This year, BRC20 has gone through two long cycles of activity, breaking the long-term dullness of the BTC economy. The community has shifted its focus back to BTC-related concepts. Although BRC20 is still in its infancy, market enthusiasm has already caused quite an impact across the crypto landscape.
BRC20 is based on Bitcoin's Taproot upgrade. It works by recording information in a specific format on the Bitcoin blockchain, which is then parsed by indexing protocols and converted into users' virtual assets.
In the first half of this year, BRC20 experienced huge volatility. The prevalence of mint scripts and bots limited BRC20 deployment, leading to an overall decline in users' MINT frequency. This resulted in a technical-induced calm period for the BRC20 market.
As shown in the chart, BRC20 saw a significant revival starting October 24th. In a short period of time, BRC20's total TX exceeded the peak of the previous cycle. User activity surpassed the May outbreaks of ORDI and MEME, although fees still lag far behind May levels.
Unlike the trading and transfer of traditional tokens like ERC20, BRC20 activity is centered around Minting, similar to NFT user behavior. More users choose to hold and FOMO. BRC20's issuance model causes scarcity, reinforcing users' belief in its speculative potential. Coupled with inherent liquidity barriers, on-chain speed and fee thresholds, users rarely choose to transfer or sell before making some profit.
After the BRC20 track warmed up, Mintable tokens with different daily names became available for users. Players mostly learn about and Mint relevant inscriptions through private communities. Community sentiment is mostly FOMO-driven, similar to MEME concepts. Most BRC20 communities compare Minted inscriptions to ORDI and Sats, with higher expected returns leveraging users' speculative psychology, reasonably hyping each inscription's bubble.
Additionally, support from top centralized exchanges like OKX and Binance further fueled community speculative sentiment. Exchange listing expectations have gradually become a core narrative for most BRC20 communities.
Why Does BRC20 Produce Huge Pumps?
Leaving aside community and artificial speculation for now, BRC20 has unique value performance at the underlying level.
Unlike traditional tokens, BRC20 pricing is similar to NFTs. Let's compare:
Take the ERC20 token CRV for example. It has $2,433,643.22 in liquidity on Curve. For CRV to rise 100%, the market needs at least $1.4 million in WETH or USDT purchases.
More DeFi and DEX platforms consolidate liquidity, like Curve V2. For non-stable assets, it uses a weighted sum of constant product and constant price curves to derive a new market making curve. An internal oracle dynamically adjusts this price and liquidity concentration, making it harder for ERC20 prices to rise, but improving liquidity efficiency.
In contrast, BRC20 allows users to buy listed assets through NFT-style on-chain bids. This significantly lowers the cost of bottom-sweeping.
OTC guides BRC20 pricing. Based on community issuance, most users prefer appropriate OTC dealers for trading, given high on-chain fees. This gives BRC20 speculative pump potential amid low liquidity. With minimal order book depth, FOMO and concentrated buying from a few can quickly boost BRC20 value. The liquidity cost is far lower than most tokens with consolidated liquidity.
Violent community pumps reflect in on-chain order books, which in turn define BRC20 value early on. Unlike MEME's extremely low market cap, when BRC20 coins appear with high fees or concentrated on-chain fomo, users rush to Mint and hold to ensure investment exposure.
As more users Mint and hold significant quantities, they buy into the high wealth effect speculation, further fueling market sentiment and the asset bubble, although 90% of BRC20 value is in the bubble.
Continued FOMO-driven pumps are clear. Detached from rationality under gain anxiety, the community pushes the bubble to its limit under the token's narrative.
Is BRC20 Currently Likely to Boom?
With Binance offering perpetual contracts on Ordi, more bears look to profit from popping bubbles. This implies higher shorting risks for listed BRC20. Ordi's stable value will likely maintain overall BRC20 sentiment to some extent.
Additionally, due to high fee-driven FOMO, market liquidity flows to miners, further shrinking total BRC20 liquidity. Like NFTs, BRC20 fears a liquidity hub draining most of the sector's value, as with Otherdeeds in NFTs. Although it captured significant value, it did not provide lasting value locks, directly causing the NFT market to quickly enter a bear market.
At the technical level, BRC20 has many problems in its current early stage:
Firstly, as a Bitcoin-based asset indexing protocol, Ordinals asset states depend on on-chain data. State transitions can be unclear due to block confirmation delays. This is mainly because:
- Ordinals indices rely on block data. Asset states are only finalized after on-chain confirmation. This means Ordinals state changes do not reflect instantly like on Ethereum.
- Block confirmation takes fairly long. New blocks may revert previous ones during this time, rolling back Ordinals states.
- User deposit/withdrawal platforms like exchanges have state change delays. Deposits may show as successful but remain unconfirmed on-chain.
The above issues can lead to:
- Inconsistent exchange and Ordinals states, enabling fake deposits/withdrawals. Attackers could withdraw on exchanges and double-spend with transaction reverts during the window.
- Asset transfer order confusion between platforms. If platforms process blocks sequentially, later-confirmed blocks can reflect states first, messing up asset flows.
- Front-running new BRC20 issuance by monitoring mempools. Grabbing tokens early compromises fair issuance.
Solutions involve:
- Improving consensus for faster confirmation at the consensus layer, e.g. seconds-level POS confirmation.
- Adding state locking and timeout rollbacks in Ordinals at the protocol layer to prevent transfers during unconfirmed states.
- Requiring certain confirmation numbers for platform transfers at the application layer, only considering states final after some confirmations and handling reverts.
- Processing states in block height order for sequential updates at the operational level, avoiding out-of-order issues.
- Monitoring mempools and intervening on suspicious activity to prevent front-running.
- Implementing deterministic deployment to prevent unfair issuance and protect early participants.
Looking back at the speculation from a technical perspective makes the bubbles worrisome.
We cannot be sure of fair issuance or if subsequent gains reasonably meet value expectations. If users hold high-value assets but face restricted community-based high-cost trading, market panic will ensue.
What Does BRC20 Still Need to Address in the Future?
Sats now exceeds $460 million market cap. Despite full circulation, it has not captured additional liquidity value. Prices are unlikely to hold based solely on community bubbles without reasonable exchange listing and market making. It urgently needs centralized exchange listing.
Like NFTs, unleashing liquidity is key for BRC20 value capture. Unlike Ethereum protocols, building BTC applications needs lightning and layer 2 infrastructure success.
NFT liquidity liberation relies on applying DeFi models. For example, BRC20 lending unlocks liquidity by letting users borrow against collateralized BRC20 at certain APYs. The released liquidity can further pump BRC20 value. Such risk leverage also significantly boosts prices.
Compared to ERC20 protocols like AAVE and Lido, BRC20 lending can offer far higher yields to attract buying and collateralization, while enabling diversified portfolio allocations beyond core assets.
Through stable user and value growth, BRC20 lending can attract more investors while maintaining liquidity, with larger borrowing pools also drawing more prospectors, further driving BRC20 value capture.
