Introduction to Runes: Fungible Tokens On Bitcoin

Introduction to Runes: Fungible Tokens On Bitcoin

Bobby Shell
Bobby Shell

April 18, 2024

Introduction to Runes

The Runes protocol is a new standard for issuing fungible tokens natively on the Bitcoin blockchain. It allows users to create interchangeable tokens.

Some key concepts:

  • Fungible tokens: Tokens that are interchangeable with each other. For example, 1 "beef coin" equals any other "beef coin".
  • BRC-20: An existing standard for producing fungible tokens on Bitcoin.
  • Non-fungible token (NFT): Tokens that are unique and not interchangeable, such as a specific "Beef NFT" image.
  • Ordinals: A system for assigning individual satoshis unique properties. This enables NFT-like capabilities on Bitcoin.
  • UTXO: "Unspent transaction outputs" - an amount of bitcoin authorized by a sender and available to be spent by a recipient.

Runes aims to provide a simple, efficient way to create and trade fungible tokens on Bitcoin. It improves upon existing token standards like BRC-20 and leverages UTXOs to enable token balances and transfers.

The goal is to bring more developer activity and mainstream users to Bitcoin. However, there are concerns about the impact on Bitcoin's network capacity and culture.

Background on Runes

Runes was created by Casey Rodarmor, who also created the Ordinals protocol for Bitcoin. Rodarmor had several goals in mind when developing Runes:

At a high level, Runes allows users to create fungible tokens on top of Bitcoin simply and efficiently. This enables capabilities like meme coins that have not previously been possible natively on Bitcoin.

How Runes Work

Runes builds on the Ordinals protocol by generating transactions using Bitcoin's unspent transaction outputs (UTXOs). UTXOs are the amounts of bitcoin left over after a transaction, similar to the change remaining after a cash purchase.

The Runes protocol extends the UTXO concept by allowing each UTXO to contain balances of different Runes tokens. For example, a single UTXO could hold 10 units of Rune A, 100 units of Rune B, and 1000 units of Rune C.

This is accomplished by attaching data to UTXOs using a Bitcoin transaction type called OP_RETURN. This OP_RETURN transaction contains information specifying the Rune balances in that UTXO.

The Runes balances can be transferred to new UTXOs when a transaction occurs. Any remaining UTXO amounts that have not been transferred have been destroyed.

Compared to the existing BRC-20 standard, Runes allows more efficient transfers. With BRC-20, users can only transfer one token type per transaction. However, with Runes, users can transfer any number of Rune balances from the inputs to the desired outputs in a single transaction.

By building on Bitcoin's base layer functionality, Runes aims to enable easy and efficient creation and transfer of fungible tokens natively on Bitcoin.

Impact on the Bitcoin Network

Runes aims to mitigate the UTXO bloat issue caused by BRC-20 tokens and other fungible tokens created on Bitcoin. As more tokens are traded, more small UTXOs are created over time, increasing the overall size of the UTXO set that every node in the Bitcoin network needs to track.

For example, the UTXO set grew from 86 million UTXOs (5 GB) in April 2022 to 140 million UTXOs (8.74 GB) in November 2022. The increased data causes network congestion and can make transactions more expensive over time if left unchecked.

Runes helps address this by allowing users to bundle multiple token transfers into a single transaction. The goal is to reduce the rate of new UTXO creation caused by token trading.

However, there is an ongoing controversy regarding tokens on the Bitcoin network in general.

On one side are those who believe Bitcoin should focus solely on being digital cash and storing value. They view tokens as unnecessary bloat or an attack that detracts from Bitcoin's core purpose.

On the other side are those who believe Bitcoin should evolve into a multi-purpose blockchain that also supports token creation. They see it as expanding Bitcoin's utility and making the network more competitive with other blockchains.

In the long run, it's unclear whether tokens like Runes will congest Bitcoin irreparably or bring benefits like miner revenue and new users to the network. For now, tokens are likely here to stay, so improvements like Runes may help mitigate their potential downsides.

Runes vs BRC-20

Runes aims to improve the existing BRC-20 standard for creating tokens on Bitcoin. The key differences between Runes and BRC-20 are:

Overall, Runes aims to provide a simpler, more efficient system for creating fungible tokens on Bitcoin compared to existing standards like BRC-20. A key advantage is bundling multiple token transfers into a single transaction.

Creating and Transferring Runes

Creating new Runes tokens starts with "etching", which mints a new Rune into existence. This is done by sending Bitcoin to an OP_RETURN output that contains the Rune definition. (aka burning Bitcoin, and it can not be used)

To transfer Runes between users, the sender includes the Rune balances they want to send in the transaction inputs. The Runes are then transferred to the recipient by specifying the output addresses and Rune amounts.

Some key advantages of transferring Runes:

Overall, the Runes protocol provides a simple yet powerful system for creating and transferring tokenized assets on top of Bitcoin. The streamlined process enables use cases like memes, badges, collectibles, and other custom assets without congesting the blockchain.

Adoption Potential

The question surrounding Runes is whether it will drive usage and adoption like Ordinals did. Ordinals was hugely popular, generating over $250 million in miner fees. However, it also led to network congestion due to increased transactions.

Runes have the potential to be even more popular with speculators and gamblers looking to mint tokens and trade meme coins on Bitcoin. The ability to quickly spin up fungible tokens will surely attract interest from that crowd.

However, Bitcoin maximalists may not be so keen on Runes. Many maximalists view tokens besides the native BTC as frivolous and detrimental to Bitcoin's core purpose as a store of value. They argue that they waste precious blockchain space and tarnish Bitcoin's image.

Whether the benefits of increased usage and miner fees will outweigh the downsides of congestion and UTXO bloat remains to be seen. Runes may bring more developer activity to Bitcoin but also push the boundaries of acceptable use.

The extent of Runes' adoption will likely depend on how much traction it gains with speculators versus how much resistance it faces from BTC purists. Its ultimate impact is still uncertain, but it is a fascinating experiment either way.

Criticisms and Concerns

Runes has faced criticism from some members of the Bitcoin community. Here are some of the main concerns that have been raised:

Moral arguments against gambling/speculation

Some Bitcoin maximalists view tokens as frivolous and as enabling irresponsible gambling or speculation. They argue that tokens detract from Bitcoin's core purpose as a store of value and digital gold. These are moralistic arguments against encouraging gambling behaviors.

Fears of congesting the bitcoin network

One thing that has been experienced prior and is expected with Runes could lead to severe congestion on the Bitcoin network. As more tokens are created and traded, this can bloat the UTXO set if not appropriately managed.

Every node has to be able to parse the entire UTXO set to validate transactions. So a drastically larger UTXO set makes it harder to run nodes, which could lead to more centralization. This could make Bitcoin usage more expensive and harder to validate.

Some argue that Ordinals and other token projects have already added significant bloat. They worry Runes could exacerbate the issue if it sees major usage. Advocates argue Runes is more efficient than other token designs. But the impact is still untested.

To wrap up

Runes is an interesting new protocol launched on the Bitcoin network that allows users to create and transfer fungible tokens, known as Runes, natively on Bitcoin. This new functionality can attract new developers and users to Bitcoin while generating more fees for miners. However, it remains controversial among some Bitcoin maximalists who view token creation as frivolous and wasteful.

Here are some of the key points about Runes:

Understanding emerging protocols like Runes is important for anyone following Bitcoin's evolution. While the impact remains uncertain, Runes is willing to experiment and expand Bitcoin's capabilities. However, it also surfaces tension between Bitcoin's roots as sound money versus a platform for innovation. How this plays out will be fascinating to follow in the months and years after Runes goes live.

In other fun news… this week LRC-20 was announced, view the Github here as it is developed.

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