ARC-20 tokens: assets ready to breathe something new into Bitcoin tokenization?

After the launch of a significant update to the Bitcoin protocol called Taproot, its blockchain can now create unique inscriptions (also known as artifacts). These inscriptions paved the way for the tokenization of assets on the Bitcoin blockchain, as the network itself did not provide such a possibility due to the lack of necessary tools, such as smart contracts, for example.

Thanks to Bitcoin's inscription creation functionality, developers were able to create new standards for tokens on the first cryptocurrency's blockchain. The first of these was BRC-20. However, alternative standards soon began to appear, gaining popularity. One such standard was ARC-20.

In this article, we will explain ARC-20, how it differs from other Bitcoin token standards dominating the market, and its features.

What is ARC-20?

ARC-20 is a new standard for issuing and transferring interchangeable tokens (Fungible Tokens or FT) on the Bitcoin blockchain, similar to the existing BRC-20 and SRC-20. As with similar standards, a specially designed protocol, in this case, Atomicals, is responsible for issuing, transferring, and modifying ARC-20 tokens. Each token issued under the ARC-20 standard is tied to its satoshi, a minimum unit of bitcoin (0.00000001 BTC).

In the Atomicals ARC-20 protocol, tokens are called "digital objects." The process of issuing tokens in the Bitcoin blockchain and smart contract-based networks is fundamentally different:

• In Ethereum and other similar networks, tokens are issued through special smart contracts created by the development team of a particular project. Each action, including the creation of the smart contract itself and the issuance of the token, is recorded as a transaction on the blockchain and displayed in a browser such as Etherscan;
• Tokens in the Bitcoin blockchain are issued differently and are not recorded as a standard transaction, i.e., they cannot be viewed in a browser like Blockchair or OKLink. Essentially, the ARC-20 standard is simply code created using a Javascript library in JSON format that defines the functions for creating and transferring tokens. Transactions with tokens like ARC-20 are displayed only in the form of special inscriptions, which is where their name comes from.

What are the features of ARC-20, and what are the differences between them and other bitcoin token standards?

The Atomicals protocol supports two ways of issuing (minting) ARC-20 tokens: decentralized and direct.

Decentralized minting allows any user to issue their tokens. In other words, the creator of his ARC-20 token grants the right to issue tokens to other users. Moreover, the creator can independently specify such parameters as the allowed number of tokens for issuance, reward per mint, the height of the initial block (in which ARC-20 tokens will be issued), and the conditions of minting.

With Direct Minting, all tokens are created in a single transaction, with each satoshi representing one unit of ARC-20 token issued; the creator needs to make an advance payment for minting. For example, if a user needs to issue 1,000,000 X tokens, they must deposit the equivalent number of satoshis as an advance. The creator has complete control over the issuance and distribution of their tokens.

In addition to the methods of token minting, ARC-20 has other differences from similar standards such as Ordinals and BRC-20:

1. The Taproot protocol activated in the Bitcoin network, ARC-20, uses the Taproot protocol exclusively for issuing and updating tokens, while Ordinals and BRC-20 use it for any use case;
2. ARC-20 involves the creation of multiple JSON files
3. Also, the ARC-20 standard provides its own Realms namespace in the underlying protocol (similar to the Internet's Domain Name System (DNS), only for addresses), which is not supported in the Ordinals protocol. The Realms namespace allows for shorter, more readable names instead of complex and long Bitcoin addresses.
4. Support for the UTXO (Unspent Transaction Output or Unspent Transaction Output) model, as in Bitcoin. The thing is that in the Bitcoin network, you can't spend only a part of the assets on the wallet: the user withdraws all the funds, only a specific part is sent to the recipient's address, and the rest is returned to the sender's address in the form of change. It's like with cash bills: you can't split a banknote and spend, for example, half of its face value, but instead, you get change in the form of smaller denomination bills or coins. The ARC-20 works in the same way.

Another feature of ARC-20, in which this standard is already similar to the others in the Bitcoin protocol, is the need to directly use wallets that support the Atomicals protocol. As of July 2024, such wallets include:

• Ledger,
• Electrum,
• Sparrow Wallet,
• Blue Wallet,
• MyCelium.

ARC-20 prospects

Of course, ARC-20 is unlikely to eclipse the pioneers — Ordinals and BRC-20 — in popularity. However, the number of standards realizing tokens on the Bitcoin blockchain is still very small, which means that ARC-20 has every chance to take its place among the leaders. As the demand for such assets grows, the ARC-20 standard's underlying tokens will increase in value.

Like other standards, ARC-20 is a new, still undiscovered area, and its future is difficult to predict at the moment. However, such high investor interest in ARC-20 is a good sign for the prospects of bitcoin tokens.