ERC-20 vs BRC-20 Token Standards | A Comparative Analysis

Understanding Tokenization 

Tokenization is the process of converting the rights of an asset into a digital token on a blockchain. It involves issuing a blockchain token representing a unit of value or an asset. Tokens digitally represent a real tradable asset.

These assets can be physical, like real estate or artwork, or digital, like a share in a company or a utility within a specific ecosystem. They offer:

• Ownership representation
• Decentralized participation
• Transaction facilitation
• Diverse asset representation

Read More on Tokenization | Asset Tokenization Development | A Comprehensive Guide

ERC-20 (Ethereum Request for Comments 20) Standard

ERC-20 is an Ethereum standard for fungible tokens. Developers use this standard to build smart contract-enabled tokens that represent assets, ownerships, rights, cryptos, and beyond. ERC-20 enables developers to create tokens that are the same as other tokens. 

Characteristics 

Here are the characteristics of ERC-20 tokens:

• Fungibility: ERC-20 tokens exhibit fungibility and allow for seamless interchangeability. Each token of a specific type is indistinguishable from another, fostering uniformity in value.
• Divisibility: These tokens are divisible so that you can break them into smaller units. This feature enhances flexibility in transactions, accommodating fractional amounts.
• Interchangeability: It is a key feature that ensures that each ERC-20 token of a particular type is interchangeable with any other token of the same type. This facilitates smooth trading and usage across platforms.
• Standardization: ERC-20 tokens adhere to a standardized set of functions and events. This adherence ensures consistency and compatibility across various decentralized applications (dApps), wallets, and exchanges within the Ethereum ecosystem.
• Transparency: All token transactions and balances are visible on the public ledger so they operate with transparency.

Use Cases

ERC-20 tokens offer multiple use cases that make them a popular choice for a wide range of applications within the blockchain ecosystem:

• ICO (Initial Coin Offering) Crowdfunding: ERC-20 tokens are widely used for ICOs. They allow projects to raise funds by issuing and distributing their native tokens to investors.
• Tokenized Assets: You can tokenize real-world assets, such as real estate or art, using ERC-20 standards. This enables fractional ownership and increased liquidity.
• Decentralized Exchanges (DEX): Many DEXs utilize ERC-20 tokens for trading pairs. The standardization ensures compatibility across various platforms.
• Utility Tokens: Projects create utility tokens on the ERC-20 standard. These tokens provide access to specific features or services within their platforms.

Check It Out | ERC-20 Token Standard | A Compact Guide to Development

BRC-20 (Bitcoin Request for Comment 20)

The BRC-20 token standard, designed for the Bitcoin blockchain, is an experimental fungible token standard facilitating the development and transfer of tokens through the ordinals protocol. Unlike ERC-20, BRC-20 doesn't rely on smart contracts. Instead, it utilizes ordinal inscriptions.

Bitcoin ordinal inscriptions, introduced on Jan 21, 2023, by Casey Rodarmor, enable users to inscribe data, like JSON code, onto satoshi tokens. They provide a unique approach distinct from ERC-20's smart contract reliance.

Characteristics 

Here are the characteristics of BRC-20 tokens:

• Fungibility: Just like ERC-20, BRC-20 tokens excel in fungibility. Each token within a specific type holds identical values and functions. This ensures seamless interchangeability and simplified transactions. 
• Divisibility: Similar to ERC-20, BRC-20 tokens have divisibility functionality that allows them to be split into smaller units. This facilitates micro-transactions and fractional ownership.
• Non-Standard Interface: This is where BRC-20 stands out. Unlike ERC-20's standardized functions, BRC-20 embraces flexibility. Developers can tailor token functionalities to create unique features beyond the basic set. 
• Bitcoin Integration: BRC-20 tokens leverage the Bitcoin network's robust security and established user base. This integration offers the potential for wider adoption and familiarity compared to solely Ethereum-based tokens. 

Use Cases

BRC-20 tokens offer the following use cases:

• Peer-to-Peer (P2P) Transfers: Users can seamlessly move BRC-20 tokens across different wallets without intermediaries. BRC-20 tokens enhance efficiency by aligning with Bitcoin's transaction model, where fees are naturally charged in Bitcoin.
• DeFi (Decentralized Finance): BRC-20 tokens offer flexibility and seamless integration with DeFi protocols. These tokens are opening new possibilities for decentralized financial platforms like decentralized exchanges (DEX), yield farms, and lending protocols. 

Suggested Read | BRC-20 Token | Everything You Need To Know

Key Differences between ERC-20 and BRC-20 Tokens

Here are the key differences between ERC-20 and BRC-20 tokens:

Blockchain Standards and Development

BRC-20 and ERC-20 represent distinct token standards on separate blockchains. BRC-20 operates on the Bitcoin blockchain, while ERC-20 is native to the Ethereum blockchain.

ERC-20 and BRC-20 tokens differ significantly when it comes to their development. Developers create ERC-20 tokens using smart contracts on Ethereum. 

On the other hand, BRC-20 takes a non-standard approach, utilizing Bitcoin's existing UTXO model. Instead of building a smart contract, token information is embedded directly into satoshis, the smallest units of Bitcoin.

Operation

ERC-20 tokens operate seamlessly within Ethereum. Every transaction involving these tokens follows the established ERC-20 protocol. This ensures compatibility with Ethereum wallets, exchanges, and dApps. 

BRC-20 tokens take a more independent approach with parallel operation. BRC-20 transactions are validated separately from Bitcoin transactions, using a dedicated set of rules encoded within the inscribed JSON files. This creates a distinct layer of operation on top of the Bitcoin network. 

Integration

The integration capability of BRC-20 tokens holds a distinct advantage over ERC-20 tokens, particularly in streamlining remittance processes. BRC-20 tokens can utilize the Lightning Network (LN) and provide an efficient remittance solution without compromising network security. 

In contrast, while ERC-20 standards are designed for composability with other blockchains, this flexibility comes at a security cost. BRC-20 tokens, prioritizing security, avoid such compromises. This makes them a more secure option compared to ERC-20 tokens.

Flexibility

ERC-20 stands out for its inherent flexibility, granting businesses the ability to tailor tokens to specific use cases on Ethereum. This adaptability ensures precision in functionality and opens doors to a myriad of possibilities. 

On the other hand, BRC-20 tokens, rooted in the Bitcoin blockchain, initially present challenges in supporting a wide range of use cases. The ecosystem may find its strength in a focused approach, catering to specific sectors. 

Transaction Speed

Transaction speed is predominantly determined by the processing efficiency of transactions. On the Ethereum blockchain, transaction speed is influenced by the Maximal Extractable Value (MEV) concept. In Ethereum, users can offer higher gas fees to receive preferential treatment.  

In contrast, Bitcoin employs a different approach, writing data on blocks and relying on miners to validate them. Unlike the Ethereum blockchain, Bitcoin's transaction processing is not influenced by the ability to pay higher fees.

Explore More | BRC-20 Wallet Development | What You Need To Know

Choosing the Right Token Standard

While ERC-20 tokens offer flexibility and integration within the Ethereum ecosystem, BRC-20 tokens bring security and potential speed advantages to the Bitcoin blockchain.

You need to carefully consider your priorities, such as integration, security, flexibility, transaction speed, and community adoption, to guide your decision. Understanding these nuances helps you select the token standard that aligns with your vision. It can unlock the full potential of your digital assets and pave the way for success in the ever-evolving blockchain world.

Interested in token development? Contact us to hire crypto developers today!