Introducing Runes: The Next Step in Bitcoin’s Fungible Token Protocols

A new conversation has stirred about a Fungible token protocol that is based on Unspent Transaction Outputs (UTXO). The new protocol is called Runes, and in this article, we discuss the evolution of the protocol, what it is, how it works, and why it’s important for the Bitcoin network.

Evolution of Runes

For the longest time, the biggest setback for the Bitcoin network was its incompatibility with major defi features. Where Ethereum had ERC-721 and ERC-1155 token standards for NFTs and the Ethereum Virtual Machine (EVM) for defi applications, Bitcoin had little utility outside of trading. In the past few years, things have changed. Bitcoin has introduced the taproot upgrade for smart contracts and, most recently, the BRC-20 token standard.

Released in March 2023, BRC-20 was a big success amongst token developers, and some popular tokens like PEPE have emerged from it. Rationally, a new fungible token standard makes sense because of several benefits like developer interest, increased revenue, and a larger user base. However, fungible token standards as they exist now do not come without consequences.

Casey Rodarmor, in a recent blog post, argued that fungible token standards like BRC-20 tend to litter and clog the network with Unspent Transaction Output (UTXO). UTXOs are simply the leftover coins in a wallet after a transaction has been concluded. UTXOs are arguably necessary for promoting transparency and security on the Bitcoin network, but they need to be effectively managed. Rodarmor proposed a solution in the form of Runes, a UTXO-based fungible token protocol with a good user experience.

What is the Runes Protocol?

Runes is the term for a UTXO-based fungible token protocol for the Bitcoin network. Proposed by Casey Rodarmor, creator of Bitcoin ordinals, Runes protocol presents an alternative approach to fungible token standards by replacing the ordinal technology with a foundation in UTXOs.

Tokens created from the Runes protocol are known simply as news, and they are unique fungible tokens that support distinct characteristics and metadata. The major difference between the Runes protocol and existing token protocols like BRC-20 and Omnilayer is that it is based on the UTXO model, which allows it to offset the influx of UTXOs on the network. Additionally, Runes was thoughtfully designed with users in mind, so it lacks a significant portion of the complex implementation process of other token standards.

How Does the Runes Protocol work?

The Runes Protocol presents a novel approach to integrating fungible tokens into the Bitcoin network, with a strong emphasis on simplicity and utilising Bitcoin’s existing Unspent Transaction Output (UTXO) model. This proposal is designed to facilitate a more efficient and user-friendly method of token management, aiming to align closely with the inherent characteristics of the Bitcoin system.

At the core of the Runes Protocol is its UTXO-based system, where rune balances are maintained within UTXOs. This allows any given UTXO to hold a specified amount of various runes, thereby integrating seamlessly into the Bitcoin blockchain’s structure and promoting effective UTXO management. The protocol distinguishes rune transactions through a special structure, primarily identified by an output containing an OP_RETURN followed by data that signals a protocol message. This structural design is crucial for maintaining the integrity and clarity of rune transactions within the broader Bitcoin network.

Transferring and assigning runes is an intuitive process thanks to an encoded sequence of tuples within a transaction. Think of these tuples as clear instructions:

• ID: The numeric identifier of the rune to be assigned.
• OUTPUT: The index of the output to receive the rune.
• AMOUNT: The quantity of the rune to be transferred.

This straightforward approach ensures transparent and efficient rune distribution within each transaction.

Issuing new runes happens through dedicated issuance transactions that define the symbol and decimal precision of the new asset. If the symbol is unique, a fresh ID is assigned, marking the birth of a new rune within the system. This process fuels the network’s growth by diversifying and expanding the potential uses of runes.

Runes vs Other Fungible Token Protocols

The Runes Protocol takes a distinctive approach to fungible tokens within the Bitcoin network. The token standard is built with certain features that set it apart from existing protocols like BRC-20, RGB, Counterparty, Omni Layer, and Taproot Assets.

First, comparing on the basis of complexity and ease of use, Runes stands out with its simplicity. The standard, which is based on UTXO, is designed to integrate seamlessly with Bitcoin’s UTXO model without the need for off-chain data or complex interactions rampant in other protocols. BRC-20, for example, is based on ordinal theory and requires the user to have some knowledge of the complex ordinal operations. RGB is heavily reliant on off-chain data, while Counterparty and Omni Layer incorporate native tokens into their operations, making adoption even more complicated.

Perhaps the most noticeable difference is the disparity in user experience. Runes is designed as a straightforward system that doesn’t require users to manage additional infrastructure or understand complex mechanisms. Contrastingly, the other standards either rely on off-chain data or personal servers, making complete reliance on the protocol and operations within the Bitcoin network impossible. With so many steps and complexities, getting accustomed to the process is harder, and there are more opportunities for failure, even costly ones.

Finally, the state model compatibility is also a vital consideration. Runes fully embraces the UTXO model on Bitcoin, allowing for natural integration and efficient management. Other protocols are not UTXO-based, and it is the leading cause of the proliferation of “junk” UTXOs, which negatively affects the overall efficiency and scalability of the system.

Future of the Runes Protocol

The success of the Runes Protocol depends entirely on its main features: simplicity, sustainable design, and native UTXO model. More important, however, is how the community of developers and Bitcoin users respond to it.

It is apparent that the protocol provides a straightforward alternative to fungible token systems. Nevertheless, the efficiency or otherwise of the standard will be determined by how easily it is adopted by members of the blockchain and crypto community.

Name: Tamilore Onikosi

Date: 25/12/2023

Data Sources:

https://rodarmor.com/blog/runes/

https://www.gate.io/learn/articles/the-next-evolution-in-bitcoin-asset-issuance-standards/981

https://www.xverse.app/blog/bitcoin-runes

https://defi-planet.com/2023/09/bitcoin-ordinals-creator-proposes-runes-as-alternative-to-brc-20-and-other-fungible-token-protocol/