BRC-20 tokens represent an experimental fungible token standard introduced on the Bitcoin network. These tokens allow for the creation and management of fungible digital assets directly on Bitcoin. Inspired by Ethereum’s ERC-20 token standard, BRC-20 tokens aim to expand Bitcoin's capabilities by enabling tokenized assets without the need for external blockchains or sidechains.

BRC-20 tokens add a new layer of functionality to Bitcoin, enabling the network to handle more complex operations beyond simple currency transactions. By facilitating the creation of fungible tokens, BRC-20 broadens Bitcoin’s potential applications, which may include decentralized finance (DeFi), governance, and other tokenized use cases. However, these tokens remain experimental, and their long-term integration within Bitcoin’s ecosystem is still evolving.

While BRC-20 tokens leverage Bitcoin’s well-established security model, they introduce technical challenges. Bitcoin's infrastructure is not inherently designed for tokenization, which can lead to inefficiencies. One notable issue is the accumulation of unspent transaction outputs (UTXOs) associated with BRC-20 tokens, which can contribute to network congestion and increased transaction complexity.

BRC-20 tokens operate using Bitcoin's UTXO model for data storage, where token information is embedded within Bitcoin transactions. This can create a heavier load on the network, as each token interaction increases the amount of data processed. Consequently, developers and users must consider the additional strain on network resources when utilizing BRC-20 tokens compared to Bitcoin’s traditional transactions.

Though BRC-20 tokens are fundamentally tied to Bitcoin's base layer, their transactions could benefit from integration with the Lightning Network. The Lightning Network, designed to handle off-chain transactions for faster and cheaper payments, might alleviate some of the network congestion caused by BRC-20 token transfers, though this application remains largely theoretical at present.