ZoneBitcoin EditorialThe Runes Protocol is a new fungible token standard on Bitcoin that was designed to improve on its predecessor: BRC-20. Scheduled to be launched in April 2024 during the halving, this new standard is generating a lot of enthusiasm and criticism within the Bitcoin community.
In this article, we will explain in detail how the Runes protocol works, as well as the differences between Runes tokens and BRC-20 tokens.
What is the Runes protocol?
The Runes protocol is a creation by Casey Rodarmor, the developer behind the protocol Ordinals. He uses the Unspent Transaction Outputs (UTXO) as a basis for the issuance of fungible tokens and helps reduce the amount of UTXOs that clutter the Bitcoin network. The main goal of the Runes protocol is then to resolve network efficiency and congestion issues caused by BRC-20 tokens.
Runes were built for degens and memecoins, but the protocol is simple, efficient, and secure. It is a legitimate competitor to Taproot Assets and RGB.
— Casey (@rodarmor) April 1, 2024
The protocol is self contained and has no dependencies on ordinals or inscriptions, making it extremely simple.
Scales are…
The Runes Protocol was announced in September 2023 as a more efficient alternative to BRC-20. While BRC-20 allows users to create fungible tokens on Bitcoin, it has been criticized for its complexity and excessive creation of UTXOs that clutter the network. Many people have criticized the fact that this resulted the rise in transaction fees on the network. The Runes protocol solves these problems by reducing the on-chain footprint.
How does the Runes protocol work on Bitcoin?
The Runes protocol works by integrating Bitcoin's existing UTXO model, where transactions are composed of inputs and outputs. When you make a Bitcoin transaction, the output of your previous transaction is used as input to the new transaction. The input is consumed when the transaction is complete, and a new output is generated. UTXOs are the outputs generated at the end of the transaction and indicate how much Bitcoin you have left for future transactions, while preventing the famous “double spending".
The Runes protocol uses OP_RETURN to denote the token supply, ID, and output to a specific UTXO. The token supply defines how many Rune tokens the specific UTXO can hold, while the identifier is the identification number of the Rune. During a transfer, the UTXO is split into multiple UTXOs with varying amounts of Rune. UTXOs are used to track Rune token holdings.
The Runes protocol uses OP_RETURN to store data directly on-chain without affecting the efficiency of the Bitcoin network. OP_RETURN is a native Bitcoin data storage function with provable non-spendable outputs that do not clutter UTXOs.
A single OP_RETURN encodes all Rune messages (Runestones) in a transaction, including registration, transfer and creation. Malformed Runestones are called Cenotaphs, and the protocol burns all Runes in a Cenotaph transaction.
The process of creating new Rune tokens is called etching. The inscription defines the rules of governance and the immutable attributes of the Rune. Runes may also have optional pre-mining capabilities, where the miner receives a predetermined quantity of tokens before they are released to the market.
Runes can be created in an open or closed fashion, each with structured parameters and conditions defined during registration. Token creation is stopped when the parameters are no longer satisfied.
Runes vs BRC-20: What are the differences?
Runes solve the problem of excessive UTXO proliferation and network congestion caused by BRC-20 tokens. Although Runes and BRC-20 create and issue fungible tokens on the network, Runes integrates with the existing UTXO model, reducing the on-chain data footprint. Therefore, Runes have lower data storage requirements and are more efficient than BRC-20s.
The BRC-20 is based on the theory of Ordinals, which requires technical knowledge of complex procedures, Ordinals and off-chain data. In contrast, Runes have a simpler system that does not require additional infrastructure, making them user-friendly and accessible.
Runes destroy malformed tokens created with Cenotaphs, giving the protocol new semantics to ensure security and minimize unnecessary egress. In contrast, the BRC-20 token issuance approach results in high on-chain metadata generation, which clutters the Bitcoin network.
However, Runes needs a standardization framework, which hampers protocol consistency, unlike BRC-20, which has an established standard and is also more accepted in the Bitcoin community.
Here is a summary of the differences between these two token standards on Bitcoin:
| Runes | BRC-20 |
|---|---|
| Release date | April 2024 |
| Creator | Casey Rodarmor |
| Model | UTXO |
| Data storage | OP_RETURN |
| Creation of tokens | Open and closed |
| Compatibility | SPV, DLC and Bitcoin L2 wallets such as Lightning |
| On-chain footprint | Minimal |
| Normalization | Fragmented |
What will Runes bring to the Bitcoin ecosystem?
The Runes protocol offers a unique approach to creating fungible tokens on the Bitcoin network, which could attract more users to the ecosystem. Its simplicity and straightforward procedure makes it easier for more people to participate in creating new token projects running on Bitcoin.
The Runes protocol is based on UTXOs, offering a simple procedure for issuing assets with a small on-chain footprint that borrows the security model of Bitcoin. An efficient data storage model and the destruction of malformed tokens will make Bitcoin less cluttered and more scalable.
Additionally, creating different types of fungible tokens can increase the utility of Bitcoin, improving user adoption in line with Bitcoin's fundamentals. As more people interact with Runes, transaction fees will incentivize miners to continue securing the network, both before and after Bitcoin halving.
Although the protocol is still in development and has not yet revealed its full potential, its promises could revolutionize tokenization on Bitcoin and network data management.
Final word
Some are enthusiastic about this new protocol which will be able to create and probably establish new usage patterns with Bitcoin. This is ultimately the opinion of those who are looking for new uses for Bitcoin and who are open to the creation of new protocols. For other people, this protocol burdens Bitcoin even more and distances users from the true function of bitcoin, which is to serve as a means of payment.
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