Runes is a Bitcoin native token protocol that empowers issuers to create and manage their own tokens directly on the Bitcoin blockchain. This capability adds utility to the Bitcoin protocol, and if widely adopted, could increase the demand and value of Bitcoin and Bitcoin blockspace.
Runes were launched on April 24, 2024, right after the most recent Bitcoin halving. The introduction of Runes marked another milestone in Bitcoin’s history. With roots firmly planted in the principles of Ordinals, Runes represents the next step in Bitcoin's evolution.
What Are Runes on Bitcoin?
The Runes protocol is a simpler and more efficient alternative to other Bitcoin standards for creating native, fungible tokens such as BRC-20.
They differ from BRC-20 tokens by using a separate data storage model. The data for BRC-20 tokens (as well as Ordinals), are included in the witness data of transactions. In contrast, Runes interface directly within Bitcoin's Unspent Transaction Output (UTXO) model. UTXO is technical jargon for a coin or spendable unit within the bitcoin network.
How Do Runes Work?
Each newly created Rune is assigned to a specific UTXO which holds information or the rule book about the specific Rune in something called a "runestone". Runestones are messages stored in Bitcoin transaction outputs that can etch, mint, or transfer Runes.
Each UXTO can only contain a single runestone, but it may hold balances of many different Rune tokens. Because the Bitcoin protocol already keeps track of UTXOs this allows developers to easily see and manage token balances.
The Runes protocol heavily relies upon OP_RETURN to handle its operations. 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.
Etching and Minting: Creating Rune Tokens
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.
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.
Avoid Error or 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.
Ways of Transferring BTC Runes
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.
Benefits and Downsides of Bitcoin Runes
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.
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.
Here are the pros and cons of Bitcoin Runes at a glance:
Benefits of BTC Runes
Simplifies the issuance of native fungible tokens on Bitcoin
Minimizes on-chain footprint through the UTXO-based model
Allows open minting within terms set by the etcher
Doesn’t require off-chain data to operate
Its simplicity could promote innovation within the Bitcoin ecosystem
Downsides of Bitcoin Runes
Token burns triggered by errors may negatively impact user experience
Still working to establish itself as a viable Bitcoin token standard
Platforms in the Runes Ecosystem
There are several kinds of tools and protocols you can use to interact with Runes.
Runes marketplaces
A marketplace is where you can buy, sell, and trade Runes tokens. Typically decentralized exchanges, Runes marketplaces may offer things like escrow, auction systems, and Runes derivatives. Magic Eden and OKX are examples of marketplaces where users could buy Runes.
Runes lending platforms
Lending platforms allow you to borrow or lend Runes tokens, a key aspect of the decentralized finance (DeFi) ecosystem. Using Runes on a DeFi platform includes things like depositing tokens, earning interest, and accessing liquidity pools.
Runes analytics platforms
Data analytics platforms provide transaction insights, price trends, and usage statistics. Traders, developers, and token creators often use analytics tools to understand token markets and quickly find accurate on-chain data. Analytics platforms can save you time researching and building on Bitcoin.
What is the Use of Runes in Crypto?
The Runes protocol offers a way to create fungible tokens on Bitcoin. While Runes haven’t been live for long, developers and Rune token enthusiasts are already experimenting with how to use Runes for:
Currency
Tokenizing assets
Utility tokens
Participating in DeFi
Because Runes are native to Bitcoin, they share the security and immutability of bitcoins. This allows anyone to create new crypto tokens that are as secure and transparent as Bitcoin itself, without having to move to another blockchain.
How to Buy BTC Runes?
Buying Runes is easy, you’ll need:
A Bitcoin wallet like Leather.
Fund your wallet with Bitcoin.
Use a Runes marketplaces to find Runes you want to buy.
Easily purchase Runes tokens by connecting your wallet to the marketplace.
With Runes tokens in a compatible wallet like Leather, it’s easy to see and manage all your tokens in one user-friendly place.
Bitcoin Runes vs. BRC-20 and SRC-20
Runes, BRC-20 tokens, and SRC-20 tokens all have their advantages and disadvantages.
For example, the Runes protocol automatically burns tokens created through erroneous transactions or cenotaphs, which encourages users to manage UTXOs responsibly. Meanwhile, the BRC-20 protocol allows users to retry after making mistakes, which can lead to more inefficiencies.
The Runes protocol builds upon the Ordinals-based BRC-20 token standard by tapping into Bitcoin's UTXO model. This allows it to function seamlessly on the Bitcoin L1, which minimizes unnecessary UTXO generation and results in a reduced on-chain footprint that boosts overall efficiency.
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, which is similar to Runes. But they do act more like NFTs and their data can’t be pruned from the blockchain.
Runes are similar to BRC-20 tokens in that they are fungible tokens on Bitcoin. They’re also 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 more flexible and less costly when it comes to data bloat.