What are Bitcoin Runes? An Overview of the Runes Protocol

Bitcoin Ordinals ushered in a new era for building on Bitcoin. Creators and developers alike were inspired by the potential of inscriptions and subsequent Ordinals-inspired technology.

This included BRC-20 tokens, which originally focused on exploring fungibility on Bitcoin. As of writing, the BRC-20 ecosystem totals almost 52 million transactions and has generated over 4,780 BTC in fees.

The imminent introduction of Runes will mark yet another milestone in Bitcoin’s history. With roots firmly planted in the principles of Ordinals, Runes represents the next evolutionary step in Bitcoin-backed tokens. Set to launch at the 2024 Bitcoin halving, they bring a more streamlined approach that addresses the limitations of previous protocols while pushing the boundaries of what's possible on the Bitcoin blockchain.

The Idea Behind Runes

The creator of Bitcoin Runes, Casey Rodarmor, wanted to improve on the Ordinals protocol. More specifically, Rodarmor wanted to find new ways to enhance the functionality and efficiency of Bitcoin tokens without taking up so much space on the blockchain. 

In a blog post about Runes, Rodarmor acknowledged that creating a novel implementation for memecoins on Bitcoin may not be advisable by some. But his goal with Runes was harm reduction in the face of memecoin inevitability, reducing on-chain “junk” created by more complex protocols, and simplifying the mechanics of fungible tokens directly on the blockchain.

The popularity of Ordinals – and Ordinals-inspired BRC-20 tokens – brought record traffic to the Bitcoin blockchain. But as innovative as these new assets and collectibles were, there were a few drawbacks. Most notably, the process of minting Ordinals and BRC-20 tokens often used a significant amount of block space. This, coupled with the amount of users looking to mint these assets, drove up transaction fees and processing times on the Bitcoin blockchain.

Rodarmor understood the need for a simpler, more user-friendly alternative to existing tokenization protocols like BRC-20 and Stamps. This became the foundation of Runes, which he conceptualized to streamline the tokenization process and minimize unnecessary blockchain bloat. Runes use a space-saving, UTXO-based approach, unlike Ordinals and BRC-20. 

The goal of Runes is to continue pushing the boundaries of what is possible on the Bitcoin network. Tokenization for both NFTs and fungible tokens has become critically important, and Runes offer a way to make fungible token protocols on Bitcoin even more efficient.

What Are Runes?

The Runes protocol is a simpler and more efficient alternative to existing Bitcoin standards for creating native, fungible tokens like BRC-20. Runes involve protocol messages called “runestones” which are stored in transaction outpubs. They are different from BRC-20 tokens in a few key ways. Most notably, they operate directly within Bitcoin's Unspent Transaction Output (UTXO) model. Ordinals and BRC-20, on the other hand, are placed in the witness data of transactions. 

Each UXTO can only contain a single runestone, but it may hold balances of any number of Runes. Rune names consist of a certain number of letters from A to Z and can have a currency symbol represented by a single Unicode code point.

The Runes Protocol is expected to launch at the Bitcoin halving on April 19 and the genesis Rune is named UNCOMMONGOODS. Runes are also numbered according to the sequence in which they’re etched. This means the genesis Rune will be Rune 0 and all subsequent Runes will be numbered accordingly.

How do Runes Work?

An important part of Runes functionality is integration with Bitcoin's UTXO model. When a new Rune token is created, it is assigned to a specific UTXO, allowing for seamless management of token balances.

Transactions involving Runes use specific protocol messages initiated through an OP_RETURN output and additional data pushes. This method allows users to assign and transfer Runes with much more flexibility than other Bitcoin tokens. It also minimizes unnecessary blockchain bloat, reducing stress on the network and the on-chain footprint.

A runestone — the message stored in Bitcoin transaction outputs — can etch, mint, or transfer Runes.

Etching

New Runes are created in a process called etching. This defines the properties of a Rune which, once set, cannot be changed. Some of the properties set in etching include:

• NAME: a name between 1 and 28 characters long, which can contain bullets as spacers.

• DIVISIBILITY: the property defining how many units a Rune can be divided into. For example, a Rune of divisibility 1 can be divided into tenths (0.1).

• PREMINE: the ability for the creator of a Rune to allocate some units to themselves.

• TERMS: the period in which Runes can be minted. After the terms close, new Runes cannot be minted. Terms also include the Rune mint cap, amount, start height, end height, start offset, and end offset.

Minting

If the mint terms of a Rune are open, anyone can mint Runes. This will create new units of that Rune which comply with the terms.

Transferring

The transfer function is the first data push that involves three integers in a sequence: 

• ID: the numeric ID of the token being sent, which is encoded as a delta

• OUTPUT: the UTXO assigned to the token

• AMOUNT: the amount of the token that will be sent

These transactions can often be identified by an uppercase “R” that is included in the transaction’s OP_RETURN data. This process also assigns the token supply to a specific UTXO, which is like a digital container that can hold any amount of Runes. UTXOs can also be broken down into smaller UTXOs, each containing a different amount of Runes. This way, users can send various amounts of Runes to different people in a single transaction.

Transferring can also include edicts, pointers, and burning. An edict defines where and how many Runes will be transferred to an output. This allows users to send Runes to multiple addresses in a single transaction. Pointers determine where remaining unallocated runes are transferred after all edicts are processed. And Runes can be destroyed or “burned” by transferring them to an OP_RETURN output with an edict or pointer.

Cenotaphs

A cenotaph is a malformed Rune that results in all Runes being burned. Mints in a transaction with a cenotaph count towards the mint cap, but the minted runes are burned.

Another notable feature of the Runes protocol is the parameters that prevent symbol squatting. This means users cannot etch desirable Rune names whenever they want. When the Runes Protocol initially launches, only Rune symbols between 13 and 28 characters can be etched.

Approximately every four months after Rune 0, shorter token names will become available, reducing the character requirement by one and following an unlock schedule until single-character symbols become available in roughly four years. 

Runes vs. BRC-20 and SRC-20

As we mentioned, the BRC-20 token standard adds information to the witness data of Bitcoin transactions. SRC-20 tokens, often known as Stamps, use UTXOs to store data, much like Runes. However, they act more like NFTs and their data cannot be pruned from the blockchain.

Runes are similar to BRC-20 tokens in that they are fungible tokens on Bitcoin. They’re similar to SRC-20 tokens in their use of UTXOs but unlike all previous Bitcoin token standards, Runes aim to make the overall user experience better, more flexible, and less costly in terms of data bloat.

Conclusion

When Ordinals took off in 2023, the Bitcoin community became excited about its implications for building on Bitcoin. But most builders also understood that Ordinals were just the beginning of a new era for Bitcoin. Runes are yet another step forward in the journey to efficient, effective, and secure crypto tokens. 

Projects like Ordinals, Bitcoin Stamps, and L2s like Lightning are all playing a role in building a bright future for the Bitcoin ecosystem. Runes are set to add another dimension to the Bitcoin network, expanding the possibilities that can exist on the world’s oldest blockchain.

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