Is The Rise of Runes a New Era for Bitcoin?

Bitcoin Runes is revolutionizing how fungible tokens are created and managed on the Bitcoin network. This is ushering in a new era of innovation and growth. Here’s the thing: There have been major developments in the Bitcoin blockchain recently. January and March of 2023 saw the launch of Ordinals and BRC-20 standards. Ordinals led the charge for Non-Fungible Tokens (NFTs) on the Bitcoin blockchain using satoshis—the smallest denomination on the chain. Every satoshi used has a serial number based on the order in which they are mined. These numbers are called ordinals. BRC-20 then introduced fungible tokens to the network, but at a cost. An experimental token standard, BRC-20, enables the minting and transferring of fungible tokens through the Ordinals protocol on the Bitcoin blockchain.

As the conversation shifts and settles on fungible tokens, the emergence of the Runes Protocol is looking like a potential game-changer. This new protocol was first proposed in September 2023 by Bitcoin developer Casey Rodarmor. Rodarmor first stirred the hornet's nest over network clogs and expensive gas fees with his Ordinals theory in 2022. He is now correcting that situation with his latest discovery, which aims to create a more user-friendly and efficient way of issuing and managing fungible tokens on Bitcoin.

But why should you care about Rodarmor’s latest discovery when his first hasn’t proven great?

This article will discuss Runes, exploring its functionalities, potential advantages, and place within a continuously growing Bitcoin ecosystem. And maybe at the end of this, you’d see why the advent of Runes might be a new era for Bitcoin. Stay with me.

Below is an outline of what we’d cover in this piece:

• What are Runes?
• How the Protocol Works
• Etching, Minting, and Transferring Runes on Bitcoin
• Benefits of Bitcoin Runes
• Runes vs BRC-20
• Bitcoin Runes Ecosystem
• How to Get Runes
• Challenges and Considerations
• The Future of Runes
• Conclusion

What are Runes?

Runes is a protocol designed to enable the creation of fungible tokens on the Bitcoin blockchain. Unlike token standards like BRC-20 or SRC-20, operating on the Bitcoin network and relying on separate layers or off-chain data, Bitcoin Runes leverages the network's native features for simplicity and efficiency. These features help the protocol create, mint and optimally transfer tokens directly on the blockchain.

Before Runes, the primary method for creating fungible tokens on Bitcoin was through the BRC-20 standard. While BRC-20 successfully introduced fungible tokens to the network, it came at a cost. The standard relies on embedding data within transaction outputs, creating numerous Unspent Transaction Outputs (UTXOs) – essentially fragments of Bitcoin that haven't been used in a subsequent transaction. This sent Bitcoin transaction fees to their highest levels since 2017. Launched in March 2023, the BRC-20 standard saw transaction fee rewards so high they eclipsed the block subsidy. Some block rewards were over 12.5 BTC (higher than the previous halving epoch). The UTXO count of Bitcoin reached an all-time high of 84.6 million in November 2022. It is threatening to reach that figure again as activities ramp up on the network.

A block from a mining pool containing 6.463 BTC in fees. Source: mempool.space

Casey Rodarmor created the Runes Protocol in September 2023. One of the immediate problems it solves is the UTXOs. Much of the excitement around Runes is because the protocol has Rodarmor’s name on it. Mostly because he is also the creator of Ordinals, this (his work on/development of Runes) improves the project's overall appeal by a lot.

How the Protocol Works

To understand how the Runes Protocol works, you must be familiar with two terms:

• The UTXO transaction model
• The OP_RETURN opcode

Runes Protocol uses the UTXO model. BRC-20s have been the Bitcoin token standard, but they have a problem creating excess “junk” UTXOs. This junk clogs the network, decreasing transaction efficiency and potentially hindering scalability. This creates a difficult experience for users.

Runes use this UTXO model to pick up Bitcoin pieces that have yet to be spent and use them to create new transactions. Think digital change. With this transaction model, the total asset in a user's ledger is used up for each transaction, and the algorithm computes a new balance after the intended amount of tokens has been transferred to the recipient. \

Runes utilize Bitcoin's native features for on-chain data storage, unlike other protocols that may rely on off-chain data. This allows for less junk UTXOs. As a result, the network is less clogged, transactions are faster, and it is less expensive and more reliable.

With OP_RETURN, users can add extra information to their Bitcoin transactions without affecting how their UTXOs are spent. This keeps transactions neat, ensuring no impact on the network's efficiency. OP_RETURN contains the Bitcoin Runes' on-chain data storage. Using the opcode, users can add up to 80 bytes of data to a transaction that cannot be spent. Examples of the data that can be added include ID, name, symbol, action commands, etc. These messages stored in the OP_RETURN part of a transaction are also referred to as Runestone.

In comparison with the BRC-20 standard, users can transfer any number of Runes, and each Rune transaction can signify multiple operations across different Runes. With BRC-20, you can only transfer one token per transaction. When a token is transferred on Runes, the protocol splits the UTXO into multiple new UTXOs according to the instructions in the OP_RETURN data. Each UTXO represents different token amounts and is then sent to the recipients. Rune transactions that fail due to invalid messages are burnt to prevent the accidental creation of Runes.

Runes may also be compatible with lightning in the sense that they use Lightning Network—a Bitcoin layer-2 solution—to carry out faster and cheaper transactions. With this, Runes bypasses delays and high fees associated with the Bitcoin network. This potential integration could enhance the usability and scalability of Rune-based tokens.

Etching, Minting, and Transferring Runes on Bitcoin

Etching is the start of a Rune token's life cycle. It is the process of creating a new Rune and the point where its properties are set. These properties include key details like the Rune's name, symbol, ID, supply amount, divisibility, and other parameters. This data is recorded in the OP_RETURN output every time a blockchain transaction takes place. Creators can include a "premine" feature that allows for the allocation of a certain amount of the Rune to themselves before it becomes available to the public.

After the Rune is etched, it can be minted through open or closed mints. With open minting, anyone can mint new Runes after the initial etching by creating mint transactions. Closed mints in comparison, only allow the minting of new tokens when already set conditions—like a specific period—are met. After this, the minting process ends, and the token supply is capped.

Transferring Runes tokens is carried out with special instructions called "edicts" that define how Runes are transferred after etching or minting. The process is completed through a transaction that consumes the input UTXOs carrying the tokens and creates output UTXOs with the updated token balances. Edicts specify the tokens, how many, and their destination. With edicts, batch transfers, airdrops, and the transfer of all minted Runes to a single account can be performed.

Benefits of Bitcoin Runes

The main goal of Bitcoin Runes is to simplify the creation of fungible tokens on the Bitcoin blockchain. There are other goals, and in this section, we'll take a closer look at some of them and the benefits they bring to users and the Bitcoin network.

Simplicity

Compared to other alternatives like BRC-20 and Taproot, Bitcoin Runes offers users a simpler way of creating and managing multiple fungible tokens on the Bitcoin network. With Runes, users can create tokens without needing off-chain data or native tokens. This helps avoid the generation of excessive junk UTXOs.

Efficiency

Bitcoin Runes uses the OP_RETURN model to provide an efficient method of handling token transactions on the Bitcoin network. The OP_RETURN model with Runes doesn't create unspendable UTXOs (which BRC-20 is known for), and the storage only takes up 80 bytes of data, unlike BRC-20 inscriptions that take up to 4MB. This stark contrast helps with decreasing the load on the Bitcoin network, enhancing performance, and reducing congestion due to clogging. By utilizing UTXOs, transactions on Runes are faster and cheaper, and this will attract more users to the Bitcoin network.

Bigger User Base

A recent study by AMBCrypto showed that 53.7% of respondents said they would choose memecoins over Bitcoin for their portfolios. This shows the popularity of memecoins in the industry and how they have proven to attract users to the blockchain. It is a strategy that is being replicated on the Bitcoin network. Ordinals and BRC-20 have facilitated the creation of fungible memecoins, and this has attracted a significant number of new users to the network. It is this same success the creator of Bitcoin Runes is aiming to achieve by setting the protocol's primary utility for "fun and memecoins."

Runes also caters to Decentralized Finance (DeFi) users interested in fungible tokens and NFT enthusiasts seeking a more efficient alternative to Ordinals. The Bitcoin Runes protocol has sparked interest among the NFT and meme coin communities as these projects dominated the protocol's pre-launch. One pre-Runes NFT project, Runestone, before launch, airdropped free Runestone to wallets with three or more inscriptions (digital items) on the Bitcoin blockchain. This attracted a lot of excitement. Excitement isn't the only thing that attracts users, though. Ordinals or other NFT collections normally limit their sizes to preserve collectibility, but with Runes, collections are made in larger amounts. This makes it easier for more people to own them, expanding the user base.

All of these expansions will result in increased network usage. A parameter that directly results in growth in revenue of the network and aligns with a key tenet of Bitcoin's mission: helping everyone, everywhere, be more economically free.

Increase in Miner Revenue

The increased network usage and growing revenue system also incentivize miners to join the network. Since the halving event in April, miners have now earned 3.125 bitcoins, less than the 6.25 bitcoins they earned following the halving event of May 2020. Runes is a potential source of revenue Bitcoin miners can use to supplement their income.

Improved Security

Runes Protocol offers a more secure and reliable platform for creating tokens and transactions. With its UTXO data storage feature, Runes is more resistant to reorganizations, especially when the Bitcoin network has to choose between two versions of its transaction history. Because of this resistance to reorganizations, Runes transactions are less likely to be affected by changes in the Bitcoin network’s transaction history.

Runes vs BRC-20

While BRC-20 uses Ordinals—a technology that allows for the attachment of data to a Bitcoin sat, Bitcoin Runes was created as an improvement on this design. Both Runes and BRC-20 protocols enable the creation of tokens on the Bitcoin blockchain, but Runes has a unique selling proposition that I think stands them apart from BRC-20; they place less demand on the Bitcoin network. There are other key differences between both protocols, and I've listed some of them below.

• Token transfer: Bitcoin Runes creates a new set of UTXOs based on the data stored in the OP_RETURN part of a transaction. In contrast, BRC-20 requires new inscriptions for each token transfer transaction.

• Scalability: While both Runes and BRC-20 enable the creation of fungible tokens on Bitcoin, their approach to this impacts scalability differently. The network clogs created by BRC-20 create UTXOs from data inscriptions on transactions, which leads to slower transaction times and higher fees. Runes, in contrast, minimizes the fragmentation of UTXOs, which results in a scalable solution that avoids the issues of congestion plaguing BRC-20.

• User-friendliness: The user-friendly approach of Runes reduces the technical barrier to entry, potentially attracting a wider range of users. Runes takes advantage of the native features of Bitcoin, which removes the need for complex data storage or additional tools. Users can etch, mint, and transfer Runes directly on the blockchain, which is ultimately a more intuitive and simpler experience. BRC-20, on the other hand, is more technical for creating tokens as it relies on off-chain data.

• Token minting: Runes can be minted in two ways: open or closed. Developers also have the option of premining. BRC-20, on its part, only allows the open mining option, and this limits the initial distribution of tokens.

• Management: The Bitcoin Runes protocol is compatible with the Bitcoin Lightning network, and it supports both lightning clients and Simplified Payment Verification (SVP) wallets. BRC-20 tokens, on their part, require wallets that support the Ordinals protocol.

• Operation model: The Bitcoin Runes operational model is based on Bitcoin's UTXO model, while BRC-20 tokens are based on the Bitcoin Ordinals protocol.

Bitcoin Runes Ecosystem

Since its launch, we've seen over 8,000 projects launch in the Runes ecosystem. Some of these projects interact with the protocol directly to create assets and carry out transactions on the Bitcoin blockchain. Others offer utilities to Runes users and enthusiasts. Some of the projects in the Runes ecosystem include:

Launchpads

These are projects that offer a platform for Runes projects to kick off their journey. An excellent example of a launchpad is Bitcoin Rune. This platform gives users and projects tools to kick-start their Runes journeys. The platform enables projects to etch Runes and run other operations like transfers. It also features a marketplace where Bitcoin Runes projects (new and already existing) can start trading.

Wallets

Some projects provide wallet services for asset management. Even though Bitcoin Runes are minted on the Bitcoin blockchain, they require specific wallets for storage, and these projects do just that. Xverse is an example of a wallet you can use to manage Bitcoin Runes. It also supports BRC-20 tokens.

Tokens

Examples of fungible token projects that have etched a Rune into the Bitcoin network via the Bitcoin Runes protocol include Runestone, Rune PUPS, and RSIC. Most of these projects are NFTs that earn the Runes for their holders.

Marketplace

Some marketplaces allow users to list and trade Bitcoin Runes. Centralized exchange OKX has a marketplace for trading runes, while NFT trading platform Magic Eden also has a section for trading runes. Another platform is the Whales Market. This is a pre-market platform that offers pre-launch services, and users can trade their allocated tokens of Runes projects.

How to Get Runes

You will need to install the Bitcoin Core Program so that you can run your own Bitcoin node and etch and mint your own Runes token. You'll also have to install Ordinals and Runes' client software. These are, however, technical and not easy for most people to set up.

To buy and sell your Runes:

• First, you have to get some Bitcoin in your wallet—a wallet compatible with Runes, e.g., Xverse—since Runes operates on the Bitcoin network. You will need this to send Runes and pay transaction fees.

• You can pre-buy Runes-themed Ordinals NFTs that will airdrop tokens from marketplaces that support Runes, like UniSat, OKX, or Magic Eden. Or you can buy directly from DEXs like RuneSwap.

• You can buy from centralized exchanges that list Rune tokens.

Challenges and Considerations

Despite the promising outlook, Runes is not without its challenges and considerations:

• Scalability: While Runes offers improvements over BRC-20, the overall scalability of Bitcoin remains a concern – Bitcoin currently averages about 6-8 Transactions Per Second (TPS). As Rune tokens and transactions increase, potential network congestion could still arise. Developments like the Lightning Network integration mentioned earlier could be crucial in addressing this challenge.

  
  

• Regulation: The regulations surrounding cryptocurrencies and tokenized assets are constantly evolving. How regulatory bodies approach Rune tokens and the broader Bitcoin ecosystem remains to be seen. Adapting to future regulations will be essential for the long-term viability of Runes.

• Decentralization and Governance: The governance structure of Runes is still under development. Ensuring a fair and decentralized decision-making process will be critical for maintaining the trust and confidence of the community.

The Future of Runes

The future of Runes holds exciting possibilities for the Bitcoin ecosystem. Here are some potential developments:

• Direct Rune Trading: At the moment, to buy Runes, you’ll need to cover Bitcoin and use marketplaces or DEXs. Direct Rune trading would eliminate the use of these intermediaries, allowing users to trade Runes directly. This will streamline user-to-user transactions for Rune tokens, reduce overall transaction fees, improve liquidity within the ecosystem, and further enhance the usability and accessibility of the protocol.

• Layer-2 Integration: The Bitcoin network’s current transactions per second are too limited. Layer-2 offers a solution to this. They operate off the main chain and can handle a high volume of transactions at faster speeds and lower costs. Bridging Runes to Layer-2 solutions like the Lightning Network could unlock advanced functionalities and faster transactions for Rune-based tokens.

• Lowering the Barrier for Developers: The user-friendly nature of Runes has the potential to attract a wider pool of developers. More developers equals more innovative applications and a more robust ecosystem.

Conclusion

So, are Runes a new era for Bitcoin?

One thing that I think is guaranteed is that they are potential game-changers for the Bitcoin ecosystem. They are a more efficient, scalable, and user-friendly solution for fungible tokens and could attract a wider range of developers and users. More developers and users, more often than not, mean more innovation and usage and could push Bitcoin towards a new era. Bitcoin Runes protocol presents a compelling vision for fungible tokens on the Bitcoin network. They leverage the existing infrastructure and address the limitations of BRC-20.

While I am excited about the possibilities that Runes unlock, further research is needed in several areas:

• Technical analysis of the protocol's performance: Evaluating the protocol's efficiency, scalability, and potential impact on the Bitcoin network is crucial.

• Innovative use cases: Identifying and researching innovative applications for Rune tokens across sectors like DeFi and supply chain management can showcase the versatility of the protocol.

• Regulatory developments: Keeping a close eye on evolving regulations and their potential implications for Runes and the wider crypto space is essential for informed decision-making.

The emergence of Runes signifies a continuous evolution within the Bitcoin ecosystem. And while challenges remain, as more developers and users embrace the protocol, its impact on fungible tokens on Bitcoin will become clearer.

Protocols like BRC-20 may have properly kickstarted fungible tokens on the Bitcoin network, but Runes is offering a solution for the future that seems more sustainable and scalable. Whether Runes truly ushers in a new era remains to be seen, but it is undoubtedly a significant step forward and promises exciting possibilities for the future of Bitcoin.