Managing Editor
Pooja Kadia
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TL;DR

  • Bitcoin Runes represent unique, UTXO-based fungible tokens that exist within the Bitcoin blockchain.
  • Designed for fungibility, Runes attaches data to Unspent Transaction Outputs (UTXOs) so that each Rune of the same type is identical and interchangeable.
  • Runes can be created, minted, and transferred using runestones, which are messages held in Bitcoin transaction outputs.

Over the years, Bitcoin has evolved to integrate fungible and non-fungible tokens (NFTs) in its design using concepts such as Ordinal inscriptions – a new way of adding arbitrary data on Bitcoin’s blockchain. The recent introduction of the Bitcoin Runes protocol has sparked interest within the Bitcoin community. This novel innovation introduces a simpler and more efficient way of creating fungible tokens directly on Bitcoin’s blockchain. It revolutionizes Bitcoin’s utility beyond the basic store of value and payment method. But what’s so exciting about Bitcoin Runes?

This article explores Bitcoin Runes, how it works, its defining features, key differences from Ordinals, and potential benefits.

Understanding the Technology Behind Bitcoin Runes

Bitcoin Runes is the latest innovation on the BTC network. It represents unique, UTXO-based fungible tokens within the Bitcoin blockchain. Casey Rodarmor proposed it in a blog post in September 2023 to improve user experience and simplify creating fungible tokens within the Bitcoin ecosystem. The protocol behind it, the Runes protocol, was launched on the same day as Bitcoin's halving, April 20, 2024.

Runes is analogous to Ethereum’s ERC-20 token standard since it also facilitates launching fungible tokens (but on Bitcoin) that adhere to its set standard. This means that it is now possible to unlock a myriad of use cases—from decentralized finance (DeFi) applications to meme coins on the Bitcoin blockchain via the Runes protocol.

How Bitcoin Runes Work

After the Taproot upgrade, the ordinals protocol made it possible to attach additional data, including images and audio, to an individual Satoshi. Designed for fungibility, Runes attaches data to Unspent Transaction Outputs (UTXOs) so that each Rune of the same type is identical and interchangeable. 

The fungible tokens resulting from Bitcoin Runes are created through a process called etching. This process entails specifying the token’s defining characteristics, such as its name, ID, symbol, supply amount, divisibility, and minting caps. During the etching process, creators can optionally premine, where they allocate themselves a certain amount of the Runes token before a public mint. 

The etching process is followed by the minting process, where additional fungible tokens are created based on the etched properties. Using the Runes protocol open-minting mechanism, anyone can participate in the process. To summarize this, Runes can be created, minted, and transferred using runestones – messages held in Bitcoin transaction outputs. Transferring Runes involves edicts, which are messages that specify the transfer details, such as the Rune ID, the amount, and the output number.

The Runes protocol uses Bitcoin’s OP_RETURN feature to record data on the blockchain without interfering with transaction management, which helps maintain overall network efficiency.

Benefits of Bitcoin Runes

Some of the benefits that Bitcoin Runes brings to the Bitcoin blockchain include:

  • Simplicity and efficiency—Bitcoin Runes is generally designed to simplify the creation of tokens on-chain without depending on off-chain data or generating surplus UTXOs.
  • Resource efficiency—While Runes relies on Bitcoin’s UTXO model, it avoids using UTXOs that will never be spent, thereby consuming fewer resources.
  • Interoperability with Bitcoin’s architecture—Inheriting Bitcoin’s UTXO model allows Bitcoin Runes to easily integrate with Bitcoin exchanges and wallets, making it practical for UTXO-based operations. In addition, since it is Lightning Network-compatible, it extends Bitcoin’s potential utility.
  • Expanded user base – Runes facilitates utilities such as DeFi applications and memecoins, which appeal to new users, mainstream investors, new communities, and crypto natives.
  • User Experience – Operate with on-chain data, simplifying the etching and minting processes, thereby streamlining user experience.
  • Expanded utility for the Bitcoin network—The combination of BOLOS and SE ensures that the private keys and recovery phrases never leave your Ledger device. 
  • Market potential – Expected to appeal to and attract new users and crypto natives, which could potentially increase transaction volumes as well as miner revenues.
  • Innovation – Opens the door for developers to explore different possibilities within a stable and secure framework.

Disadvantages of Bitcoin Runes

While Runes potentially opens the door for new possibilities and use cases, it does not come without its drawbacks. Some of the associated drawbacks include:

  • Complexity for users – Since they use a different approach from Ordinals, developers are forced to re-adapt to the new standard. It also requires technical expertise that the everyday user lacks.
  • Impact on Bitcoin’s original purpose – With every new protocol introduced on Bitcoin, Bitcoin goes further from its original purpose – to handle simpler transactions and serve as a store of value.
  • Transaction fees—The popularity of BRC-20 tokens increased Bitcoin transaction fees because they added more network load and congestion. A widespread adoption of Runes may also potentially increase the network’s transaction fees.
  • Security concerns – While Runes operates completely on-chain Bitcoin, new protocols always arouse security concerns within the Bitcoin community. And these are no different.
  • Market volatility – Like any other innovation introduced to Bitcoin before it, Runes is susceptible to changes and fluctuations. In addition, once it gains popularity and demand rises, the cost of generating and transferring fungible tokens could potentially increase the cost of this asset, hurting users and further adoption.

Ordinals vs Runes: What Is the Difference?

Some of the key differences between Ordinals and Runes approaches include:

  • Fungibility vs non-fungibility – Runes is a standard that simplifies the creation of fungible tokens, while Ordinals are Bitcoin’s version of NFTs.
  • Data storage approach – Runes attach data to UTXOs to transform them into representations of digital assets while retaining their compatibility with Bitcoin. On the other hand, Ordinals etch arbitrary data directly within Bitcoin’s witness to create unique NFTs.
  • Transfer mechanism – Runes can be transferred in a simple and user-friendly manner like any other Bitcoin transaction. While Ordinals transferring involves a complex process of splitting the UTXO and holding the data into multiple new UTXOs.
  • Security and risk factors—Runes inherit Bitcoin’s robust security infrastructure, making it inherently secure. However, the vulnerabilities in the Ordinal protocol could impose significant security risks on the inscribed data.
  • Use cases—Runes can represent fungible digital assets, such as in-game currencies and stablecoins within Bitcoin, while Ordinals are ideal for creating unique NFTs with provable on-chain verifiability.
  • Scalability and transaction fees – Runes uses Bitcoin’s native UTXO model, thereby reducing the data added to the blockchain and potentially lowering transaction fees. On the contrary, Ordinals embed data onto individual Satoshis, resulting in increased transaction sizes and transaction costs.

Future of Bitcoin Runes

The Bitcoin Runes protocol was launched alongside the Bitcoin halving event on April 20, 2024. And nearly 7,000 Runes were minted within two days of the launch. Ideally, the project had already sparked interest and inspired spin-off projects even before it was officially launched.

What the future holds for Runes is still uncertain. However, its potential success could be entirely dependent on its key features, such as Bitcoin’s native UTXO model, simplicity, and sustainable design. This also relies on how the Bitcoin community, developers, and users receive it.

Frequently Asked Questions

What is a Bitcoin Rune?

Bitcoin Rune is the token standard for creating fungible tokens on the Bitcoin blockchain. It is a more efficient and cost-effective alternative to the experimental BRC-20 standard since it minimizes the amount of unnecessary UTXOs when creating tokens.

When is the launch of the Bitcoin Runes Protocol?

Bitcoin Runes was launched on the same day as the Bitcoin halving event, on April 20, 2024.

What is the purpose of Bitcoin Runes?

The main purpose of Bitcoin Runes is to simplify the user experience when creating fungible tokens on the Bitcoin network. It also serves to reduce network congestion by eliminating “junk” UTXOs.

Disclaimer:
It is highly recommended to conduct thorough research prior to making any financial decisions. Please note that this article's purpose is solely for educational purposes and the author and the organization, M2, do not influence the reader's investment or trading choices.

Pooja Kadia
Author

With over 7 years of experience working for more than 200 web3 projects, Pooja is a content strategist and growth specialist for blockchain and Web3 companies. Her work has been published across leading publications which have garnered over 1 Million views. Her extensive experience in this field enables her to simplify complex blockchain concepts, making them easily understandable for diverse audiences.

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