The future of Bitcoin was at stake last week in two ways: with both the Halving upgrade and the launch of the Runes protocol, a new token standard for issuing fungible tokens directly on the Bitcoin blockchain. The Runes Protocol laid a foundation that will determine the fate of the chain in the decades to come. Activated on 19 or 20 April 2024 on block 840,000, coinciding with the next Bitcoin halving, Runes aims to provide a more efficient and responsible way of creating fungible tokens compared to existing options. Let’s dive into what Runes is all about, who created it, how it works, and what impact it could have on the Bitcoin ecosystem.

What is the Runes Protocol?

The Runes protocol is a new token standard that allows issuers to create fungible tokens on the Bitcoin blockchain in a more efficient way. It can offer users a streamlined method for creating tokens that represent various assets, from stablecoins to governance tokens. Runes positions itself as a robust platform for token creation and management with all the security and immutability of Bitcoin. At least, that’s the official line. For Bitcoin maximalists, Runes and its predecessors Ordinals and BRC-20 are cynical money-grabs that clutter and congest the world’s most important blockchain with its flood of transactions. 

Rodarmor: The Mastermind Behind Runes

Bitcoin developer Casey Rodarmor, well-known as the creator of the Ordinals protocol, proposed Runes in September 2023. Building upon his experience with Ordinals, which opened the door to NFTs on Bitcoin, Rodarmor envisioned Runes as an improved token standard that addresses the limitations of existing solutions like the BRC-20 standard, which he felt required too many steps to complete and wasn’t built in accordance with Bitcoin’s ethos.

Rodarmor designed Runes to be a simple protocol with minimal on-chain footprint and responsible UTXO management. UTXOs, or Unspent Transaction Outputs, represent individual units of Bitcoin value that have not yet been spent. Unlike the BRC-20 standard, which is complex and produces junk UTXOs that congest the Bitcoin network, Runes aims to be more efficient and user-friendly.

Other fungible token protocols on Bitcoin, such as RGB and Taproot Assets, rely on off-chain data storage. Runes distinguishes itself by keeping all token information on-chain using OP_RETURN, a Bitcoin script opcode for storing data. In this way, Runes ensures that asset metadata remains tightly integrated with the base layer.

Under the Hood: How Runes Works

Runes adopts a UTXO-based model that aligns seamlessly with Bitcoin’s design. When a Rune token is created (‘etched’), minted, or transferred, a protocol message called a runestone is generated. Runestones contain all the necessary information, including the token ID, output index, and amount, encoded in an OP_RETURN output.

The token supply of a Rune is stored within a single UTXO, with a maximum supply of approximately 340 undecillion (340 followed by 36 zeros). Each Rune has a divisibility parameter that determines the number of decimal places it can have, up to a maximum of 38.

New Runes are created in a process called etching, where the token’s properties, such as its name, divisibility, symbol, pre-mine amount, and minting terms, are defined. Once etched, the Rune can be minted according to the established terms, with the minter specifying the Rune ID and the desired quantity.

Transferring Runes is accomplished through ‘edicts’ – instructions that define how tokens move from inputs to outputs within a transaction. Edicts support batch transfers, airdrops, and a transfer of all remaining units of a specific Rune ID in a single transaction.

Runes vs. BRC-20 and Ordinals

Runes vs BRC-20

While both Runes and BRC-20 are token-standards built on the Bitcoin blockchain, there are several key differences between the two.

BRC-20 is a meta-protocol that relies on the Ordinals protocol. This means that BRC-20 inherits the complexity of Ordinals, and requires multiple transactions for minting and transferring tokens. In contrast, Runes is a standalone protocol that operates independently of Ordinals, allowing it to create and manage tokens more efficiently.

Another significant advantage of Runes over BRC-20 is its simplified transaction structure. With Runes, minting and transferring tokens can be done in a single transaction, reducing the overall on-chain footprint and minimizing the creation of unnecessary UTXOs. This streamlined approach leads to improved scalability and a more user-friendly experience for token issuers and holders.

Runes vs Ordinals

Although both Runes and Ordinals are protocols built on top of the Bitcoin blockchain, they serve different purposes. Ordinals is primarily focused on creating and managing non-fungible tokens (NFTs) by inscribing data onto individual satoshis. These inscriptions are unique and can represent various types of digital assets, such as artworks, collectibles, or even text.

On the other hand, Runes is designed specifically for fungible tokens, which are interchangeable and divisible. 

The Potential Impact of Runes on Bitcoin

The Runes protocol could have far-reaching implications for the Bitcoin ecosystem, both good and bad. Developers can use Runes to create various types of fungible tokens, potentially attracting a wider user base and expanding Bitcoin’s utility beyond its primary function as a digital currency.

As more projects build on top of Runes, the increased transaction volume could generate additional revenue for miners in the form of transaction fees. This is particularly relevant in light of the halving of the Bitcoin block reward: the added revenue from fees would compensate for one incentive for miners being reduced.

Moreover, Runes could spur innovation within the Bitcoin developer community. Projects like RSIC, a metaprotocol that combines Ordinals with yield-farming, have already emerged in anticipation of Runes’ launch. As developers explore new use-cases and build novel applications on top of Runes, the Bitcoin ecosystem could witness a surge in creativity and experimentation.

However, Runes has also in its short history attracted an avalanche of scam or low-quality projects that offer little to no chances of a return on investment. 

The Road Ahead for Runes

Casey Rodarmor’s next plan is to introduce direct trading between users, potentially reducing reliance on centralized exchanges and mitigating issues like Replace-By-Fee (RBF). Additionally, the approval of the OP_CAT Bitcoin Improvement Proposal (BIP) could pave the way for bridging Runes tokens to Layer-2 networks, enhancing scalability and interoperability.

As the Bitcoin community prepares for the launch of Runes, excitement is building around the potential for a new era of token innovation on the world’s most secure and decentralized blockchain. With its focus on simplicity, efficiency, and responsible UTXO management, Runes aims to address the limitations of existing token-standards, and to provide a solid foundation for growth of the Bitcoin ecosystem.

Only time will tell how developers and users will receive and adopt Runes. However, one thing is certain: when Runes is activated at block 840,000, it marks a significant milestone in Bitcoin’s ongoing evolution, opening up new possibilities for token-creation, management, and exchange on the original and most secure blockchain.

The Runes protocol has the potential to bring numerous benefits to the Bitcoin ecosystem –

• Firstly, Runes can attract a wider user-base by enabling various types of tokens, such as utility tokens, governance tokens, or even stablecoins. This increased diversity of use-cases can draw new users to the Bitcoin network, driving adoption and fostering a more vibrant and inclusive ecosystem.
• Secondly, the increased activity generated by Runes can make the entire Bitcoin network more sustainable. As more users engage with Runes-based tokens, the demand for block space will increase, leading to higher transaction fees. These fees will draw in more miners to continue securing the network, especially as the block rewards diminish.
• Lastly, Runes can serve as a catalyst for innovation and experimentation within the Bitcoin ecosystem. By providing a standardized and efficient platform for issuing tokens, Runes can lower the barriers to entry for developers and entrepreneurs who want to build new applications and services on top of Bitcoin. This can lead to a proliferation of novel use-cases, and a more dynamic, resilient, and interesting ecosystem.

Runes provides a platform for token-related activities directly on the Bitcoin blockchain, and can help drive transaction fees, nourishing a sustainable mining ecosystem. Even if some of the tokens created through Runes are shitcoins or memecoins, Rodarmor argues that the fees generated from these activities are still valuable for the network’s security.

Moreover, Rodarmor sees Runes as a way to bring more users and activity to the Bitcoin ecosystem. This increased adoption and engagement can further strengthen the Bitcoin network and its position as the world’s leading cryptocurrency.

How Runes Works

• Etching is the process of creating a new Rune token and defining its properties. This is done through a special transaction that includes an OP_RETURN output containing the token’s metadata, such as its name, symbol, and any additional attributes.
• Minting refers to the act of creating new units of a Rune token. The minting process involves specifying the token ID, which is derived from the etching transaction’s block height and transaction index. Minting can be done through an open process, allowing anyone to participate, or it can be restricted based on predefined terms set during the etching process.
• Transferring Runes involves moving tokens from one UTXO to another. This is accomplished through a transaction that consumes the input UTXOs containing the tokens and creates new output UTXOs with the updated token balances. The transfer process is governed by a set of instructions called ‘edicts’. These edicts specify the token ID, amount, and destination UTXO.
• In the event of an error during the etching, minting, or transferring process, a ‘cenotaph’ is created. Cenotaphs are runestones with invalid or unrecognized data, and they cause the associated tokens to be burnt. This mechanism encourages responsible UTXO management and helps maintain the integrity of the Runes protocol.

Conclusion

Existing token standards, such as BRC-20, have certain limitations. Every time they are minted or transferred, multiple transactions have to pass through the Bitcoin blockchain, and this leads to increased complexity and network congestion.

In contrast, Runes offers a streamlined approach, allowing you to create and transfer tokens with minimal on-chain footprint and responsible UTXO management. Fewer transactions are needed and Bitcoin’s limited block space is used more optimally. It is a more efficient and scalable solution for issuing tokens.

Conversely though, the protocol is still young and has had to deal with some adversity. Proponents of BRC-20 feel that Runes projects are too centralized, while others feel Rodarmor’s design was nothing more than a cynical money grab. Only time will tell if they will survive and even thrive. As Samson Mow told me in an interview last year at Bitcoin Miami, “it’s just noise”. 

It pays to zoom out and see where other chains like Ethereum and Cardano are heading, and what’s possible with new protocols and even Layer-2 chains for Bitcoin. When mining rewards become negligible in the next 10 or 20 years, the network will have to rely on transaction fees to keep the miners from revolting and shutting down their machines. Innovations like Runes are asking the right questions in order to get them to stay. 

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