Castle Island Partner: BTC Strategic Reserve Bill Unlikely to Pass

This article will briefly introduce BTC L2 architecture, BRC-20 related content, and security perspectives for everyone.

Author: Beosin

Recently, the focus of discussion in the BTC field seems to have shifted to the BTC network, and BRC20 has also become a hot topic of discussion.

Everyone is discussing the emergence of BTC L2 expansion plan and BRC20 standard, whether it can bring more powerful functionality and scalability to BTC. However, from the current perspective, there is still too much speculation in the market. In this article, we will briefly introduce the BTC L2 architecture, BRC20 related content and security views.

What is BTC L2 architecture?

In the Blockchain, there is The Impossible Triangle, which consists of security, decentralization, and scalability. When introducing the Blockchain, only two out of the three can be achieved, but not all three at the same time.

BTC is a Block chain system that sacrifices scalability to maximize security and decentralization. The block time of BTC is about 10 minutes, while other common public chains such as ETH 2.0 and Solana have block times in seconds or even milliseconds. It can be seen that BTC has made a huge sacrifice in efficiency while maintaining the highest level of security and decentralization, which has generated a great demand for the scalability of BTC among a large number of Block chain participants.

BTC Layer2 is an extension scheme for BTC, mainly aimed at the scarce application scenarios of BTC and the relatively low operational efficiency, with the purpose of addressing the scalability dimension of The Impossible Triangle, such as the Stacks system.

The Stacks system is an upper-layer network on BTC that supports decentralized applications and smart contracts, connecting to the BTC blockchain system through a Consensus Mechanism that spans two chains, achieving the goal of having both the security of BTC and the rich application scenarios of smart contracts.

Stacks adopts a pyramid approach, with the base layer being the settlement layer (BTC), then adding Smart Contract and programmability on top of it (Stacks), and then adding scalability and speed layer on top of it (Hiro’s subnet). By adopting this layered approach, it not only has the same rich functionality as public chains like Ethereum, but also avoids many drawbacks of these complex public chains.

Stacks is the second layer of BTC, with some unique properties, such as its own Token, which serves as an incentive mechanism to maintain its own transaction history ledger and operate according to its own security scheme.

Although Stacks has added additional functionality to BTC, it has not changed the essence of BTC itself due to its Proof of Transfer (POX) consensus mechanism. This is also the reason why Stacks is distinguished from L2 scaling solutions on the ETH network, such as Polygon or Arbitrum, which can maintain the simplicity and security of BTC itself, while other functions and optimization speed are implemented on other layers. Even if other layers are compromised, the underlying layer (BTC) will not be affected.

What is BRC20?

To explain BRC20 clearly, we need to first introduce Ordinals.

Ordinals is a system protocol for numbering BTC’s smallest unit Satoshi (sats), which assigns a unique number to each Satoshi. Moreover, Ordinals also supports writing text, images, audio, video, etc. into Satoshi, making each Satoshi unique, similar to the familiar ETH-based Non-fungible Token (NFT), which we call BTC Non-fungible Token. Ordinals also artificially assigns rarity to these sats, dividing the sats numbers into the following levels based on specific events in the BTC network:

Regular: not the first Satoshi of its block;

Rare: the first Satoshi of each block;

Rare: The first Satoshi of each Difficulty Retargeting cycle;

Epic: the first Satoshi of each Halving period;

Legendary: the first Satoshi of each cycle;

Myth: The first Satoshi of the Genesis Block.

And the BRC20 founder, based on the Ordinals protocol, came up with another trap concept. Since the Ordinals protocol can create BTC Non-fungible Tokens by assigning different ‘attributes’ to each Satoshi, it can also create BTC FT by giving a uniform ‘format’ and ‘attributes’, which is Fungible Token.

BRC20 writes unified JSON formatted textual data into Satoshi through the Ordinals protocol. This textual data serves as the ledger of BRC20 Token, and based on this textual data, token holdings and transfer information can be parsed. It mainly includes the following contents:

{

“p”: “brc-20”,

“op”: “deploy”,

“tick”: “ordi”,

“max”: “21000000”,

“lim”:“1000”

}

{

“p”: “brc-20”,

“op”:“mint”,

“tick”: “ordi”,

“amt”:“1000”

}

{

“p”: “brc-20”,

“op”:“transfer”,

“tick”: “ordi”,

“amt”:“1000”,

}

The above are three standards of BRC20. Among them, the ‘op’ field represents the operation to be executed, including deploy, mint, and transfer. The ‘tick’ represents the name of the Token that needs to be operated. ‘max’ represents the total amount of Token issuance. ‘lim’ represents the maximum number of Token minting per Token. ‘amt’ represents the quantity of Token to be operated. In the transfer standard, there are also fields such as ‘to’, but this is not mandatory. Transfer is achieved by sending the inscription to the target Address to change the balance, as shown in the figure below.

The mechanism implemented by BRC20 is first come, first served. After deploying a BRC20 Token, you cannot deploy another Token with the same name. Even if you deploy a Token with the same name, the off-chain accounting platform has already recorded the previously deployed Token in the parsing process, so the second deployment will be considered illegal and will not be recorded. The management principle of the coin minting limit is also the same.

The above example is the recent hot ordi Token, which is a BRC20 experimental Token launched by the creator of BRC20 and is the first BTCinscriptionToken. Its total circulation is 21 million, and at the beginning, it can be minted by paying gas fee, and up to 1,000 tokens can be minted each time. Although this Token is an experimental BRC20 Token, as the first BRC20 Token, it has attracted a large number of investors, causing the price of ordi to once surpass $100 with huge fluctuations. Moreover, because ordi uses the method of open orders instead of the way of trading pairs, that is, TokenholderMaker sells, and the price is defined by the seller, the price of this Token cannot be uniformly calculated, and there is no unified effective price on different platforms.

Currently, the deployment quantity of BRC20 Token exceeds 20000, which can be viewed through the unisat website.（）

What are the security risks related to BRC20?

Currently, although BRC20 Token has gained a lot of follow and recognition from users, it is only a json file after all, without any practical value or business application scenario as support. It is a product that attracts investors using the popularity and traffic of BTC. Moreover, BRC20 Token cannot be easily used and managed like BTC, and it needs to be managed by a separate Wallet. Ordinary users need to learn and use third-party tools if they want to participate in BRC20 investment. These third-party tools usually have thresholds for use. For example, Unisat requires users to pay nearly 200 dollars in sats to enter the Unisat market for BRC20 investment, which greatly increases the complexity of user use and participation threshold.

Although BRC20 has received widespread attention recently, it still has some risk points, including:

1 Bubble Risk: Due to the speculation and speculation in the BRC20 Token market, Token prices may be overvalued.

2 Security Risks: Like other blockchain technologies, BRC20 Token may also be vulnerable to Hacker attacks.

3 Lack of regulation: The lack of regulation in blockchain technology and the cryptocurrency market may lead to some criminals using BRC20 Token for fraud and illegal activities.

*Extended Reading: When encountering MEME tokens and Pixiu Stock, what do you need to pay attention to in the Meme craze?

The BRC20 can easily create a misconception among users that it is a token created using the security of BTC, and therefore, is as secure and stable as BTC. However, it is different from BTC. The security of BTC is based on the encryption and consensus algorithm support, and it has been running relatively stably for a long time, withstanding the test of time. On the other hand, BRC20 is bound with BTC using the Ordinals protocol, which is currently in its early stages of development and operation and may have some undiscovered security vulnerabilities.

For example, the Ordinals protocol supports writing text, images, audio, video, and even code to the BTC network. Is this process secure? Are there any injection risks? The above introduces the numbering of sats, and each number is artificially divided into levels. When it comes time for some special BTC blocks, miners may steal and rollback blocks to obtain higher-level sats numbers in order to seize the accounting rights for special blocks. If the computing power of the miner is in an advantageous position, it will have a security impact on the consensus of BTC. These are security risks that need to be followed closely.