What Are Runes in Bitcoin?
Runes are fungible tokens issued directly on Bitcoin using the Runes protocol. Ordinals creator Casey Rodarmor proposed the new protocol in September 2023, pitching it as a better and simpler alternative to the experimental BRC-20 standard for fungible tokens.
Unlike other fungible token protocols for Bitcoin, Runes doesn’t require off-chain data or a native token to operate. For instance, the Taproot Assets Protocol uses UTXOs but stores asset metadata off-chain. Alternatively, Counterparty, a protocol built on top of the Bitcoin blockchain, requires a native token for some operations and is not UTXO-based.
The Bitcoin community has reacted to the Runes protocol with much enthusiasm that the first Rune token, $RUNE, was issued on the same day Rodarmor made the announcement.
How Does the Runes Token Standard Work?
Now, let’s take a look at how the Runes protocol works.
Runestones
Messages on the Runes protocol are known as runestones (not to be confused with the Runestones Ordinals collection). They can etch new tokens, mint existing tokens, and transfer runes from transaction inputs to outputs.
Runestones are held in Bitcoin transaction outputs that begin with OP_RETURN, a special function that stores data on the Bitcoin blockchain. At most, one rune may be included in a transaction.
How to Setup a Bitcoin Node and Mint Runes
Xverse encourages everyone to setup a Bitcoin node to reinforce Bitcoin's principles of decentralization. Running a node for minting and etching Runes is only recommended for those who know how to run a command line and have advanced technical experience.
Xverse is working with many partners in the ecosystem to offer all the same services and more to make it easy for anyone to get started with Runes. While the ecosystem of Runes minting and etching services is swiftly growing, some users may still prefer to run their own Bitcoin node rather than rely on third-party services.
Creating Rune Tokens
Creating a new Rune token begins with etching, where elements such as name, token supply, number of decimals, and minting terms are defined. The token supply is assigned to a specific UTXO, allowing a single UTXO to contain any amount of any number of Runes, be it a billion, million, or less. UTXOs are used to keep track of the Rune token balances.
Here’s the code used to etch a new Rune token:
It’s important to avoid errors or cenotaphs when etching runes because those tokens will be unmintable.
Minting & Transferring
The next steps after etching are minting and transfer. Minting generates the actual tokens according to the set terms, while Runes tokens are transferred from transaction inputs to outputs using edict messages. The transfer function splits a UTXO into several new UTXOs holding different amounts of runes to send records to recipients.
An edict is made up of a Rune ID block height and transaction index, the output number, and the amount. The Rune ID is used to identify tokens, and it comprises the block in which a rune was etched, as well as the index of the etching transaction stored within that block.
The mint and transfer code structures are as follows:
Data Storage
Ordinal inscriptions are created by adding content like images, audio, and HTML files into the witness section of a Bitcoin transaction. The witness section was introduced by the SegWit upgrade, which changed the Bitcoin transaction format by dividing it into two parts. The first part holds the wallet addresses of the sender and receiver, while the witness segment contains transaction signatures.
The Runes Ecosystem Is Growing
With Runes scheduled to go live on the date of the next Bitcoin halving, Bitcoin builders are already gearing up for the launch by building the supporting infrastructure for Runes tokens.
Runes Marketplaces
Runes marketplaces are platforms where users can buy and sell runes with their Xverse wallets once the protocol launches.
However, investors can currently trade pre-rune tokens like Runestone, RSIC, Rune Pups, and RuneX: Unnamed on Magic Eden.
Runes Launchpads
Runes launchpads are websites where projects can launch and drop their tokens. Both Magic Eden and BitX have launchpads that offer marketing support to projects. However, Runes token projects can also launch on Meta Runes, CraftRunes, and Runes Terminal.
The Meta Runes and CraftRunes launchpads are currently accepting project applications, while the Runes Terminal launchpad hasn’t yet been rolled out.
Runes Lending Platforms
Runes lending platforms are decentralized applications (dApps) that enable users to lend and borrow runes directly with their Xverse wallets.
Runes vs. BRC-20 Tokens: Similarities and Differences
Here is how Runes compare to BRC-20 tokens.
The Runes protocol improves the Ordinals-based BRC-20 token standard by adopting Bitcoin's UTXO model. This allows it to operate within Bitcoin Layer 1, or the base blockchain, and reduce the production of unnecessary UTXOs. Therefore, Runes has a minimal on-chain footprint and improves overall efficiency.
On the contrary, BRC-20 is based on Ordinal Theory, which is not native to Bitcoin. The protocol’s token issuance approach also leads to UTXO proliferation and network congestion.
Benefits And Challenges of Runes
Let’s take a look at the benefits and challenges of Runes.
Benefits
Minimizes on-chain footprint thanks to the UTXO-based model
Simplifies the issuance of native fungible tokens on Bitcoin
Its simplicity could promote innovation in the Bitcoin ecosystem
Doesn’t require off-chain data to operate
Allows open minting within terms set by the etcher
Challenges
Competition from the widely accepted BRC-20 token standard
Token burns triggered by errors can adversely affect user experience
Yet to establish itself as a viable Bitcoin token standard
The Rise of Fungible Tokens on Bitcoin
The rise of fungible tokens on Bitcoin has advanced significantly in 2023 since the launch of the Ordinals protocol, which ushered in the concept of numbering satoshis (sats) in the order in which they are mined.