BRC-20 tokens are an experimental fungible token that uses a loophole in Bitcoin’s 2021 Taproot upgrade to add a small amount of data to individual satoshis. (As a reminder, 100 million satoshis represent one Bitcoin). In 2014, a protocol upgrade allowed Bitcoin users to attach small amounts of arbitrary data to each transaction in an effort to limit the amount of data stored on the blockchain. The 2021 upgrade expanded what could be saved directly onto the blockchain, allowing everything from GIFs to sound files to be stored. BRC-20 tokens now use this process of “inscription” to add a short piece of JSON code to create tokens and track their existence.
A sample BRC-20 token deployment
Tracking these inscriptions requires a system that assigns distinct IDs to every satoshi. BRC-20 tokens currently use one known as “Ordinals,” which was introduced by developer Casey Rodarmor in January 2023. The system assigns numbers to all 2.1 quadrillion satoshis in their minted order.
It’s not the first time developers have attempted to store more information on the Bitcoin blockchain. Layer 2 protocol Stacks (STX-USD) uses a secondary blockchain to store data and then creates transactions on the Bitcoin blockchain to validate. Miners send predetermined amounts of Bitcoin to specific addresses to “complete” a transaction on the Stacks network.
But BRC-20 tokens take this further by assigning information directly onto the Bitcoin blockchain in a traceable, standardized way.