Summarize

The emergence of the Ordinals protocol has brought new narrative space to the BTC ecosystem. Recently, the re-creation of the BRC-20 token standard based on Ordinals has pushed the market FOMO sentiment to a climax. In this research report, Huobi Research discusses the origin of the Ordinals protocol, the opportunities and current data of the BRC-20 token, and the future development of the BTC ecosystem.

The Ordinals protocol gives BTC's smallest unit, Satoshi, a higher transaction and collection value, opening a new door for the development of the Bitcoin ecosystem. The Ordinals NFT market continues to grow, and its infrastructure will become an important track. The attempt to implement the BRC-20 token standard has triggered a new wealth effect, and more than 18,279 BRC-20 projects have been minted on the chain. The trading market has expanded rapidly, and Unisat has emerged as a dark horse, accounting for more than 50% of the trading volume. BRC-20 tokens have both risks and opportunities. BRC-20 still has many defects, but it also creates some possibilities for the future development of the BTC ecosystem. The BTC ecosystem is in a very early stage, and developers and the community need to continuously tinker with standard designs and build a sound infrastructure.

The crypto market is always full of hot spots. Recently, the popularity of BRC-20 has gradually increased, replacing the coin issuance and airdrop effect of Arbitrum. BRC-20 is an experimental alternative token standard for Bitcoin proposed by domo@domodata based on the Ordinals protocol. Ordinals has opened up a new narrative for the BTC ecosystem and decentralization.

Since its birth, the core value of BTC has always been decentralization and free trading. It is also the only cryptocurrency with commodity attributes recognized by the U.S. Securities and Exchange Commission (SEC). The BTC network is not Turing complete, but there have always been developers who want to develop the BTC ecosystem and build an ecological empire similar to Ethereum. For example, the BTC second-layer network project and the Web5 network proposed by Jack Dorsey are all hoping to develop a more powerful ecological project based on the decentralization of BTC.

1. Ordinals Protocol: The Renaissance of BTC

Since Casey Rodarmor created the Ordinals protocol on December 14, 2022, more than 6.41 million NFTs or tokens have been minted as of May 14, which has opened a new door for the development of the Bitcoin ecosystem. BTC NFT is defined based on the smallest unit of measurement in the BTC network, Sats (Satoshi). The Ordinals protocol assigns a unique identity to each Satoshi, i.e., number + annotation, making each originally homogeneous Satoshi a unique "NFT". The Ordinals protocol gives Satoshi higher transaction value and collection value.

Figure 1. Ordinals-Inscriptions (overtime) (Source: dune, @dgtl_assets)

BTC NFTs minted based on the Ordinals protocol are fundamentally different from ETH NFTs. Users can engrave information on the chain, including text/pictures/audio/video, but the storage space of each block is only 4MB, which is the upper limit of Bitcoin inscriptions.

ETH's NFT uses smart contracts based on the ERC-721 or ERC-1155 standards for issuance and trading. The only information stored on the chain is the Token ID composed of integers. This string of numbers will be mapped to the URL to retrieve the Metadata (name, description, image address) about the NFT. NFT Metadata is usually stored on IPFS or centralized servers. The information in BTC NFT is completely on-chain, and no Metadata needs to be stored off-chain. An NFT includes a number, that is, the mining order starts from 0, which ensures the uniqueness of each Satoshi. Precisely because NFT is truly stored on the chain, the information contained in NFT is limited in size and cannot be modified. This is also the reason why BTC enthusiasts are chasing it.

More and more blue-chip NFT projects have joined the BTC NFT ecosystem and have been successful. Yuga Labs' "Twelvefold" won the bid with a maximum bid of 7.115 BTC. According to a research report by Galaxy, by 2025, the Ordinals NFT market will reach $4.5 billion, and by the second quarter of 2023, the market infrastructure of Ordinals NFT will be perfected. Developers will also continue to explore new decentralized software or Bitcoin expansion technologies.

2. BRC-20: Ordinals Protocol Evolution

On March 9, the BRC-20 protocol was informally proposed by founder domo, which triggered the FOMO effect. According to ordspace.org, as of May 14, there were more than 18,279 BRC-20 token projects with a total market value of more than $500 million. Currently, the transaction volume related to the BRC-20 protocol on the BTC network has exceeded the transaction volume of non-Ordinals protocols. On May 7 and May 14, the BRC-20 protocol transaction volume once accounted for more than 65%, and market sentiment seems to continue.

Figure 2. BTC network transaction volume category ratio (Source: dune, @cryptokoryo)

The BRC-20 protocol is a technology that uses the Ordinals protocol to create and trade homogeneous tokens (FTs) on the Bitcoin blockchain. It uses JSON data token contract information, including the token's name, symbol, total amount, decimal places, etc. The name "BRC-20" is a play on Ethereum's ERC-20 token standard, but BRC-20 tokens cannot interact with smart contracts and cannot perform any automated operations.

Figure 3. BRC-20 ordi deployment code (Source: twitter, @domodata)

2.1 Ordi Token Price Miracle

Ordi is the first token issued under the BRC-20 standard, with a minting limit of 1,000 tokens per coin, totaling 21,000,000 tokens. Ordinal wallets such as Unisat quickly deployed tools applicable to the BRC-20 standard, and in less than 18 hours, all 21,000,000 ordi tokens were minted. The price of Ordi also rose from $0.1 to $29.04 in just three weeks, a hundredfold increase.

2.2 Rapid Expansion of Ordinals Trading Market

The BRC-20 token mechanism is somewhat complex and requires additional steps for storage and trading. Specifically, users need to run a full node when minting Ordinals; in addition, there is no on-chain automatic market maker on Bitcoin, which requires secure secondary market transactions. User demand and potential huge fee income have dramatically accelerated the emergence of the Ordinals trading market and even ushered in fierce competition. These infrastructure and auxiliary tools mainly serve Ordinals NFTs, BRC-20 tokens, and BTC domain names.

Ordinals went through a two-month dormant period after its birth. During this period, Magic Eden recovered from the trauma of Solana and switched to the BTC NFT trading market, gaining the first trading volume. With the emergence of BRC-20, Unisat became the dark horse of the trading market. Currently, Unisat has become the number one in trading volume, with more than 50% market share. The birth of these tools and trading markets has promoted the multiples of more BRC-20 tokens, resulting in more than 30,000 ordinal inscriptions being minted in a single day.

Figure 4. Comparison of the number of transactions in the BTC trading market (Source: dune, @domo) 3. A carnival driven by multiple parties

BRC-20 tokens have greater room for hype than BTC NFTs. From the perspective of retail investors, exchanges, developers, and miners, this is a carnival that is mutually beneficial.

Victory for BTC Miners

The minting and trading of BRC-20 has brought unprecedented pressure to the BTC network. The minting and trading of a series of tokens such as BRC-20 have greatly increased the transaction fees of BTC. According to glassnode data, the number of BTC on-chain transactions reached 680,000 and 670,000 on May 1 and May 10, respectively. On May 7, the Bitcoin network-wide transaction fee was 403.91 BTC, while just one month ago, the single-day Bitcoin network-wide transaction fee was only 21.89 BTC, an increase of nearly 18 times. As a result, the Bitcoin transaction fee rate has set a record high in the past 6 years. The high transaction fees and block rewards have created amazing profits for miners.

Figure 5. Bitcoin miners’ fee income ratio (Source: glassnode)

Joining of leading ecosystems and institutions

Blue-chip Ethereum NFT projects such as Yuga Labs, Crypto Punks, and BAYC have already joined the Bitcoin ecosystem and issued NFTs. NFT markets such as Magic Eden and several leading exchanges are also supporting the Ordinals ecosystem. For exchanges, they can have more opportunities to manage assets and receive more commission income. In order to enter the BTC ecosystem early and establish relationships with the community and developers, many exchanges are more willing to be the first to try it out than investment institutions.

The BSV community’s support

According to observations, a large number of BRC-20 ecological applications currently come from the original BSV community developers, including the BRC20 wallet Unisat, which is backed by the Chinese development team of the previous BSV ecosystem and has developed the smart contract solution Sensible Contract on BSV. BSV community members have once again gained wealth on the BRC-20 track. The popularity of BRC-20 has also provided development opportunities for developers focusing on the POW chain.

4. Risks and opportunities

The current BRC-20 token development is still in its early stages, with strong meme attributes and innovative concepts, but no actual use scenarios. Moreover, the BRC-20 standard is not as comprehensive and strict as the ERC token standard, which is not considered to be the standard for the fungibility of Bitcoin and ordinals. As founder Domo said, this is just an experiment, and the Bitcoin community is encouraged to tinker with the standard design and optimization until a general consensus is reached on the best practice performance. After that, ORC-20 and BRC-721 token standard protocols appeared one after another. These token standards have made improvements in scalability, adaptability and security.

BRC-20 may be an interesting social experiment, but it cannot be ignored that it has many flaws: (1) The ecological infrastructure of BRC-20 tokens is almost zero, and most of the tokens are meme attributes and have no use value; (2) The BTC ecosystem does not provide a liquid exchange and cannot guarantee the security of token transactions; (3) Because BRC-20 introduces a more complex mechanism for asset management, it requires additional tools or platforms, which leads to security being linked to the platform and vulnerable to malicious attacks, which violates the decentralization of BTC; (4) Regulatory risks, BTC is more like a commodity, but BRC-20 tokens may facilitate an unregistered securities market on the Bitcoin blockchain.

In addition, the FOMO sentiment caused by BRC-20 tokens has led to severe congestion in the Bitcoin network. On May 8, there was a rare phenomenon of no blocks for one hour. At the same time, when Bitcoin fee income continues to exceed block rewards, it may cause time-bandit attacks. Miners will choose to process transactions with higher fees and ignore transactions with lower fees. At present, the number of unconfirmed transactions on the BTC network has exceeded 300,000. Many BTC supporters are dissatisfied with the ecology of Ordinals or BRC-20, and believe that this is an attack and damage to the BTC network.

4.1 Future development of BTC ecosystem

Any new attempt will cause controversy and bring new thinking. We can see more possibilities of BTC narrative through BRC-20 and prepare for the next wave of wealth codes. As more and more developers pay attention to the BTC ecological track, solutions to the congestion problem on the chain continue to emerge. I believe that the BTC ecosystem will gradually prosper.

Better token standards and smart contract markets

Today, some exchanges and wallets have joined the discussion of alternative token standards based on BTC. This includes replacing JSON data structures to reduce block space consumption. Ordinals protocol or other more protocols require better tools for indexing and managing these tokens. These all require industry developers and leaders to participate in the discussion.

Attract more investors

At present, the launch of tokens such as BRC-20 is more of a boost to the secondary market, and investment institutions are not very interested in participating. The main reason is that there are still too many controversies about the emergence of token standards such as BRC-20. However, the innovation brought by the Ordinals protocol is also a new attempt at the future development of the BTC ecosystem. The Renaissance of BTC will reshape investors' stereotypes of the BTC ecosystem.

BTC Layer 2 may usher in a second spring

With the prosperity of Ethereum's second layer, many developers have flocked to the BTC second layer network. The early well-known one is the Lightning Network. The use cases of the Lightning Network include social platform reward payment, cross-border remittance, merchant payment, transfer transactions, etc., which can meet the needs of various payment scenarios. It is also one of the best ways to solve the current network congestion. In addition, there are Liquid, RSK, and Stacks projects. The BTC ecosystem is still in its early stages.