30.8.2024
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Bitcoin-native assets gained momentum in 2023 with the launch of Ordinals and are likely to continue with the introduction of the Runes Protocol in April 2024.
In this guide, you will learn about Bitcoin Runes tokens and how they might impact the Bitcoin ecosystem.
The Runes protocol is a token standard for issuing fungible tokens on Bitcoin that seeks to give users a more efficient way of creating fungible tokens.
Runes are set to launch in April 2024 on block 840,000, coinciding with the upcoming Bitcoin halving.
Bitcoin developer Casey Rodarmor proposed the Runes protocol in September 2023 as an improved token standard for fungible asset issuance on Bitcoin.
He has been working on the protocol since then, with the goal of making it ready for launch in April 2024. Rodarmor is a well-known developer in the crypto space. He is the creator of the Ordinals Protocol, which developers have used to develop various token standards for native asset issuance on Bitcoin.
Although the Runes protocol is yet to launch on the Bitcoin mainnet, a few developers are already building projects based on it. Examples of these projects are Runealpha, PipeBTC, and RSIC.
On his blog, Rodarmor describes Runes as a simple protocol with minimal on-chain footprint and responsible UTXO management.
UTXOs (Unspent Transaction Outputs) are individual units of Bitcoin value associated with specific addresses on the blockchain, representing funds that have not yet been spent and can be used as inputs in new transactions.
Runes is different from the BRC-20 token standard, which is complex and not UTXO-based. The latter characteristic causes the BRC-20 token standard to produce excessive junk UTXOs, which congest the Bitcoin network.
The goal of Runes is to replace the less efficient Ordinals-based BRC-20 token standard.
Furthermore, the Runes protocol also strives to be better than other existing fungible token protocols on Bitcoin like RGB and Taproot Assets. These options rely on off-chain data.
For instance, Taproot Assets stores the metadata of its assets off-chain, making the asset information detached from Bitcoin’s main layer. On the other hand, options like Omni Layer and Counterparty need a native token to operate. In a nutshell, Rodarmor believes that these issues make these existing protocols cumbersome and less user-friendly.
Let’s look at how the Runes protocol works, starting with an overview.
The Runes UTXO-based model integrates naturally with Bitcoin, which uses UTXOs. This helps minimize the creation of junk UTXOs, which can clog the network.
A UTXO is a specified quantity of BTC you haven’t yet spent, which you can use to make a new payment. It’s an output of a previous Bitcoin transaction and remains available for spending until it is used as an input in a new transaction.
A Rune is assigned to a UTXO through a protocol message that designates the output, ID, and amount using OP_RETURN.
OP_RETURN is a unique function for data storage on Bitcoin. OP_RETURN outputs don't congest the UTXO set since they are provably unspendable.
The ID is a numeric identifier of the Rune, while the output specifies the output index to receive the Rune token. The amount defines how many Rune tokens will be transferred.
All rune messages, be it creating (etching) new runes or transferring runes, are encoded in a single OP_RETURN output in a transaction. Divisibility, rune name, and other metadata are in the same OP_RETURN in the same transaction.
The token supply of a Rune is contained in a single UTXO. The supply/transfer amount is a 128-bit unsigned integer, so the maximum is 340282366920938463463374607431768211455. Each rune has a "divisibility," which is the number of decimals it can have. The maximum is 38. The human-readable maximum supply also has this many decimals, e.g., with 18 decimal places (similar to most ERC-20 tokens), the human-readable max supply is 3402823669209384634633.74607431768211455.
UTXOs are used to track the balances of Runes tokens. Interestingly, the Runes protocol doesn’t link the balance record of a token to a wallet address but holds it within a UTXO.
Runes are transferred with a bitcoin transaction with an OP_RETURN output that specifies what amounts of runes from inputs go to what UTXOs.
Runes are etched, minted, and transferred using runestones. A runestone is a Runes protocol message stored in a Bitcoin transaction output. Once the Runes protocol activates on Bitcoin block 840,000, all runestones in earlier blocks will be disregarded.
In theory, a runestone has the following fields:
Source: Github
Etching is the process of creating a new rune and setting its properties. These properties include:
Once the rune is etched and the properties are set, the next step is minting.
Etchers are required to enter the Rune ID in the mint field when minting tokens. A rune ID contains the transaction index and block height (a block’s location in the blockchain measured by how many blocks came before it) of the transaction in which the token was etched.
The Runes protocol allows open minting just like the BRC-20 token standard. However, open minting in Runes is subject to the terms established during etching.
The next step after minting is transferring a rune from a transaction input to output using an instruction known as an edict.
Edicts are messages defining how a rune should be transferred from an input to an output. They contain the output number, the rune’s ID, and the amount. Edicts are specified in OP_RETURN, and runestones can have any number of edicts. The Runes protocol can allow users to make batch transfers, airdrop runes, and transfer all remaining units of that rune ID.
Below is the code of runes transferred by edict:
Source: Github
Runestones with errors are called cenotaphs, and they could result from inaccurate encoding or missed outputs. The Runes protocol burns tokens in transactions with a cenotaph to encourage users to practice proper UTXO management. This differs from the BRC-20 token standard that permits users to try again when they make mistakes.
Here is a comparison between the BRC-20 and Runes token standards.
Rune Specific Inscription Circuit, or RSIC, is a metaprotocol that combines Bitcoin Ordinals with yield farming.
The team behind the metaprotocol has created 21,000 Bitcoin “NFTs” called RSICs using the Ordinals protocol. Every RSIC features runic symbols (ancient letters used by various Germanic languages) and is linked to an early inscription.
The goal of RSICs is to distribute the Rune Coin in the future. RSIC is one of the projects that has emerged thanks to the proposed Runes protocol.
In January 2024, the RSIC project airdropped 90% of the 21,000 RSICs to select Ordinals wallet addresses that have been active since the protocol was launched.
Holders of the Bitcoin Frogs, Nodemonkes, and Bitcoin Puppets Ordinals collections were some of the lucky people who received the free RSICs now trading at a floor price of about 0.1 BTC ($6,100). The project distributed RSICs to over 9,000 wallets.
RSICs are capable of earning Runes for their holders until the halving event in April.
Each RSIC will then be entered into a raffle where 21 billion Rune tokens will be up for grabs. Holders of these inscriptions can activate their “NFTs” to start earning Runes by transferring them to the same wallet or a different one.
Let’s look at the possible advantages of the Runes protocol.
The Runes protocol will allow projects to issue different types of fungible tokens, such as security tokens, stablecoins, and governance tokens, on the Bitcoin blockchain. This could expand Bitcoin’s utility and attract more users, who will enjoy near-instant and low-cost transactions due to the protocol’s potential Lightning compatibility. In other words, Runes could help Bitcoin achieve its goal of widespread adoption.
More transaction fees will be generated as more people interact with Runes tokens. This will boost revenue for miners, incentivizing them to keep securing the Bitcoin network. With the block reward set to decrease further in April 2024, Bitcoin miners will be in need of more revenue drivers and Runes could be just the protocol needed to keep miners motivated.
As we have already seen with the RSIC example, the Runes protocol is encouraging developers to innovate in new and exciting ways, giving users a chance to experience activities on the Bitcoin blockchain that no one would have ever thought possible. It will also open the door for developers wanting to tap into Bitcoin development while doing so on the world’s most stable and secure public blockchain.
The Runes protocol seeks to enable asset issuance directly on Bitcoin with as few minimal negative effects as possible. As mentioned earlier, the protocol is improving on the current fungible token protocols that rely on native tokens and off-chain data. Moreover, its design is better thought out than the BRC-20 token standard, which was rolled out for fun to showcase what the Ordinals protocol can achieve. Therefore, the seriousness of this protocol could potentially make Runes more successful than BRC-20 tokens.
Rodarmor plans to introduce direct trading between users in the unspecified future. This could minimize reliance on centralized crypto exchanges and solve the problem of Replace-By-Fee (RBF). RBF is the process of replacing a previous unconfirmed transaction with another version that includes a higher transaction fee. RBF aims to encourage miners to prioritize the transaction with a higher fee.
Also, Rodarmor expects that once the OP_CAT Bitcoin Improvement Proposal (BIP) is approved, it will be possible to bridge runes tokens to Layer 2 networks. He estimates that the BIP will be introduced to Bitcoin within a year. OP_CAT is an operation code (opcode) in the original Bitcoin script. “CAT” represents the word “concatenate,” where two elements in a script are joined together. Satoshi Nakamoto disabled the opcode to prevent DoS attacks.
Although this proposed OP_CAT upgrade is said to have security risks, some developers claim it can enable bridging to other chains and enhance Bitcoin’s functionality.
