In The Weeds #12
Exploring BRC-20s, the ERC-6551 Standard, and Maker's Spark Protocol
Welcome to Decentral Park’s new research sub-newsletter: In The Weeds.
This weekly instalment will focus solely on key technical developments and themes within Web3, keeping you ahead of the game on upcoming trends.
Let’s get stuck into this week’s key highlights.
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1: Bitcoin’s BRC-20 Standard
What is it? Bitcoin is an asset best known for its utility as a store of value, and the decentralisation and immutability of its network. However, this has not prevented experimentation aimed at introducing new assets to the Bitcoin network.
Most notably, coloured coins were introduced in 2012 by a group of developers including Yoni Assia, in an attempt to extend the functionality of the Bitcoin protocol beyond the single BTC digital currency. This technique involved "colouring" specific bitcoins, assigning them additional metadata that represents ownership of a distinct asset. The purpose is to enable the creation and transfer of digital tokens that could represent various assets like stocks, real estate, or even virtual items in video games.
More recently, developments have been made in the RBG Bitcoin layer, whose latest release, v0.10, takes a material step toward enabling smart contracts on Bitcoin, and thus the ability to deploy assets other than BTC to the network.
Enter the topic of the week in the web3 community: Bitcoin’s BRC-20 token standard. This token standard has been trending up only in its dominance of daily Bitcoin transaction count since the 20th of April, peaking at 65.3% on the 7th of May. The result is that Bitcoin recently saw two-year highs in network fees as a result of congestion, with Binance even opting to temporarily halt withdrawals on the Bitcoin network as a result.
So, what actually are BRC-20s, and how do they work?
On the 20th of January, a developer by the name of Casey introduced the concept of the Ordinals Protocol. What he’d managed to do is find a way to inscribe any type of file on-chain to a single Satoshi, i.e. the smallest denomination of a Bitcoin, and track it throughout the Bitcoin network. This inscription tracks the ownership of the file, essentially creating a Bitcoin native onchain NFT.
This concept was taken a step further by a pseudo-anonymous account known as domo, who identified a method through which it was possible to create fungible tokens on the Ordinals Protocol. Essentially, one inscribes JSON onto Bitcoin (Satoshis) via the Ordinals Protocol to "Deploy" a BRC-20 by providing a ticker, a maximum number of tokens, and a limit per mint. Users are then able to mint these tokens for free, yes that’s right… all BRC-20 tokens were minted for free with no pre-mine.
BRC-20 tokens can only be transferred once a token project meets its maximum number of tokens minted. Transfers too are made possible by inscription, in which a user will inscribe a transfer JSON of however many tokens they desire to send.
As it currently stands, there have been over 14k BRC-20 tokens deployed, with a total market capitalisation of over $580m. The most notable being the native token of the Ordinals Protocol itself, $ORDI, as well as meme coins $PEPE and $MEME.
Why is it important? As mentioned, additional utility on top of the Bitcoin network is something developers have been seeking for a long time, though the design of the network has made this challenging.
BRC-20 tokens represent a breakthrough, which coupled with fascinating work from the RGB protocol could ultimately lead to the use of arguably the most secure blockchain network as a smart contract hub.
Experimentation and innovation down this path of thinking are crucial for the development of the Bitcoin network. Although ultimately developers may opt to use Bitcoin for its sole utility purpose as a store of value, and leverage the purpose-built Ethereum ecosystem, or alternatives, for logic-based transactions.
Where does it go from here? BRC-20 tokens are in their infancy, and as such appear to be very much in the ‘silly’ phase with the majority of BRC-20 tokens being meme coins, not to be conflated with altcoins. While this phase shouldn’t be belittled, it represents the low utility of the BRC-20 token standard and the limited innovation and development beyond the initial concept for the standard.
I believe the reasoning behind this limitation is the fact that the logic is currently offchain, leaving limited incentives for indexers to behave honestly, but also reducing the flexibility of onchain actions. What’s next for BRC-20 tokens, or perhaps a new token standard, would be the introduction of onchain logic. This is something that RBG is working towards. Such onchain logic would enable utility within these BRC-20 tokens beyond a mere store of value-esque dynamic seen in meme coins.
Beyond this, I expect the UI/UX associated with BRC-20s to improve with purpose-built front-end developments.
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2: Ethereum’s ERC-6551 Standard
What is it? For those unfamiliar with the Ethereum governance process, an ERC is an ‘Ethereum Request for Comment’. ERCs are used as a means to convey essential technical notes and requirements to Ethereum developers and users. For example, ERC-20 was a request for comment dating back to 2015 published by Vitalik Buterin and Fabian Vogelsteller that ultimately became the default token standard for Ethereum.
ERC-6551 is a request for comment on non-fungible token-bound accounts, published on the 23rd of February. What this means is that it allows a Non-Fungible Token (NFT) to own an Ethereum account. In practical terms, this is not so much ownership as it is the NFT having access to the private key for an Ethereum-based wallet.
The result of this dynamic is that Ethereum-based wallets become tradable, which opens up a host of use cases across a broad spectrum of Ethereum sub-sectors, including identity, NFTs and custody solutions.
Why is it important? The introduction of non-fungible token-bound accounts opens up a host of use cases that ultimately will act to improve the user experience within the Ethereum ecosystem. It introduces the ability for developers to experiment and innovate to create utility not previously possible in the ecosystem, with the goal of ultimately attracting further users and capital to the ecosystem.
In the NFT sub-sector alone there is the possibility for NFTs to be backed by real-value. This spans from PFP collections that could be backed by meme coins, to real-world assets such as properties that could be backed by underlying tokens associated with building society ownership tokens and user ownership tokens to represent mortgage ownership share.
Where does it go from here? As mentioned, I expect material experimentation and innovation utilising this potential standard, to generate new use cases within the Ethereum ecosystem.
This ERC introduces tradable accounts at a time when account abstraction, a topic this newsletter often refers to, is in the process of developing and adding material value to the wallet experience. This is pivotal for the advancement of onchain Digital IDentity (DID) solutions, introducing the ability to have full Ethereum accounts owned by tradable NFTs.
I expect DID solutions such as ENS to adopt non-fungible token-bearing accounts, and introduce logic to these accounts leveraging account abstraction.
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3: Maker’s Spark Protocol
What is it? DeFi OG MakerDAO, the protocol behind the fourth largest stablecoin, DAI, launched Spark Protocol yesterday. Let’s dive into what the protocol is, and how it adds value to the DAI ecosystem.
The first iteration of the Spark Protocol is Spark Lend, a DAI-centric lending marketplace designed to enable users to supply high-quality DeFi assets to borrow DAI. This brings the DAI interaction path for users into the control of the Spark front-end directly, connecting to Maker’s liquidity. The assets available to supply at launch include ETH, stETH and sDAI.
You may be wondering what sDAI is… the answer is a new tokenised version of the DAI deposited in the DSR, dubbed Savings DAI (sDAI). This is a yield-bearing version of DAO that is automatically connected to the Dai Savings Rate (DSR) Module. At current, the DSR’s yield is set at 1%, although is subject to onchain governance changes.
Spark is connected to both Maker’s D3M and Maker’s PSM. By integrating with D3M Spark gains the ability to inject and automatically balance fresh DAI liquidity into Spark Lend, while enabling users to access the best DAI rates in the market. At current the initial annual rate is 1.11%. This enables more predictable rates that don’t increase with utilisation.
Integrating the Peg Stability Module (PSM) connects material liquidity infrastructure for instant swaps of DAI and sDAI for USDC and vice versa at a 1:1 rate.
Why is it important? The introduction of Spark Lend acts as a catalyst for Maker to expand on the $7.21b TVL they currently command, by reducing user friction, enhancing the utility within the DAI ecosystem and creating a more favourable user experience through rate predictability.
This is particularly relevant given the recent regulatory pressure placed on stablecoins, though it does appear decentralised stables will face more pressure than originally anticipated.
Where does it go from here? The co-founder of the Spark Lend consultant developers Phoenix Labs hinted upon launch that Phoenix Labs is looking to deploy Spark Lend on L2s with a direct connection to Maker via a D3M. Utilising lower-fee environments could act as a further catalyst for DAI adoption, particularly with improvements such as proto-danksharding around the corner.
Spark Lend is just one piece of the MakerDAO Endgame Era implementation. This is a roadmap designed by Rune Christensen, Makers’s co-founder, to decentralise governance at MakerDAO and enhance DeFi innovation. We can expect further deployments and governance changes at Maker as they move towards this vision.
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