Introduction
As Bitcoin sees its fourth halving this weekend, a new token protocol will launch in its wake that will make its network more efficient and could reshape how we view the future of the world’s largest cryptocurrency. Runes is a new protocol first proposed in September 2023 by Casey Rodarmor, the Bitcoin developer who opened a pandora’s box of gas fee-guzzling and network-clogging Bitcoin NFTs and tokens with his Ordinals Theory in 2022. Rodarmor is making amends with his latest brainchild, which will create a more efficient and user-friendly way to issue and manage fungible tokens on Bitcoin than what incumbent protocols like BRC-20 currently offer.
The new Bitcoin token standard’s launch is adding substantial intrigue to the latest Bitcoin halving, due to the potential long-term impact it could have on the Bitcoin ecosystem and the wave of new projects and innovation it will bring for the rest of the 2024/2025 bull cycle.
What Is the Runes Protocol on Bitcoin?
The Runes protocol is a token standard designed specifically for issuing fungible tokens on the Bitcoin network. Unlike other token standards that rely on separate layers or off-chain data, Runes leverages Bitcoin’s native features to enable the creation, minting, and transfer of tokens directly on the blockchain and in a more optimal fashion. A key aspect of the Runes protocol is its UTXO-based model, which aligns perfectly with Bitcoin’s underlying architecture.
UTXOs, or Unspent Transaction Outputs, represent the available funds in a Bitcoin wallet that can be used as inputs for new transactions.
This helps Runes to minimize the creation of unnecessary “dust” UTXOs, which can clutter the network and impact its efficiency, as we’ve experienced with BRC-20 transactions. It also ensures that Runes operates in harmony with Bitcoin’s core principles and helps maintain the network’s integrity.
How Are Runes Different From Ordinals and BRC-20?
Runes
Runes is a new way of creating and managing tokens on the Bitcoin blockchain in a single transaction, making the process faster and more efficient. This is important because it prevents the Bitcoin blockchain from getting cluttered with unnecessary data.
Ordinals
Ordinals, on the other hand, is a protocol that focuses on creating and managing non-fungible tokens (NFTs) on the Bitcoin blockchain. It does this by inscribing data onto individual satoshis, the smallest unit of Bitcoin, effectively turning them into unique digital artifacts or “rare sats.”Ordinals has seen a meteoric rise since its January 2023 launch. To date over 66 million inscriptions have been made, with fees totaling 6700 BTC, according to Dune Analytics.
While Ordinals enables unique non-fungible digital assets, Runes will help developers create easily transferable tokens that can be used for a wide range of purposes, such as representing ownership, voting rights, or even serving as a medium of exchange.
BRC-20
As Runes got closer on the horizon, data from LunarCrush suggests that engagement with BRC-20 content has stagnated, with the trendline of social interactions remaining essentially flat over the last 3 months.BRC-20, created in February 2023 by the anon developer Domo to be faster, cheaper and more inclusive than Ordinals, pioneered the process of creating fungible tokens on the Bitcoin blockchain. However,it’s also built on top of Ordinals and therefore inherits some of the complexities of Ordinals, which will make it less efficient than Runes.
For example, creating or transferring BRC-20 tokens requires multiple transactions, which can lead to a more cluttered blockchain and potential delays in processing. Runes can require only transactions.
Why Did Rodarmor Create Ordinals?
While he’s been maligned by many maxi’s for his Ordinals work, Casey Rodarmor is no Satoshi Frankenstein. His commitment to Bitcoin is evident in his work on the Runes protocol.
In a recent interview, Rodarmor made it clear he never intended to harm Bitcoin. As an ex-Bitcoin Core developer, he was looking for a way to add value to its growth and saw an opportunity in DeFi tokens and NFTs that took off on other chains.
Casey felt that most crypto projects outside of Bitcoin are useless, and preferred to see the fees generated from these activities go towards securing the Bitcoin network. Importantly, as the block mining rewards decrease with each halving every 4 years , Bitcoin’s security will eventually rely solely on transaction fees generated by network activity.
Rodarmor’s intention with Runes is to create a venue for people to engage in token-related activities, even if some of them might be considered “sh*tcoins” or “memecoins.” By providing a platform for these activities directly on the Bitcoin blockchain, Runes will help bring in more transaction fees, users and activity to the ecosystem while maintaining the core principles of decentralization and security.
What’s the Significance of Its Bitcoin Halving Launch?
Rodamor has said in interviews that there’s no specific reason for Runes to launch at the same time of the halving. However, it’s also an auspicious time that’s “thematically cool.”
How Runes Protocol Works
Core Concepts
To grasp how Runes work, it’s important to first understand these 3 core concepts
Runestone
A runestone is a unique message stored within a Bitcoin transaction that contains information about a Rune, including instructions for creating, minting, or transferring the token.
UTXO
UTXO, or Unspent Transaction Output, is akin to bills and coins, stored in your Bitcoin wallet until you use them. They represent the funds available in your wallet from different sources that can be used as inputs in new transactions.
OP_RETURN
OP_RETURN is a section of a Bitcoin transaction that allows you to store data, and it’s where the runestone resides. This part of the transaction enables the inclusion of Runes protocol messages directly on the Bitcoin blockchain.
The Runes protocol operates on a UTXO-based model (unlike Ethereum’s account structure, where tokens get added and deducted in a straightforward manner) seamlessly integrating with Bitcoin’s existing architecture.
In this model, each transaction consumes one or more UTXOs as inputs and creates new UTXOs as outputs to transfer the sum total of the Bitcoin transaction. Runes uses this structure to assign tokens to specific UTXOs, using a protocol message stored in an OP_RETURN output.
Etching, Minting, Transferring and Cenotaphs
The lifecycle of a Rune token involves three main processes: 1) Etching, 2) minting, and 3) transferring.
- Etching is creating a new Runes token and setting its rules through a special transaction that includes an OP_RETURN output containing the token’s metadata like the name and any special attributes.
- Minting is making new units of an existing Runes token. It can be open for anyone to mint more, or restricted based on the rules set during etching.
- Transferring Runes tokens means sending them from one wallet 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.
- Special instructions called “edicts” specify which tokens, how many, and where they’re going.
- If something goes wrong when etching, minting, or transferring, it results in a “cenotaph” – basically an invalid transaction that burns those tokens. This encourages people to be careful and helps keep Runes secure.
Rodarmor firmly believes that Runes can have a positive impact on the Bitcoin network, particularly in terms of transaction revenue for miners.
In his Bankless interview, Rodarmor emphasized the importance of transaction fees for the long-term security of the Bitcoin network. As the block rewards decrease with each halving, miners will increasingly rely on transaction fees to remain profitable and continue dedicating their computing power to secure the network.
By allowing all sorts of tokens like utility coins, governance tokens, or even stablecoins, it opens up Bitcoin to a much wider audience. More use cases mean more people getting involved and an ecosystem that feels more inclusive and dynamic.
But it’s not just attracting new users. With Runes driving up activity and demand for block space, miners would see higher transaction fees rolling in. That extra income stream becomes crucial for keeping the whole network chugging along, especially as the block rewards get smaller over time.
Maybe most excitingly, Runes lays the groundwork for a wave of innovation. By standardizing token issuance, it dramatically lowers the barrier for developers and entrepreneurs trying to build new apps and services on Bitcoin. We could see an explosion of fresh ideas and use cases making the ecosystem more resilient and future-proof.
What’s Next for Runes?
Post-launch, here are several exciting developments for Runes on the horizon.
One of the planned features for Runes is the ability to enable direct trading between users.
Additionally, Rodarmor envisions the possibility of bridging Runes tokens to Layer 2 networks once the OP_CAT Bitcoin Improvement Proposal (BIP) is approved. It was originally included in the Bitcoin script but later disabled for security reasons.
If reintroduced, it could enable more advanced smart contract functionality and facilitate the interoperability of Runes tokens with other blockchain networks.
Bottom Line
Rodarmor’s new brainchild will drive a ton of new activity on Bitcoin, which will be welcomed by some Bitcoiners and hated by others for potential network congestion and unwanted regulatory attention in terms of securities law it may bring. Only time will tell.While we’ll likely see an avalanche of low-quality shitcoins memecoin type tokens flood the market at first, Runes’ more thoughtful and Bitcoin-centric design should see it vampire most of the less efficient BRC20 token standard’s market and attract its leading projects to migrate over.
This is a good thing as it’ll help speed up Bitcoin transactions, while spurring on new innovation and creativity on the world’s most secure and decentralized blockchain.
With mining rewards set to dwindle by 50% every four years,the transaction revenue from Rune projects and the protocols that come after it could very well end up being Bitcoin’s saving grace in a decade or two from now. To the Rune!
