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Runes is a Bitcoin-based protocol that allows for the creation of fungible tokens on the Bitcoin blockchain.
What are Bitcoin Runes?

Perhaps the most well-known cryptocurrency token standard is Ethereum’s ERC-20, which was originally proposed in 2015. ERC-20 allowed developers to create fungible (i.e., interchangeable) digital assets on top of Ethereum’s blockchain, and it standardized how these tokens could be created, managed, and used in smart contracts. Ethereum’s inherent computational ability made this functionality natural.

However, Bitcoin was originally developed as a simple solution for storing and transferring digital value, making other functionality—like smart contracts and alternative token standards—less organic. Still, developers have been creative in their ways to build on Bitcoin. This ingenuity has brought multiple Bitcoin-based fungible token standards thanks to continued upgrades to the underlying code.

Introduced in 2023, Runes is a protocol for creating and managing fungible tokens on Bitcoin that uses Unspent Transaction Outputs (UTXOs)—a basic function of Bitcoin—rather than a more complex, secondary system (like Ordinals). It was introduced to be a resource efficient solution for creating and trading tokens on bitcoin (like memecoins) without excessive on-chain “bloat”.

How was the Runes protocol developed?

When the Runes protocol was announced, the idea of alternative assets on the Bitcoin blockchain was not new. The earliest forms of Bitcoin-based non-fungible tokens (NFTs) were first conceived between 2012 (Colored Coins) and 2014 (Counterparty). The latter most famously supported Spells of Genesis, a digital trading card game, and Rare Pepes, which some would argue were the first meme NFTs.

Enter Casey Rodarmor, the Bitcoin developer who launched the Ordinals protocol in December 2022. Ordinals claimed to create true NFTs on Bitcoin by using a novel mechanism for tracking satoshis. However, its design inherently creates a lot of new on-chain data, which made the Bitcoin network sluggish and expensive to operate. This quickly became problematic, as more than 1 million Ordinals had been created by April 2023.

Colored Coins, Counterparty, and Ordinals all created ways to use NFTs on Bitcoin—but not fungible tokens. In March 2023, a pseudonymous developer named Domo announced BRC-20, a fungible token standard for Bitcoin based on Ordinals. Although this solved the fungible token problem, it was still based on a protocol that heavily taxed Bitcoin’s network.

Therefore, in September 2023, Rodarmor—fresh off his launch of Ordinals only 10 months prior—proposed Runes, a UTXO-based fungible token protocol for Bitcoin. The first rune was created on Block 840,000 in April 2024, after the highly anticipated halving.

How do Runes work?

The Runes protocol uses the strong foundation of Bitcoin’s code and its most important upgrades to allow developers to create and manage fungible tokens on the blockchain. The main components include:

  • Bitcoin’s base code – Bitcoin transactions use a model called Unspent Transaction Output (UTXO). When a transaction is initiated, BTC in a user’s wallet are divided into 1) UTXOs to be sent to other parts of the network and 2) UTXOs to return to that user as “change.” UTXOs can contain any number of bitcoins/satoshis (or runes), and they can only be used once before being marked as spent. The OP_RETURN “opcode” allows for more flexible storage of arbitrary data on Bitcoin, which is used by Runes to define tokens’ names, symbols, and other information. This information, stored in OP_RETURN script, is called the runestone.
  • Segregated Witness – Launched in 2017, “SegWit” changed how transaction data is processed, ultimately decreasing the size of transactions and allowing more transactions per block.
  • Taproot – Launched in 2021, the Taproot Upgrade also reduced the size and cost of transactions by simplifying signatures (using a new type called Schnorr signatures) and allowing for more complex scripts.

In sum, Runes uses the additional efficiency and functionality of Bitcoin transactions (from SegWit and Taproot) and the base code (UTXOs and OP_RETURN) to specify the parameters of fungible digital assets and allow them to be traded across the network.

Other fungible token protocols on Bitcoin

  • BRC-20 – uses Ordinals as a base protocol, which creates more bloat on the blockchain.
  • SRC-20 – uses Bitcoin Stamps as a base protocol, which writes data directly onto UTXOs.

How are Runes used?

Runes are created (etched) and then released (minted) into users’ wallets before being tradable on the Bitcoin network. Although they exist on Bitcoin’s mainnet, third party wallets and platforms may be necessary to etch, mint, trade, and interact with runes (like Xverse, or Phantom). Despite this extra layer of complexity, runes otherwise operate like any other digital asset familiar to the crypto community.

To date, runes have primarily been used to create and trade memecoins, which means they are primarily speculative assets.

Conclusion

  • Runes are fungible tokens on the Bitcoin blockchain introduced by the developer of Ordinals.
  • Although there are other protocols for creating Bitcoin-based fungible digital assets, Runes are designed to minimize data use and blockchain congestion.
  • Memecoins dominate the runes market, as the protocol was developed with this purpose in mind.

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