What Are Bitcoin Runes?
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What Are Bitcoin Runes?

What Are Bitcoin Runes?

Intermediate
Published May 17, 2024
6m

Key Takeaways

  • Bitcoin Runes is a protocol that enables the creation of fungible tokens on the Bitcoin blockchain.

  • The Bitcoin Runes protocol utilizes Bitcoin’s UTXO model and the OP_RETURN opcode to simplify the creation and management of fungible tokens on the Bitcoin network.

  • Some benefits of Bitcoin Runes include increased efficiency and a straightforward approach to creating fungible tokens.

Introduction

Over the years, the Bitcoin ecosystem has expanded to incorporate both fungible and non-fungible tokens (NFTs) within its network. In this article, we will explore the Bitcoin Runes protocol, how it works, key differences from BRC-20 tokens, and its potential benefits.

What Are Bitcoin Runes?

Bitcoin Runes is a protocol that enables the creation of fungible tokens on the Bitcoin blockchain. Unlike BRC-20 and SRC-20 tokens that also operate on the Bitcoin blockchain, Runes are not reliant on the Ordinals protocol and are designed to be simpler and more efficient. They utilize established Bitcoin blockchain models, such as the UTXO model and the OP_RETURN opcode.

How Do Bitcoin Runes Work?

The Bitcoin Runes protocol operates through two fundamental mechanisms of the Bitcoin blockchain: Bitcoin’s UTXO (Unspent Transaction Output) transaction model and the OP_RETURN opcode. 

In the UTXO transaction model, each transaction results in outputs that are treated as separate pieces of digital currency. To initiate a transaction, you use these outputs as inputs. The UTXO model allows for the tracking of every unit of cryptocurrency. In the context of Bitcoin Runes, each UTXO can hold different amounts or types of Runes, which simplifies the management of tokens.

The OP_RETURN opcode allows users to attach additional information to Bitcoin transactions. This opcode facilitates the inclusion of up to 80 bytes of extra data in an unspendable transaction. Bitcoin Runes specifically use the OP_RETURN opcode for storing the token data, such as the token’s name, ID, symbol, commands for specific actions, and other essential data. The data is stored in what is referred to as the Runestone within the OP_RETURN opcode of a Bitcoin transaction.

Etching and minting Runes on Bitcoin

The process of creating a new Rune is called etching. Etching involves specifying some key details, including the Rune’s name, symbol, ID, supply amount, divisibility, and other parameters. All of this data is recorded in the OP_RETURN output of a blockchain transaction. During the etching process, creators also have the option to include a "premine," allowing them to allocate a certain portion of the Rune to themselves before it becomes available to the public.

Once a Rune is etched, it can be minted either through open or closed mints. Open minting allows anyone to generate new Runes after the initial etching by creating mint transactions. In contrast, closed mints allow the minting of new tokens only when predetermined conditions are met, such as a specific time period, after which the minting process is finished.

Bitcoin Runes vs. BRC-20

Operation model

Bitcoin Runes operate based on Bitcoin's UTXO (Unspent Transaction Output) model. Conversely, BRC-20 tokens are based on the Bitcoin Ordinals protocol, wherein data is attached directly to individual satoshis (sats).

Token transfer

Bitcoin Runes utilize a transfer mechanism where transactions create a new set of UTXOs based on the data stored in the OP_RETURN field of a Bitcoin transaction. In contrast, BRC-20 token transfers require the creation of new inscriptions for each transaction.

Token minting

Runes can be minted using either open or closed minting procedures, with the option for premining available to developers. In contrast, BRC-20 minting is limited to the open minting procedure, limiting the flexibility in how tokens can be initially distributed.

Management

The Bitcoin Runes protocol is compatible with the Bitcoin Lightning network and supports both lightning clients and SPV (Simplified Payment Verification) wallets. Conversely, BRC-20 tokens require wallets that support the Ordinals protocol.

Benefits of Bitcoin Runes

Efficiency

Bitcoin Runes provide an efficient method of handling tokens on the Bitcoin network through their use of the OP_RETURN model. This prevents the creation of unspendable UTXOs that can clog the network. The OP_RETURN code only takes up 80 bytes of data, unlike BRC-20 inscriptions that can use up to 4MB. This contrast in data usage helps decrease the load on the Bitcoin network, enhancing its performance and reducing the risks of congestion.

Simplicity

Relative to other alternatives, Bitcoin Runes enable a more straightforward creation and management of multiple fungible tokens directly on-chain. This is achieved without the need for off-chain data or the creation of native tokens, thereby avoiding the generation of excessive "junk" UTXOs. This approach simplifies the process of token management and makes it more accessible to a wider range of users.

Potential to expand user base

Ordinals and BRC-20 have previously facilitated the creation of fungible meme coins, attracting more users to the Bitcoin network. The introduction of Bitcoin Runes has also sparked interest among cryptocurrency communities and meme coin enthusiasts, especially prior to and right after its launch in April, 2024. While the protocol’s activity decreased after launch, it presents a new use case for Bitcoin that can potentially attract more users in the future.

Closing Thoughts

Bitcoin Runes is a protocol that allows for the creation of fungible tokens on the Bitcoin blockchain. It utilizes both the UTXO model and the OP_RETURN opcode to improve the efficiency of handling tokens on the Bitcoin network. Runes have the potential to attract more users to Bitcoin and simplify the process of creating new tokens.

Further Reading

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