Bitcoin Runes represent the latest protocol for creating fungible tokens on the Bitcoin blockchain, designed to be both simple and efficient. This guide explains what Bitcoin Runes are, how they function, their key differences from BRC-20 tokens, and how to manage them securely using a compatible wallet.
What Are Bitcoin Runes?
Runes are fungible tokens issued directly on the Bitcoin blockchain using the Runes protocol. Casey Rodarmor, the creator of Ordinals, introduced this new standard in September 2023 as a more efficient and simplified alternative to the BRC-20 token standard.
The BRC-20 token standard, launched by an anonymous developer known as Domo in March 2023, quickly gained popularity. Within just three months, the total market capitalization of BRC-20 tokens surged to $1 billion.
Although BRC-20 allowed users to create native Bitcoin fungible tokens for the first time, it also led to the excessive production of "junk" UTXOs, clogging the network. Rodarmor aimed to address this issue with a UTXO-based protocol that minimizes unnecessary UTXO generation.
Bitcoin operates on a UTXO (Unspent Transaction Output) model, where transactions consist of inputs and outputs. When a transaction occurs, inputs are spent, and new outputs are created. These outputs, known as UTXOs, remain available for future transactions.
Unlike other fungible token protocols on Bitcoin, Runes does not require off-chain data or a native token. For example, the Taproot Assets protocol uses UTXOs but stores asset metadata off-chain. Similarly, the Counterparty protocol, built on top of the Bitcoin blockchain, requires a native token for certain operations and is not UTXO-based.
The Bitcoin community has responded enthusiastically to the Runes protocol. On the same day of its proposal, Trevor Owens of the BTC Frontier Fund offered a $100,000 grant to the first team to develop a Runes indexer, issuance, or transfer tool. Shortly after, Luminex released a Runes issuance tool, allowing users to create and issue their own Rune tokens.
The Runes protocol was activated at Bitcoin block 840,000, coinciding with the Bitcoin halving event.
How Does the Runes Token Standard Work?
Let’s explore the mechanics of the Runes protocol.
Runestones
Messages on the Runes protocol are referred to as Runestones (not to be confused with the Ordinals collection of the same name). These messages can etch new tokens, mint existing tokens, and transfer Runes from transaction inputs to outputs.
Runestones are stored in Bitcoin transaction outputs beginning with OP_RETURN, a special function used for storing data on the Bitcoin blockchain. Each transaction can contain only one Runestone.
Setting Up a Bitcoin Node and Minting Runes
Running a Bitcoin node helps strengthen the decentralization of the Bitcoin network. However, minting and etching Runes via a node requires familiarity with command-line interfaces and a relatively high level of technical expertise.
Many platforms are collaborating to offer user-friendly services for minting and managing Runes. While these services are rapidly evolving, some users may still prefer running their own Bitcoin node rather than relying on third-party solutions.
Below is a brief overview of the node setup and minting process.
Creating Rune Tokens
Creating a new Rune token begins with etching, which defines elements such as the token name, total supply, number of decimals, and minting terms. A single UTXO can hold any quantity of Rune tokens, whether it's billions, millions, or any other amount. UTXOs are used to track Rune token balances.
Here is an example of code used for etching a Rune:
Source: Ordinals.com
During the etching process, it’s crucial to avoid errors or creating "cenotaphs" (malformed Runestones), as tokens associated with such errors will be burned.
Minting and Transferring
After etching, the next steps are minting and transferring. Minting generates the actual tokens based on the terms set during etching, while transfers move tokens from transaction inputs to outputs using "edict" messages. The transfer function splits a UTXO into several new UTXOs, each holding different amounts of Runes, and then sends the record to the recipient.
An edict consists of a Rune ID, block height, transaction index, output number, and amount. The Rune ID identifies the token and includes the block height where the Rune was etched and the index of the etching transaction within that block.
The code structure for minting and transferring is as follows:
If a minting transaction results in a cenotaph, the associated Rune tokens will be burned.
Data Storage
Ordinals inscriptions are created by adding content such as images, audio, and HTML files to the witness section of a Bitcoin transaction. The witness section was introduced with the SegWit upgrade, which split Bitcoin transactions into two parts. The first part contains sender and receiver wallet addresses, while the witness section contains transaction signatures.
Runes do not store data in the witness section. Instead, all data—including etching, minting, and transfer information—is stored in OP_RETURN. This is a key distinction between the Ordinals and Runes protocols.
The Growing Runes Ecosystem
With Runes scheduled to launch on the day of the next Bitcoin halving, developers are already preparing for the release of Rune tokens and building supportive infrastructure.
Let’s take a look at the emerging Runes ecosystem.
Runes Marketplaces
Runes marketplaces are platforms where users can buy and sell Runes using compatible wallets like Xverse.
Investors can currently trade pre-Rune tokens such as Runestone, RSIC, Rune Pups, and RuneX on marketplaces like Magic Eden.
Runes Launchpads
Runes launchpads are websites where projects introduce and distribute their tokens. Magic Eden and BitX offer launchpad services with marketing support for projects. Additionally, Rune token projects can launch on platforms like Meta Runes, CraftRunes, and Runes Terminal.
Meta Runes and CraftRunes are currently accepting project applications, while the Runes Terminal launchpad has not yet been released.
Runes Lending Platforms
Runes lending platforms are decentralized applications (dApps) that allow users to lend or borrow Runes directly from their wallets.
Fluid Tokens is an example of a Bitcoin-based Runes lending dApp. It offers permissionless lending for Runes and Ordinals. Some pre-Rune tokens available for borrowing include RSIC, Runes Guardian, and Runesto.
Runes vs. BRC-20 Tokens: Similarities and Differences
Here’s a comparison between Runes and BRC-20 tokens.
The Runes protocol leverages Bitcoin’s UTXO model, improving upon the Ordinals-based BRC-20 token standard. This allows it to operate within Bitcoin’s base layer, reducing unnecessary UTXO proliferation. As a result, Runes have a minimal on-chain footprint, enhancing overall efficiency.
In contrast, BRC-20 is based on Ordinal Theory, which is not native to Bitcoin. This protocol’s token issuance method often leads to UTXO spam and network congestion.
Another major difference is that the Runes protocol burns tokens if a transaction contains errors or results in a cenotaph, incentivizing proper UTXO management. The BRC-20 protocol, on the other hand, allows users to retry after mistakes.
Advantages and Challenges of Runes
Let’s examine the benefits and challenges of the Runes protocol.
Advantages
- UTXO-based model minimizes on-chain footprint
- Simplifies the process of issuing native fungible tokens on Bitcoin
- Its simplicity may foster innovation within the Bitcoin ecosystem
- Operates without relying on off-chain data
- Allows open minting under conditions set by the etcher
Challenges
- Must compete with the widely adopted BRC-20 standard
- Token burning due to errors may negatively impact user experience
- Not yet established as a viable Bitcoin token standard
The Rise of Fungible Tokens on Bitcoin
Since the introduction of the Ordinals protocol in 2023, the development of fungible tokens on Bitcoin has progressed significantly.
The numbering scheme known as "Ordinal Theory" was initially used to create non-fungible tokens (NFTs) by inscribing arbitrary data onto individual satoshis. These NFTs, called Ordinal inscriptions or digital artifacts, differ from NFTs minted on other blockchains.
In early 2023, shortly after the rise of Ordinal inscriptions, the experimental BRC-20 token standard was launched in March. It introduced fungible tokens directly on Bitcoin and sparked a meme token explosion. However, the BRC-20 standard proved inefficient and complex, as it required users to first mint an NFT to create a BRC-20 token.
As a result, the ORC-20 token standard was introduced a month later to address BRC-20’s inefficiencies and other issues, such as a naming system limited to four characters and insufficient anti-double-spend mechanisms.
With the emergence of the Runes protocol, the process of issuing fungible tokens on Bitcoin is becoming more refined. This indicates a strong desire among developers to find the optimal way to issue fungible tokens on Bitcoin’s base layer while minimizing adverse effects.
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Frequently Asked Questions
What are Runes in Bitcoin?
Runes are native Bitcoin fungible tokens based on the Runes protocol. This protocol aims to enhance the issuance of fungible tokens on Bitcoin through efficient UTXO management and a minimal on-chain footprint, making it more efficient than the Ordinals-based BRC-20 token standard.
What is the Runes protocol for Bitcoin?
The Runes protocol is a mechanism for creating, minting, and transferring fungible tokens directly on Bitcoin. It strives to be more efficient than the BRC-20 token standard by providing proper UTXO management and reducing on-chain footprint. The protocol achieves this through a UTXO-based model that aligns well with Bitcoin’s architecture. Proposed in September 2023, Runes launched in April 2024.
How can I invest in Runes?
You can invest in Runes by purchasing various Rune tokens. Alternatively, you can use Runes lending protocols to earn interest by lending your tokens. If you’re considering investing in Runes, remember that these tokens carry high risk. Always conduct thorough research before purchasing any Rune tokens.
What wallets support Rune tokens?
Several wallets now support Rune tokens, offering features for storing, sending, and receiving these assets. It’s essential to choose a wallet that is compatible with the Runes protocol and provides robust security measures.
Are Runes more efficient than BRC-20 tokens?
Yes, Runes are designed to be more efficient than BRC-20 tokens. By leveraging Bitcoin’s native UTXO model and avoiding off-chain data requirements, Runes reduce network congestion and minimize unnecessary UTXO proliferation.
Can I create my own Rune token?
Yes, you can create your own Rune token through a process called etching. This requires defining the token’s properties, such as its name, supply, and divisibility. However, the process demands technical knowledge, and users should be cautious to avoid errors that could lead to token burns.