The Problems With BRC-20 Tokens

Friday, May 12, 2023

The new BRC-20 tokens have taken the crypto world by storm this month, reaching over $1 Billion in market cap. Almost all the tokens are meme coins, but that hasn’t deterred speculation, and we are seeing the first dapps and decentralized exchanges pop up. 

To associate these tokens with Bitcoin, applications use the Ordinals protocol to add a JSON script to an inscription in Bitcoin’s witness data. 

However, the technology that is being used is heavily flawed and isn’t in line with the axioms of the core Bitcoin community.

Network Pollution

There are currently 390,000 unconfirmed transactions in the Bitcoin mempool. There are so many transactions coming in for the block size that transactions set to lower priority are getting stuck. 

To clear this backlog, it would take mining 179 blocks. Given the average block time of 10 minutes, this would take 1.24 days of only processing the stuck transactions. 

When users started seeing thousands of transactions sending 546 sats ($0.16 USD) while paying nearly $10 in transaction fees, they first believed that it was a coordinated DDoS attack. In reality, it was thousands of users minting and trading ORDI, a meme token minted in BRC-20.

We built Mintlayer specifically for DeFi use cases and tokenization. Every mint of BRC-20 tokens requires two transactions for a single batch, and there can be tens of thousands of batches, (VMPX took 339,193 transactions to fully mint), you can deploy a new token on Mintlayer with a single transaction. 

High Cost

Because of the stacked nature of the user interfaces being built, most transactions require the gas token for the exchange or BTC to pay the minting app, and a second payment in BTC for the network fees.

Double the fees practically mean double the cost, but the on chain pollution has driven average transaction costs for all Bitcoin transactions to over $30 as of May 8th. The Bitcoin blockchain has only witnessed transaction costs over $30 one other time, in April 2021. 

Transactions on Mintlayer only require a single processing fee and that you can pay in any token a blocksigner accepts. 

Transaction Speed

BRC-20 tokens are subject to slow speeds in two different ways. First, the network congestion causes transactions that aren’t high priority to be confirmed slower. The average Bitcoin confirmation time peaked at over 900 minutes several times during April. It is currently at 257.61 minutes, a 641% increase from one year ago. 

Trading BRC-20 tokens takes even longer. BRC-20 trades are subject to the mechanisms and work performed by the wallet or DEX chosen by each user. 

BRC-20 decentralized exchanges take over 10 minutes, and sometimes several hours, to complete a transaction which is significantly longer than Ethereum based Uniswap. 

Because of this slow speed, the current slippage is 100% on the most popular BRC-20 DEX, so you could lose all of your assets simply by completing a transaction.

Mintlayer’s transaction speeds will be on par with other layer 1 options, and moving DeFi transactions off of Bitcoin to Mintlayer will help keep transaction speeds on the base layer fast.

Not Trustless

The largest attack surface in DeFi is token bridges and wrapped tokens. In 2022, DeFi users lost $1.4 billion to bridge attacks by hackers. Mintlayer is working to solve this problem by enabling atomic swaps to trade native Bitcoin directly with any token on Mintlayer. 

The exchanges that have cropped up to trade BRC-20 tokens require a wrapped $BTC token to add liquidity. These platforms popped up in about a month, without the testing and audits required for securing tranches of Bitcoin with such a great value. These token bridges could be an easy opportunity for hackers.

Instead of addressing the friction and lowering the barrier of entry for new users, BRC-20 adds friction and requires using additional wallets and infrastructure that is currently not user friendly.

Confusing and Ripe For Scams

The entire ecosystem was set up to be misleading from the start. BRC-20 was chosen as the name to glean some reputation from the popular ERC-20 tokens on Ethereum, not because it was the 20th request for comment by developers. 

To even store BRC-20 tokens, you need an additional wallet. The workflow for doing a DEX trade includes installing a new wallet, adding both $BTC and the DEX gastoken, then wrap $BTC to actually trade. 

Now you go to the DEX interface and input your trade while agreeing to 100% slippage, and then go to the wallet’s website to process the transaction. 

This adds 2 new tokens and several extra layers of friction to the current process of using a DEX. 

Since all the tokens and tools are new, scammers can more easily take advantage of unsophisticated users chasing quick profit with identical token tickers and phishing attacks. BRC-20 creator @domodata warned users of one of the many security issues in a recent tweet saying “…just because a deploy function inscription is held by an address, it does not mean that the address owner deployed it!”

Introduces Regulatory Concerns For Bitcoin

All the BRC-20 tokens that users have minted so far are meme coins. They have neither utility nor value.

They are, however, commingled with sats to be recorded in the blockchain via inscription. This could cause issues for Bitcoin and every BRC-20 token minted if someone mints unregulated securities via BRC-20. 

On Mintlayer tokens are not commingled with one another, so the transgressions of one user will not affect other tokens or the platform as a whole.

They Were Not Designed For and Were Never Meant to Be a Legitimate Option for DeFi

The creator of BRC-20 tokens warned users in a Twitter thread “These will be worthless. Please do not waste money mass minting”. Hype has driven interest, but even the creator is warning you it’s a flawed idea and there is nothing inherently valuable there. 

BRC-20 tokens were positioned as if they were an official standard associated with Bitcoin, but some Bitcoin core developers are already planning how they can get rid of BRC-20 tokens. It will be as simple as a few lines of code in the next update. Since it’s considered a bug fix they won’t even have to wait for a major release. 

Mintlayer was built from the ground up to be as interoperable with Bitcoin as possible while retaining the large feature set and smart contract capability required for DeFi.

If you are currently working on a project or application for the BRC-20 ecosystem, consider applying for a grant through our ecosystem fund to build on Mintlayer instead.