What is the Bitcoin Runes Protocol?
The Bitcoin Runes Protocol introduces a new fungible token standard on the Bitcoin blockchain.
In September 2023, Casey Rodarmor, the creator of the Ordinals Protocol --- which effectively brought non-fungible tokens (NFTs) to the Bitcoin blockchain ---, introduced the concept of Runes through a blog post, outlining a new utxo-based fungible token protocol for Bitcoin with the goal of enhancing token functionality within the Bitcoin ecosystem.
He later developed and implemented the Runes Protocol, integrating it within the same framework as the Ordinals theory. The new protocol was officially hard-coded into the Bitcoin blockchain at block 840,000 in April 2024.
How do Runes work?
The UTXO model
The Runes Protocol utilizes Bitcoin's native UTXO (Unspent Transaction Output) model.
In cryptocurrencies, UTXOs represent the amount of crypto that remains unspent after a transaction, serving as inputs for future transactions. The UTXO model, used by the Bitcoin network and others, tracks the current location of coins on the network.
A UTXO represents a portion of BTC that remains unspent after a transaction---essentially like spare change left in your pocket. Every Bitcoin transaction works by using existing UTXOs as inputs (similar to spending money) and generating new UTXOs as outputs (like receiving change). You can learn more about how they work in our dedicated help center article: How do UTXOs work?
Runes transactions leverage this UTXO model by consuming the total value of assets in a user's wallet for each transaction. The system then calculates the remaining balance, creating new UTXOs after transferring the specified amount of tokens to the recipient. This ensures compatibility and seamless integration with the Bitcoin network.
OP_RETURN
Runes transactions utilize the OP_RETURN field in Bitcoin transactions to store their instructions. This field serves as a guide, specifying the Rune's name (also referred to as Rune ID), symbol, quantity, and actions (such as transfers or splits).
A single Rune transaction can handle operations for multiple Runes efficiently. To ensure system integrity, Runes include a safeguard: if a transaction contains errors, cenotaphs, or invalid instructions, the affected Runes are permanently removed from circulation in a process called "burning."
The OP_RETURN opcode allows for the inclusion of up to 80 bytes of additional data in a Bitcoin transaction. Runes use this feature to store essential token information, such as the token's name, ID, and supply details, directly on-chain. This method reduces reliance on off-chain data and minimizes the creation of unspendable "dust" UTXOs, which can clutter the network and degrade performance.
Etching
Etching is the process of creating a new token and setting its properties, such as its name, symbol, and divisibility. The etcher of a rune can decide how they distribute it. Runes do not rely on complex smart contracts, making creating tokens on the Bitcoin blockchain a leaner and smoother user experience.
Some projects rewarded early supporters through pre-mining. Pre-mining refers to the initial allocation of runes set aside by its creator. Supporters who held a specific Bitcoin Ordinal before the Bitcoin Halving, for example, would receive an airdrop.
Runes also allow for open minting, depending on the terms set by the etcher. The etcher can set a total supply limit, and individuals can go to minting platforms to mint runes --- like with other tokens, the mint transaction brings the token into existence. Once the total supply limit is reached, the mint closes and no new runes can be created.
What is the difference between BRC-20 Tokens and Runes?
The Runes protocol addresses the limitations of other standards, essentially making it a better and simpler alternative to the experimental BRC-20 token standard for fungible tokens, by offering a more efficient and streamlined approach to token issuance and transactions.
BRC-20 tokens (the equivalent of Ethereum ERC-20 tokens) rely on inscribing data onto individual satoshis, permanently binding the data to each sat as it moves through the Bitcoin network (like Bitcoin Ordinals do). Although upon its creation, the token standard enabled users to creative Bitcoin-native fungible tokens for the first time, it also resulted in the overproduction of dust UTXOs, which caused network congestion.
Runes utilizes Bitcoin's native Unspent Transaction Output (UTXO) model, efficiently integrating with the blockchain's existing infrastructure and reducing the additional data stored on-chain. The Runes Protocol provides a simpler and more Bitcoin-integrated solution compared to BRC-20 tokens and other fungible token protocols. For example, the Taproot Assets Protocol uses UTXOs but stores asset metadata off-chain. Similarly, Counterparty, a protocol built on the Bitcoin blockchain, depends on a native token for certain operations and does not utilize the UTXO model.
BRC-20 tokens may require multiple transactions, leading to higher transaction fees and slower processing times, whereas Runes allow for multiple token transfers within a single transaction.
Runes does not rely on off-chain data to operate, nor does it require a native token. By integrating with Bitcoin's UTXO model and utilizing OP_RETURN for data storage, Runes minimizes on-chain footprint and enhances network efficiency.
Notable Runes projects
In the first few weeks after the halving, over 40,000 Runes digital assets were etched. Several projects rewarded early supporters with Rune tokens airdrops, using several criteria to determine whether users were eligible to receive an airdrop.
Collections such as Runestone took a one-time snapshot of Ordinal holders and distributed their tokens (DOG-GO-TO-THE-MOON for Runestones) after the halving.
RSIC, for example, prioritized longtime holders of their collectibles, who mined the Rune token prior to the launch of the protocol. The longer a holder had an Ordinal, the more RSIC-GENESIS-RUNE tokens the holder was airdropped when the protocol went live.
When Casey Rodarmor launched the Runes protocol following the Bitcoin halving, he hardcoded the first Runes project, UNCOMMON-GOODS. Although there is no cap on the total supply of UNCOMMON-GOODS tokens, minting is only allowed until the next Bitcoin halving, expected around March 2028.
Other notable projects include SATOSHI-NAKAMOTO, which reached one of the highest market caps in the first week of trading, and WANKO-MANKO-RUNES, considered the first Rune memecoin.
Runes can be bought, sold and swapped on Runes marketplaces such as Magic Eden, Dotswap, RunesDex and more. Users will need a Bitcoin wallet which supports Runes, such as Xverse.
Impact on the Bitcoin ecosystem
Runes introduces a novel way to create fungible tokens on the Bitcoin network while capitalizing on its unparalleled security and global infrastructure.
Runes play a crucial role in improving the Bitcoin network's efficiency by consolidating and utilizing small, fragmented UTXOs, known as "dust." By transforming these underutilized fractions into more valuable and functional assets, Runes help clean up the blockchain and reallocate dormant resources. This process not only reduces network clutter but also boosts overall liquidity within the Bitcoin system, fostering a more robust and dynamic blockchain ecosystem.
The protocol empowers users to innovate freely---whether by launching tokens for decentralized organizations (DAOs) or even creating the next big memecoin---all with the reliability of Bitcoin's network at its core. The straightforward design of the Runes standard makes it more accessible for developers to build cutting-edge applications. This ease of use could attract fresh talent and inspire a surge of new projects and ideas centered around Runes.
Runes provide and standardized method for token creation, which in turn enhances Bitcoin's functionality and makes the network a more versatile platform for various use cases. The protocol is designed to work seamlessly with existing Bitcoin infrastructure, including the Lightning Network, enabling faster and more cost-effective transactions.
Much like Bitcoin Ordinals, Bitcoin Runes mark a significant milestone in expanding Bitcoin's utility beyond its original role as a peer-to-peer electronic cash system. Whether it's for community currencies, innovative DeFi solutions, or viral memecoins, by leveraging Bitcoin's strengths---such as decentralization and strong security---Runes unlock new possibilities for the network.