The recent explosion of the BRC-20 token standard, a fungible token standard using the Ordinals Bitcoin protocol, has sparked a lot of discussion about the necessity of layer 2 solutions compatible with the Bitcoin blockchain.
This is because given that the new token standard involves inscribing JSON data using Bitcoin's Ordinals protocol, bitcoin transaction volume has drastically increased and the network has been getting bogged down as users seek to create their first BRC-20 tokens so they can deploy, mint, and transfer tokens.
For this reason, users and exchanges are exploring how layer 2 solutions like Lightning Network can help lighten the load. In this article, we’ll explain how Bitcoin Ordinals and the BRC-20 token standard are pulling layer 2 Bitcoin projects into the spotlight.
The Impact of the BRC-20 Token Standard Explosion
In just a couple of months, the BRC-20 token standard on Bitcoin has shaken up the crypto ecosystem. Since its launch on March 8, 2023, BRC-20 tokens have exploded, reaching a market cap of nearly $1 billion by May 9.
This huge $1 billion market cap milestone is unprecedented in such a short period of time and while BRC-20 values are still highly volatile, the impact is not going unnoticed since the BRC-20 token frenzy reached its first peak at the beginning of May.
The volume of transactions BRC-20 is driving up Bitcoin’s layer 1 fees. That’s where layer 2s (L2s) come in.
Bitcoin Layer 2 Benefits from BRC-20 versus ERC-20
The new BRC-20 token standard is different from other token standards like ERC-20, as we’ve previously discussed. One of the benefits of BRC-20 is that everything happens completely on-chain without the use of smart contracts or other centralizing mediums. This is a big step for trustless technologies on Bitcoin, but has driven up transaction fees on the network.
A BRC-20 layer 2 network can take a lot of the token minting and trading transactions off the main chain. The fact that this is necessary on a blockchain like Bitcoin, compared to Ethereum, is creating a need for layer 2s in the BRC-20 ecosystem. ERC-20 tokens can and do utilize layer 2 solutions, but BRC-20 is making layer 2s an urgent necessity.
BRC-20 Token Standard and Bitcoin Layer 2 Projects
One of the most popular layer 2 solutions to benefit from the spike in BRC-20 transactions is the Lightning Network (LN). In fact, exchanges like Binance and Coinbase are swiftly moving toward Lightning integration, and the popularity of the BRC-20 standard is only adding to demand for L2s.
In May 2023, for instance, Binance briefly paused bitcoin withdrawals from its exchange due to network congestion. This ultimately informed Binance's decision to start integrating the Lightning Network.
Another major crypto exchange, Coinbase, is also working to integrate the Lightning L2, with Coinbase CEO Brian Armstrong tweeted in April, “Lightning is great and something we’ll integrate.”
Lightning still requires large block space on-chain, but the number of transactions waiting in the mempool doesn’t affect off-chain transactions on Lightning. This allows many BRC-20 transactions to happen off the network. They’re then confirmed on-chain in chunks via an open Lightning channel.
Bitcoin Request for Comments (BRC-20) Discourse and BRC-21 Proposal
As with everything in the crypto world, there are many points of contention about what’s best for the world’s dominant blockchain.
Some say that “meme culture” and NFT fun should be taken off the Bitcoin network altogether. They see the rising gas fees as inexcusable for minting meme tokens while users in Africa and South American want to use the blockchain for urgent banking needs.
Bitcoin’s high fees in recent weeks are, according to some, hurting the long-term adoption of crypto. Even with an L2 solution like Lightning, some say they still can't open channels on Lightning because gas fees are too high.
Others, however, see BRC-20 and the Ordinals Protocol as a catalyst for new solutions that drive innovation. With a larger need for L2s like Lightning Network, exchanges and users will be motivated to find new use cases. The BRC-21 proposal is an example.
Behind the BRC-21 Proposal
The BRC-21 Proposal aims to enable minting and redeeming fully decentralized, cross-chain BRC-20 tokens on Bitcoin. It would allow tokens created on other blockchains like Ethereum and Polkadot to be minted on Bitcoin.
However, the BRC-21 experiment proposes that its main use case will be, “Deploying decentralized stablecoins onto Lightning Network or similar payment protocols.” The proposal suggests that, instead of creating complicated solutions for deploying stablecoins on Bitcoin, BRC-21 could deploy stablecoins onto an L2 like Lightning much more easily.
Bitcoin Blockchain Smart Contracts and BRC-20 Utility
The use cases for Bitcoin L2s are only growing, as they open new possibilities for cross-chain interoperability and scalability. They also allow things like smart contracts, with layer projects like Stacks and Lightning Network are bringing a whole world of utility that no one thought would exist on Bitcoin.
Nearly anything can be minted on Bitcoin with Ordinals inscriptions and new kinds of cross-chain transactions are being conceptualized. It will also be a huge benefit if high non-fungible and fungible BRC-20 transaction volumes force scalability solutions.
If you want to dip your toe in the water of BRC-20 tokens, here are a few tips to get you started.
BRC-20 Compatible and Integrated Bitcoin Wallets
To begin, you’ll need a Bitcoin wallet. Some common BRC-20 wallets are UniSat, Xverse, and OKX Wallet. This will allow you to hold and trade BRC-20 tokens and in many cases, you can even mint your own BRC-20 token.
BRC-20 Marketplaces, Exchanges, and Trading
BRC-20 and Bitcoin Network Scalability
The exact results of BRC-20 are still to be determined. After all, it’s a development that is only months old. But the more people use new tools and protocols like BRC-20 and L2 solutions like Lightning, the brighter the future of Bitcoin utility becomes.
L2s like Lightning Network are growing in popularity as users begin to see their value. In the end, if Bitcoin or crypto at large ever wants to see worldwide adoption, it’s necessary to continue improving usability and scalability for everyday users.