What are ARC-20 Tokens: Your Comprehensive Guide

ARC-20 tokens have lately caught the Bitcoin community by storm, igniting a frenzy of anticipation and speculation. Based on the groundbreaking Atomicals protocol, ARC-20 introduces a new paradigm for producing and managing digital assets directly on the Bitcoin blockchain.

But, despite the enthusiasm, it's critical to understand what ARC-20 tokens are and how they function. This detailed article will demystify the ARC-20 standard, exploring its underlying technology, usage cases, and possible implications for the future of Bitcoin.

What is the ARC-20 Token?

To comprehend ARC-20 tokens, it is essential to first investigate what the Atomicals protocol is.

Defining the Atomicals Protocol

Atomicals is an open-source framework for creating and managing digital assets on Bitcoin or any other blockchain that follows the UTXO (Unspent Transaction Output) model.

Consider it a method for generating distinct digital items, or "atoms," on the Bitcoin blockchain, each with its own set of rules for ownership and transfer. This protocol enables the production of diverse digital assets, including static collectibles like NFTs and dynamic, programmable tokens like ARC-20.

ARC-20 Token Explained

ARC-20 tokens, modeled after Ethereum's ERC-20 standard, bring the concept of fungible tokens to the Bitcoin network. They do this by leveraging the idea of “colored coins”, which are satoshis designated to reflect ownership of a certain token. This novel solution bypasses the need for complex smart contracts, allowing for the creation of unique and tradeable tokens directly on the Bitcoin blockchain.

Each ARC-20 token is inherently valuable, being linked to at least one satoshi, ensuring a minimum price floor and utilizing Bitcoin's divisibility. Additionally, anyone can issue these tokens to any Bitcoin address using a UTXO-compatible wallet.

The deployment process is also decentralized, with choices for direct issuance and governance-based processes. An integrated ticker symbol service simplifies the procedure by assigning unique names to each token.

How Does ARC-20 Work?

As briefly mentioned above, ARC-20 tokens utilize the Atomicals protocol's unique features to create and manage fungible tokens on the Bitcoin network. They act as “colored coins”, effectively identifying certain satoshis (the smallest units of Bitcoin) to reflect ownership of a given token.

Unlike traditional NFTs, which are immutable, these tokens and NFTs are updateable. This is accomplished by linking a series of "revised" transactions, resulting in a dynamic and developing history for the asset.

The ARC-20 standard also has a built-in ticker and name service to ensure that each token has a unique identity. This removes the need for centralized indexing services, increasing ecosystem transparency.

Decentralized vs Direct Minting

There are two methods to mint ARC-20 tokens: decentralized and direct minting. Both approaches rely on the Atomicals Protocol, which employs a Javascript library and JSON files to define token generation and transfer functionalities.

Decentralized Minting

Decentralized minting under the ARC-20 standard provides developers with more freedom and control over the token production process. They can specify critical characteristics such as the total number of mints allowed, awards per mint, and minting conditions.

Yet, as the name implies, token distribution via decentralized minting is not within the creator's authority. Instead, anybody who meets the established parameters can generate tokens over time until the entire quantity is exhausted. This approach offers flexibility but can lead to a more unpredictable token supply.

Direct Minting

In contrast, direct minting creates the entire token supply in a single transaction. This method gives creators full control over the token production and distribution. Nevertheless, it demands a hefty initial investment since creators must commit satoshis equal to the whole intended token supply.

For example, if a creator wants to mint 10,000 tokens utilizing direct minting, that person must give 10,000 satoshis at the start. This early contribution can boost the project's reliability by demonstrating the creator's true dedication and decreasing the risk of possible frauds or "rug pulls."

You might also be interested in: What is DeFi Mining?

How Does ARC-20 Differ From BRC-20 And Ordinals?

While ARC-20, BRC-20, and Ordinals all work on the Bitcoin blockchain to enable the creation of digital assets, they have unique properties and applications. Let's look at the following summary table for an overview of their significant differences before diving deeper into the details below.

Although the table offers a concise summary, it is worth exploring the subtle distinctions between these token standards in greater detail.

• Protocol: ARC-20 is built on the Atomicals protocol, while both BRC-20 and Ordinals utilize the Ordinals protocol.

• Token type: ARC-20 focuses on fungible tokens, similar to ERC-20 tokens on Ethereum, while Ordinals primarily deals with non-fungible tokens (NFTs). BRC-20, though built on Ordinals, also creates fungible tokens.

• Address usage: ARC-20 uses Taproot addresses specifically for minting and updating tokens, whereas Ordinals employ Taproot addresses for all use cases, including transfers.

• Data storage: Bitcoin ordinals and BRC-20 store data in a single file upon minting. In contrast, ARC-20, leveraging the Atomicals protocol, allows for the storage of multiple files, providing more flexibility for complex digital assets.

• Name service: ARC-20 has a built-in name service within its protocol (Realms), while Ordinals lacks this feature natively. BRC-20 relies on external JSON protocols for naming.

• Minting mechanisms: ARC-20 tokens are minted through Proof-of-Work (PoW), requiring computational effort from miners. Ordinals and BRC-20 tokens are minted by creating and spending a Taproot output, relying primarily on transaction fees.

• Fairness philosophy: The PoW approach aims to ensure fairness and scarcity by tying token creation to computational resources, not just financial means. This contrasts with "fair mints" from BRC-20, which can still be influenced by wealthier users paying higher fees.

More about Bitcoin (BTC) Wallet

Why are ARC-20 Tokens so Important?

ARC-20 tokens provide a standardized way of indexing and maintaining tokens on the Bitcoin blockchain, making it easier to create and transfer digital assets. This standardization helps speed up the creation of Bitcoin-based apps and promote more interoperability within the ecosystem.

Plus, ARC-20 tokens bridge the gap between tokenized assets and Bitcoin's original currency, opening up new opportunities for decentralized finance (DeFi) and asset tokenization.

The Atomicals protocol, on which ARC-20 is based, is flexible enough to support a wide range of applications. From media and digital collectibles to gaming assets, site hosting, and even digital identification solutions, ARC-20 tokens can have a big impact on the future of Bitcoin and the larger blockchain ecosystem.

To securely traverse this ever-changing environment and handle your ARC-20 tokens, consider utilizing a secure and user-friendly wallet like Bitget Wallet, which smoothly interacts with numerous blockchain networks and allows you to safely explore the world of decentralized finance.

Download Bitget Wallet