By Alex Xu, Research Partner at Mint Ventures
Introduction
Inscriptions, especially epitomized by the BRC-20 series, are currently experiencing a notable surge in market interest. This trend marks a pivotal second wave of valuation growth, following the transformative introduction of the Ordinals protocol earlier this year. My recent endeavors in exploring the burgeoning inscribed asset landscape have involved an in-depth analysis of market trends, data synthesis, and active participation in both online and offline forums centered on BRC-20 assets. These experiences have shaped my preliminary insights into inscriptions, which I aim to coherently present in this article.
This piece seeks to demystify and address some issues, specifically:
What are Inscriptions and what are the criteria determining the popularity of BRC-20 tokens?
What is the inherent value proposition of inscriptions, particularly those under the BRC20 umbrella?
What is the viability of inscriptions as a novel business model?
What are the underlying mechanisms and catalysts propelling the rapid growth of inscriptions?
What is the potential evolution of inscriptions?
What are the hypothetical scenarios leading to their collapse?
The insights offered herein represent a snapshot of my analysis, framed by the knowledge available at the time of writing. There may be factual inaccuracies or biases. This article is intended for discussion purposes only, and feedback is welcomed.
What are Inscriptions and The Criteria for High-Quality Inscriptions?
Inscriptions refer to digital assets by embedding information in a designated format on the Bitcoin blockchain or other blockchains and subsequently leveraging specific indexing protocols to convert this data into fungible assets. The versatility of inscriptions is evident in their forms, ranging from fungible tokens like BRC-20 tokens to non-fungible tokens such as Bitcoin Frogs.
The traditional role of the Bitcoin blockchain is a public ledger that contains every transaction on the network. The Taproot upgrade completed in November 2021 enhanced the data storage capabilities of the Bitcoin blockchain, allowing for lower-cost uploads of both text and multimedia content. This technological advancement has laid the essential foundation for the development and growth of inscriptions.
Diverging from Ethereum’s reliance on smart contracts for asset issuance and management, BTC inscriptions pivot on the synergy of on-chain recorded data and indexing standards for their issuance and operation.
Despite these mechanism variances, both Bitcoin inscriptions and Ethscriptions share a common thread: they are both assets based on the input data of public blockchain ledgers.
Fungible Token Inscriptions on Bitcoin, Source: BTCTOOL
Non-Fungible Token Inscriptions on Bitcoin, Source: BTCTOOL
Based on distinct indexing standards, fungible token inscriptions can be categorized into BRC-20 tokens and ORC-20 tokens.
This article delves into the inscriptions on Bitcoin, particularly focusing on the BRC-20 tokens due to their leading position in the market cap.
Despite the impressive performance of BRC-20 tokens like $ORDI and $SATS, which have seen considerable gains this year, and others such as $RATS experiencing notable increases, the broader landscape for BRC-20 tokens has been less optimistic. A majority of BRC-20 tokens have demonstrated a concerning trend: a rapid decline to zero value, often losing all liquidity within just a few months of their issuance.
Through my active participation in several discussions about inscriptions and BRC-20 tokens, certain attributes have been identified that mark BRC-20 assets as ‘promising’. These include:
A catchy name: A name that resonates with Bitcoin and inscription culture (examples being Ordi and Sats), or it is animal-themed. For example, many projects are named after animals in the 2021 memecoin mania.
Originality: It should not be a simplistic imitation of existing memes but should represent an original intellectual property.
Community Engagement: The success of a BRC-20 token often hinges on the presence of influential leaders and a vibrant, high-profile community that is actively engaged in promoting and expanding the project.
Token Distribution: In the early stages, it’s crucial that a lower proportion of tokens are held by whales, particularly those who are purely speculators and do not contribute to the promotion of the project.
However, applying these criteria in a practical context presents challenges.
The appeal of a token’s name is inherently subjective, and even within the niche realm of inscriptions, trends can shift rapidly. What the market favors in terms of ‘naming logic’ today might lose its appeal in just a matter of weeks.
The Value Proposition and Business Innovation of BRC-20 Tokens
There are diverse opinions on the value proposition of BRC-20 tokens. I have summarized the principal viewpoints as follows:
Fair Launch Mechanism: BRC-20 tokens are reputed for their equitable distribution approach, a stark contrast to many mainstream Web3 projects. In such projects, venture capitalists often get the opportunity for early investment, acquiring tokens at lower prices and later selling them at a premium to the public.
Simple Protocol Format and Functionality: The BRC-20 protocol is straightforward and focused, thereby avoiding the risks associated with smart contracts, such as vulnerabilities to rug pulls, blacklisting incidents, or breaches in contract security.
The emergence of BRC20 assets has expanded the recording capabilities of the Bitcoin network, introducing a new class of assets. This diversification could potentially lead to significant network fees, which may play a crucial role in compensating for the diminishing block rewards on the Bitcoin blockchain, ensuring its long-term sustainability and robustness.
While the previously mentioned aspects of BRC-20 tokens hold significance, in my assessment, they do not fully explain the surge in popularity and the substantial wealth effect associated with these inscriptions this year.
So, the question arises: are inscriptions represented by BRC-20 tokens a promising business innovation?
The answer to this hinges on the criteria used to define “promising” in this context.
From the viewpoint of trading platforms, speculators, and professionals in the Bitcoin mining industry, the advent and rising popularity of BRC-20 and similar assets are indeed advantageous innovations. These groups have seen a tangible increase in their revenue streams owing to the emergence of these assets.
However, when we broaden the perspective to evaluate whether BRC-20 tokens and other inscriptions contribute to overarching commercial value — such as lowering the costs of producing goods and services, boosting business efficiency, or optimizing the allocation of resources — my current observation leads me to a more skeptical conclusion.
In essence, BRC-20 token is a new category of Memecoins.
I am not averse to Memecoins. Acknowledging their role as mediums for speculation, it’s clear that they essentially create a negative sum game. In such a market, exchanges and project operators often extract value from ongoing speculative activities. Despite this, Memecoins do fulfill a specific demand by providing the excitement and thrill similar to gambling. This aspect meets the needs of a segment of users who, similar to casino-goers, engage in such activities fully aware of the mathematical unprofitability but are drawn by the allure of speculation and chance.
The enduring appeal of Memecoins can be attributed to a fundamental aspect of human nature — the irresistible pull towards gambling and greed. These impulses are as strong and primal as basic physiological needs like hunger and sexual desire.
Within the broader spectrum of Memecoins, BRC-20 tokens expand the range of available products rather than a radical innovation.
For example, the much-touted ‘Fair Launch Mechanism’ of BRC-20 tokens, while commendable, isn’t exclusive to this category. A well-designed fair distribution mechanism can also be implemented using smart contracts, suggesting that this feature is not uniquely inherent to inscriptions.
The debate around the “VCs invest early, retail investors buy in later” model highlights the inherent risk and reward dynamics in early-stage investments. Venture Capitalists (VCs) typically invest in projects at a nascent stage when little more than a business plan exists. This stage is riddled with uncertainties, compelling VCs to commit capital at very low valuations to balance their risks. By the time these projects reach the secondary market, where their tokens are traded publicly, many initial uncertainties have been resolved. For instance, the project might have developed a functional product, accumulated measurable data, entered a more mature market, and attracted interest from exchanges for token listing. This transition from a high-risk venture, primarily existing in whitepapers and pitch decks, to a more concrete entity with tangible assets and prospects, justifies the increase in token prices at this stage.
Drawing a parallel, Memecoins without VC backing, like $SHIB and $PEPE, exhibit a similar trajectory. Initially, they start as mere concepts with unpredictable futures concerning public attention, speculative investment, and potential endorsements from key opinion leaders (KOLs). This high degree of uncertainty renders their tokens extremely cheap. However, as their community grows, resources accumulate, and optimism about their future increases, these uncertainties give way to certainties, leading to a dramatic rise in their value in the secondary market.
Given this context, as a not-so-new variant of Memecoins, what exactly is the reason behind the particular surge in popularity of BRC20 tokens, especially in the latter half of this year?
The Mechanism Logic and Driving Forces Behind the Rapid Rise of The BRC-20 Tokens
In understanding the wealth frenzy phenomenon of BRC-20 tokens, it’s essential to dissect it from two angles: the underlying mechanism logic and the driving forces propelling their growth.
The Mechanism Logic
BRC-20 tokens primarily serve as a medium for speculation in the crypto market. Their principal appeal to participants is rooted in the possibility of quickly generating significant wealth. This allure is magnified by the psychological phenomenon known as the law of large numbers, which suggests that individuals are more inclined to publicize their successes while remaining silent about their failures. In the speculative world, this leads to a biased public perception. Stories of remarkable profits and wealth accumulation are more prominently shared and discussed, creating an impression of widespread financial success. However, this narrative often overlooks the reality that a majority of market participants may actually experience losses. The disproportionate emphasis on success stories, as opposed to the more common experiences of loss, paints an overly optimistic view of the potential returns from investing in BRC-20 tokens, obscuring the inherent risks involved in such speculative ventures.
In comparison to traditional ERC-20 Memecoins, BRC-20 tokens have demonstrated a more potent capability in generating a “wealth effect.”
This heightened efficiency stems primarily from the trading mechanisms employed in the early stages of BRC-20 tokens, which continue to some extent today. Most BRC-20 tokens are traded via over-the-counter (OTC) order matching, unlike ERC-20 memecoins, which are primarily traded on Automated Market Maker (AMM) Decentralized Exchanges (DEX) or Centralized Exchanges (CEX). The liquidity in OTC markets is significantly shallower than that in AMM DEX or CEX environments. This means that the capital needed to influence BRC-20 token prices is considerably less compared to ERC-20 memecoins. Especially in a bullish market sentiment, the same amount of buying pressure can lead to more pronounced price surges for BRC-20 tokens.
Indeed, due to the low liquidity inherent in OTC trading, the same level of purchasing power can lead to more pronounced price increases of BRC-20 tokens compared to ERC-20 Memecoins, thereby creating a more intense and rapid “wealth effect.”
Besides the difference in the cost of market manipulation, BRC-20 tokens, which are not traded on CEX, lack short-selling mechanisms such as perpetual contracts. This further removes a key counterbalance to upward price movements, potentially fueling short-term price surges.
A noteworthy aspect of the BRC-20 market is the substantial participation of what can be termed “dama-type” investors. These individuals differ from the typical DeFi enthusiasts or mainstream cryptocurrency investors. Many are drawn into the market by the persuasive efforts of community leaders and grassroots marketing campaigns. These Chinese dama tend to follow guidance more readily and are more susceptible to influence, with some even lacking the knowledge of how to sell their holdings. This behavior often leads to a (3,3) pattern, where investors hold onto their tokens without selling, thereby reducing the short-term selling pressure and contributing to price stability or increases.
This year, the enhanced user experience provided by OKX Wallet, a wallet heavily promoted by OKX, has played a crucial role in facilitating the entry of these novice investors into the BRC-20 market. The comprehensive infrastructure of these wallets has streamlined the process, making it easier and more accessible for “dama-type speculators” to engage in the market.
The Driving Forces
The burgeoning interest in BRC-20 inscriptions has emerged as a beacon of speculative activity in an otherwise bearish market, offering a lucrative opportunity for various stakeholders who have strong incentives to sustain and amplify this trend.
Miners: The increase in transactions involving inscriptions has been a boon for miners and mining pools, resulting in significant fee income. Additionally, this trend has spurred the sales of mining machines. As direct beneficiaries of this “Inscription Summer,” miners have a vested interest in maintaining and furthering this momentum.
Exchanges: The rise of inscriptions as a new speculative avenue has brought in additional revenue through trading fees. It has also attracted new users to these platforms and effectively activated strategic products like wallets. Exchanges like OKX have reaped considerable benefits from this trend, becoming a notable winner. Following this success, Binance is also entering the fray.
Network Marketing People: The advent of inscriptions provides network marketers with fresh narratives and themes to explore, allowing them to monetize their resources anew.
The collective efforts of these three groups — miners, exchanges, and network marketers — create a powerful synergy that could significantly accelerate the momentum of inscriptions into the next phase of their popularity and development.
The Next Stage of The BRC-20 Market
As we contemplate the future of BRC-20 tokens, it’s essential to envision a roadmap that can further expand and intensify the already burgeoning market. Several key developments could play a pivotal role in this next phase:
Expansion by Secondary CEXs: The continued listing of inscription tokens beyond the likes of $ORDI and $SATS, could be a significant catalyst. Such expansion would not only elevate the status of other Memecoins but also potentially draw traditional crypto investors into the speculative orbit of BRC-20 tokens.
Involvement of Leading CEXs like Binance: Their listing of a broader range of inscription tokens could channel substantial mainstream crypto funds into the BRC-20 ecosystem.
Innovations Beyond Pure Memecoins: The introduction of BRC-20 Memecoins that incorporate Ponzi-like mechanisms could create even more pronounced wealth effects.
However, the crucial question remains: Will the inscription market successfully transition to an even hotter phase, or will it experience a gradual cooling, or possibly an abrupt crash?
To understand this, it is vital to explore the possible scenarios and conditions that could lead to a potential collapse of the BRC-20 market.
Theoretical Pathways to the Collapse of the Inscription Market
The initial wealth boom of BRC-20 inscriptions has been driven by a confluence of factors, notably the low liquidity inherent in OTC trading, a high proportion of “dama-type” investors, and the engagement of various stakeholders with vested interests.
This low liquidity, while a catalyst for rapid price surges, also poses a risk of equally sharp declines during market downturns. This vulnerability arises from the potential scarcity of buyers when the tide turns. A critical point often overlooked by investors is that a large portion of the perceived wealth in their portfolios, sometimes as high as 95%, may be nothing more than “illusory market value.” This valuation is contingent on the ability to withdraw positions swiftly and the assumption that there will always be sufficient market liquidity to facilitate such withdrawals.
The potential collapse of the BRC-20 market could be attributed to several key factors:
Prevalence of Short-Lived Rug-Pull Projects: In a market with finite users and capital, the primary competitors for BRC-20 projects are the market-making forces behind other similar projects. As capital and user attention shift to new BRC-20 projects, the available resources to support existing tokens diminish. This intense competition often prompts market makers, or ‘whales’, to exit their positions increasingly early to secure profits. Consequently, the window for users to achieve speculative gains narrows progressively. When the market narrative shifts towards loss rather than gain, and negative sentiment and ridicule become the norm, users are less likely to participate, resulting in a liquidity crunch in the BRC-20 market.
Slowed User Acquisition: The first point could make CEXs more hesitant to list new BRC-20 tokens. This reluctance, in turn, may slow the inflow of new users and capital into the market, failing to match the rapid movements of market makers.
Transition of Liquidity Battleground to CEXs: Once BRC-20 tokens are listed on CEXs, the primary arena for liquidity shifts to these centralized platforms. This transition introduces greater resistance to price manipulation due to deeper market liquidity. Additionally, the availability of short-selling tools like derivatives on CEXs can significantly diminish the wealth effect post-listing if there is no change in the underlying mechanism.
The cumulative effect of these dynamics can create a feedback loop, reinforcing each factor and potentially leading to a collapse pattern in the BRC-20 market.
Conclusion
The unyielding forces of greed and the inherent allure of gambling continue to be powerful drivers in the cryptocurrency industry. The recent phenomenon of the Inscription Summer represents a fascinating experiment within this context, and as this landscape continues to unfold, I remain committed to closely monitoring and analyzing these developments.
For further insights into Memecoins, you can read Mastering the Dip: Dodging Meme Coin Mania.
