The Promise and Peril of Bitcoin-Backed Tokens

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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 activity in the market. The proposed new standard was introduced in March by a coder known online as Domo, and it has a lot of exciting potential.

Tokens on Bitcoin are not a radically new idea in fact, one of the first big experiments in crypto, colored coins, was an attempt to do something very similar. But BRC-20s, like non-fungible ordinal tokens (NFTs), have been enabled by new features introduced in Bitcoins recent Taproot update.

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This 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 a few resources for techs who want to dig deeper into the BRC-20s. This basic primer for builders explains how to deploy BRC-20s and addresses some of the larger issues that remain to be resolved. This is a more in-depth technical overview of Domo. And this is a video introduction by YouTuber pazNGMI, which includes information about typing and wallets.

But Domo, and most other pundits, issued stern warnings against financial speculation in the new token format. In fact, right after the launch of the Experimental Standard, Domo said These were worthless. Please don’t waste money in droves.

With a flood of new BRC-20 memecoins being traded for real money, at least some people are clearly ignoring this warning. And it’s hard to blame them: in crypto, being first on anything 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 parts to the explanation.

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

But even that standardization might still be a long way off: the BRC-20 design isn’t necessarily finalized, let alone fully approved or adopted. In theory, there could be other ways to deploy tokens on Bitcoin, or other improvements to BRC-20 in its current form. If a competing or improved standard ends up being more widely adopted, the current wave of BRC-20s could become little more than digital museum pieces.

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

Importantly, this is a question because BRC-20s are not widely compatible with smart contract or decentralized finance (DeFi) systems. Although they borrowed their nomenclature from Ethereums ERC-20, they are not technically parallel, and regardless, Bitcoin itself does not have DeFi features. So if and when workarounds emerge, installing BRC-20 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 give them utility and value. There are certainly possible use cases for simple tokens on Bitcoin, but their structure may 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 the current BRC-20 limitations, even for degenerates happy to play the decentralized Ponzi game of memecoins. The lack of DeFi compatibility means that BRC-20s cannot benefit from the liquidity provided by DeFi services like trading pools. So even pure token speculation may not have the frothy edge of a similar token issued on Ethereum.

In fact, we were seeing that play out right now. A BRC-20 known as Pepe is among those being traded in now by a few daring underground dwellers. BRC Pepe and all other BRC-20s that currently exist had a combined fully diluted value (FDV) of $137 million as of May 2.

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

In short, the BRC-20s are a fascinating innovation with great potential. But if you’re looking for the lowbrow thrill of riding ephemeral pumps in animal-based casino chips, it seems Ethereum should always be your home base.

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