1 dollar bill holds one token worth 100 dollars. 

If you want this 1 dollar bill from me, you can’t give me 1 dollar in exchange; you have to give me 100 dollars in exchange for it. There is a cohort of people who believe that these dollar bills can be traded on a secondary market and respect the prices set for these marked dollar bills.

What are secondary asset markets on Bitcoin?

If you were to inscribe a satoshi or you purchased an inscribed satoshi, and you approached a rational Bitcoiner or an exchange that doesn’t recognise the ordinals protocol, they wouldn’t acknowledge the premium created by the inscription and would pay you the going rate for a satoshi.

Now that’s not going to fly for someone who paid a few hundred dollars to inscribe these satoshis; they’re looking for a way to realise the premium they created out of thin air and reap the profits. 

This is where secondary markets come into play. Secondary asset markets on Bitcoin are markets where users can trade BRC-20 tokens and other digital assets.

The introduction of BRC-20 tokens has given rise to secondary asset markets on the Bitcoin network.

These markets allow for trading these new “assets” without the need for a centralised exchange. 

Since a satoshi can represent a wide array of assets, the secondary markets run nodes using the ordinals protocol and create indexers that validate the satoshi has an inscription and what token is attached to that satoshi.

These secondary markets will help facilitate the listing of token sale offerings, token minting and token trading. While the underlying satoshis are still being traded and moved from wallet to wallet, the trades are settled based on the price of the inscribed asset instead. 

Secondary asset markets on Bitcoin offer a number of advantages over traditional exchanges, including access to buyers and sellers, greater liquidity, and more transparency.

The secondary markets are public-facing websites, which anyone can view offers, while those who want to trade privately utilise OTC trading desks instead.

So why the need for block space?

Since you take ownership of the inscribed satoshis on-chain, these BRC-20 tokens are seen as inheriting the properties of the underlying and claim also to be non-custodial, meaning that users have full control of their tokens and do not need to rely on a third party to store them.

Since the tokens are attached to the satoshis to move them, trade them or mint them, you need to broadcast an updated status of these tokens to the Bitcoin blockchain. Each status update requires you to perform a transaction, which requires block space and fees. 

To better understand what I mean, we will go through the life span of a BRC-20 token and why it requires more block space than a standard satoshi.

How are BRC-20 tokens minted?

BRC-20 tokens are minted using a process called inscription. During the inscription process, a user broadcasts to add data to individual satoshis, or 0.00000001 BTC. Once a satoshi has been inscribed, it can be used to create a BRC-20 token. 

The data that is added to the satoshi can include

There is no smart contract for these tokens, only a loose set of rules for the token to update its status, manage total supply and allow it to be transferred.

The minting process is typically controlled by the token creator, who could choose to mint all the tokens if they have enough Bitcoin to match the supply set out initially and then resell on the secondary market. Alternatively, the token creator can also set up a BRC-20 to allow others to create new tokens based on certain minting limits. 

The theory behind this form of minting versus that of ERC-20 tokens which could have a low-cost pre-mine or create an issuance schedule favourable to early or large holders, is that BRC-20 tokens require you to submit the Bitcoin upfront, and everything is done on-chain. 

There is a cost in the number of satoshis you inscribe, how many inscription intervals there will be for you or the early crowd who participate in the mint and, of course, the on-chain fees paid to miners.

So instead of project creators and pre-mine investors simply creating tokens and hyping them, BRC-20 tokens allow for those sitting on secondary markets waiting for new mints to pop up and capture their portion of the supply. Once the supply has been fully minted, anyone who wants to get in will need to purchase it from one of the early minters in the secondary market. 

It reminds me of the domain squatting market, where if a trend erupts, let’s say it’s AI, you would go ahead and front run by buying as many “.AI” domains as possible and hope that you can resell them.

The listing phase

The minters, of course, want to make a profit, and because these tokens are so illiquid and require several on-chain transactions to sell, this is all added into the token price and reflected on these secondary markets.

If you wish to sell your minted BRC-20 tokens, and they’re not held in a wallet that can interact with these markets, you will need to move your UTXO to that wallet first, either on-chain or by restoring the private keys. 

Once you’re set up with a wallet that is compatible with a secondary exchange, you need to perform a series of transactions.

• You first need to broadcast a transferable transaction on-chain to update the status of the JSON file to let marketplace indexers know this set of tokens can be transferred for sale. 
• Then you need to broadcast a listing transaction on-chain to update the status of the JSON file to let marketplace indexers know this set of tokens is available for sale. 
• If you purchase a token, you need to broadcast a transaction to pay for the token, and the seller needs to broadcast a transaction to move the tokens to your wallet. 

As you can tell, if this process is constantly repeated on-chain, it can clog up the blockchain pretty quickly as you’re not always transferring Bitcoin but updating statuses of JSON files attached to the Bitcoin.

As these transactions take place, people get impatient, and they begin to bid up block space to get their transactions confirmed first. 

The economics of BRC-20 tokens.

The economics of BRC-20 tokens are still in their early stages, but several factors will likely influence their value. 

These factors include:

• Demand: The demand for BRC-20 tokens will be driven by several factors, including the number of secondary asset markets that support them, the ease of use of these markets, and the overall adoption of Bitcoin.
• Supply: The supply of BRC-20 tokens is limited by the number of satoshis that can be inscribed. This limited supply will likely help to keep the value of BRC-20 tokens relatively stable.
• Fees: The fees associated with minting and trading BRC-20 tokens will also influence their value. The demand for block space will determine these fee influences at the time of minting.
• Distribution:  If it’s one person minting all the tokens and there is demand, this individual seller can maintain a low price to profit from their mint. If the minting was more distributed during a frenzy of people trying to secure a portion, they might be more reluctant to sell, which can be reflected in the price.
• Hype: As is the case with meme coins or any token, any press, regardless of what it is, can generate buyers.
• Unit bias: Meme coin traders usually are a collection of people who fall for unit bias; they’re looking for something they can own, one or many tokens under a certain price range, for a purchase under 100 dollars, 1000 etc. 
• Illiqidy: Since these tokens can only be acquired on-chain (centralised exchanges are coming), the market is highly illiquid, and one sale can reflect in a massive price rise and reflect in the market cap, attracting naive investors who think they can profit from these illiquid markets. 

These tokens have no use case other than hoping you can squat on a ticker for a short period of time and hoping that some media hype and social media promotion bring in another round of exit liquidity after you so that you can realise your position and take the risk off the table.

When you pass on that risk at a higher cost, the next person needs to hold on, hoping they can repeat the process, which is a dubious proposition at best.

What is the appeal of BRC-20 tokens?

BRC-20 tokens are appealing for one real reason, and that is to be able to sell satoshis at an irrational markup. The amount you can mark up is arbitrary and can be seen by some as a Veblen good.

Avoid this Bitcoin wealth redistribution.

BRC-20 tokens are a new and innovative way to generate profits for a select few through seignorage and information asymmetry. The creation of BRC-20 tokens will lead to a redistribution of wealth on the Bitcoin blockchain from those who are naive or don’t understand the value of the underlying satoshis. 

Those who are able to mint and trade these tokens early on could potentially profit from the increased early demand and realise profits through the exit liquidity generated. At the same time, the vast majority will be left with a tiny balance of satoshis in an on-chain wallet that will not compensate for all the fees paid, while the inscribed asset heads towards zero with a lack of buyers. 

If you are considering investing in BRC-20 tokens, it is important to do your own research, understand the risks involved, and realise that you could lose everything you’ve put into the process. 

Do your own research.

If you want to learn more about BRC-20 on Bitcoin, use this article as a jumping-off point and don’t trust what we say as the final say. Take the time to research other sources, and you can start by checking out the resources below.

• GitBook – brc-20
• unisat.io

A token of no appreciation.

So what do you think of BRC-20 tokens? Will it take off and move more speculation to Bitcoin? Will the tooling used to create these standards become widely adopted? Or will this all fall flat on its face like previous attempts to add non-native assets on the Bitcoin base chain?

Let us know in the comments down below.