What Are Bitcoin Runes? A Beginner's to the New Token Protocol

Runes is the latest fungible token protocol to hit the Bitcoin ecosystem, with promises of simplicity and efficiency. In this guide, you will discover what Bitcoin Runes are, how they work, how they differ from BRC-20 tokens, and how to safely store them in your Xverse Runes wallet.

What Are Runes in Bitcoin? 

Runes are fungible tokens issued directly on Bitcoin using the Runes protocol. Ordinals creator Casey Rodarmor proposed the new protocol in September 2023, pitching it as a better and simpler alternative to the experimental BRC-20 standard for fungible tokens. 

BRC-20 tokens gained a lot of popularity shortly after the Bitcoin token standard was launched in March 2023 by the pseudonymous developer Domo. About three months later, the value of BRC-20 tokens soared, hitting a market cap of $1 billion. 

Although the token standard allowed users to create Bitcoin-native fungible tokens for the first time, it also led to the excessive production of “junk” UTXOs, which clogged the network. Rodarmor seeks to solve this issue with a UTXO-based protocol that will prevent the generation of “junk” UTXOs. 

Bitcoin uses the UTXO model, where a transaction consists of inputs and outputs. When a transaction occurs, the input is deleted, and an output is generated. The output left behind is referred to as a UTXO, which can be used later in a new transaction. In other words, unspent transaction outputs (UTXOs) are the coins left in a wallet after completing a transaction.

Unlike other fungible token protocols for Bitcoin, Runes doesn’t require off-chain data or a native token to operate. For instance, the Taproot Assets Protocol uses UTXOs but stores asset metadata off-chain. Alternatively, Counterparty, a protocol built on top of the Bitcoin blockchain, requires a native token for some operations and is not UTXO-based.

The Bitcoin community has reacted to the Runes protocol with much enthusiasm that the first Rune token, $RUNE, was issued on the same day Rodarmor made the announcement. 

BTC Frontier Fund’s Trevor Owens also offered a $100,000 grant that same day to the first team to produce a working Runes indexer, issuance, or transfer application. A few days later, Luminex introduced a Runes issuance tool that allows users to create and issue their own Rune tokens. 

The Runes protocol was activated in April on Bitcoin block 840,000, at the same time as the fourth Bitcoin halving. 

How Does the Runes Token Standard Work?

Now, let’s take a look at how the Runes protocol works. 

Runestones

Messages on the Runes protocol are known as runestones (not to be confused with the Runestones Ordinals collection). They can etch new tokens, mint existing tokens, and transfer runes from transaction inputs to outputs. 

Runestones are held in Bitcoin transaction outputs that begin with OP_RETURN, a special function that stores data on the Bitcoin blockchain. At most, one rune may be included in a transaction.

Creating Rune Tokens

Creating a new Rune token begins with etching, where elements such as name, token supply, number of decimals, and minting terms are defined. The token supply is assigned to a specific UTXO, allowing a single UTXO to contain any amount of any number of Runes, be it a billion, million, or less. UTXOs are used to keep track of the Rune token balances.

Here’s the code used to etch a new Rune token:

Source: Ordinals.com

It’s important to avoid errors or cenotaphs when etching runes because those tokens will be unmintable.

Minting & Transferring

The next steps after etching are minting and transfer. Minting generates the actual tokens according to the set terms, while Runes tokens are transferred from transaction inputs to outputs using edict messages. The transfer function splits a UTXO into several new UTXOs holding different amounts of runes to send records to recipients.

An edict is made up of a Rune ID block height and transaction index, the output number, and the amount. The Rune ID is used to identify tokens, and it comprises the block in which a rune was etched, as well as the index of the etching transaction stored within that block. 

The mint and transfer code structures are as follows:

Runes tokens will be burned if the minting transaction has a cenotaph.

Data Storage 

Ordinal inscriptions are created by adding content like images, audio, and HTML files into the witness section of a Bitcoin transaction. The witness section was introduced by the SegWit upgrade, which changed the Bitcoin transaction format by dividing it into two parts. The first part holds the wallet addresses of the sender and receiver, while the witness segment contains transaction signatures.

Instead of storing data in the witness part of a transaction, Runes stores all data, including etching, minting, and transfer messages in OP_RETURN. This factor separates the Ordinals and Runes protocols from each other. 

Platforms in the Runes Ecosystem

Bitcoin builders have already launched multiple platforms in the still-nascent Runes ecosystem, expanding the infrastructure for runes tokens. 

Let’s take a look at the budding Runes ecosystem. 

• Runes marketplaces are decentralized exchanges that allow you to buy and sell runes using your Xverse wallet. 
• Runes lending platforms are autonomous lending dApps that enable you to borrow and lend runes on a peer-to-peer basis. 
• Runes launchpads are platforms where builders can launch and distribute their tokens to investors.
• Runes analytics platforms are data tools for exploring what is happening in the world of runes tokens. 

Below are ten notable platforms that have sprung out of Bitcoin’s growing Runes ecosystem:

Runes marketplaces

Dotswap

Dotswap is an automated market maker (AMM) where you can buy, sell, or trade Bitcoin-based assets. The exchange is designed to facilitate trustless transactions. While the platform keeps funds in custody for its liquidity pools, you can make trades directly from your non-custodial wallet. 

Fluid BTC

FluidBTC is a decentralized exchange built on top of a dynamic orderbook that facilitates peer-to-peer (P2P) digital asset swapping, non-custodial storage, and P2P lending. Some Rune tokens you can trade, lend, or borrow on Fluid BTC include RSIC, Rune Guardians, and Runestones. 

Saturn BTC

Saturn BTC is a P2P platform where you can buy, sell, and trade runes. The non-custodial exchange uses an order book system to match buyers and sellers. You can make trades by setting your own prices or buying at the current market price, and a central system will help match the trades.

RunesDEX

RunesDEX is an AMM built on Bitcoin for trading runes for BTC. The exchange supports permissionless swaps, and it uses non-custodial storage when handling funds for its liquidity pools. 

RunesFi

RunesFi is a platform available on testnet that offers a DEX for trading BRC-20 and runes tokens. Full details of the platform are not yet available since it is in the test phase. However, besides the DEX, it also aims to launch a Runes explorer and a bridge from Bitcoin to Ethereum (ETH) and other blockchains.

Runes lending platforms

Liquidium

Liquidium is a lending platform for Bitcoin assets, where runes, BRC-20 tokens, and Ordinals serve as collateral, while lenders earn interest on their BTC holdings. Once the borrower repays the loan, the protocol deposits interest into the lender’s wallet alongside their BTC. In case the borrower defaults, the lender receives the collateral.

Runes launchpads

Magic Eden

Magic Eden is an NFT marketplace and launchpad that also supports Bitcoin-native tokens such as BRC-20, Ordinals, and runes. As a launchpad, the platform also allows builders to kick-start new projects and build partnerships with global brands.

Meta Runes

Meta Runes is the flagship project of the Runes protocol-based Meta, an all-in-one incubation platform for DeFi (decentralized finance). The project is a launchpad that aims to facilitate creating runes, helping builders launch their ideas, enhancing airdrop campaigns, and personalizing runes tokens. 

Runes analytics platforms  

Runealpha

Runesalpha is an analytics platform to keep an eye on what is happening in the world of the Runes Protocol, including token transactions, trading volumes, and a heat map that indicates the best and worst performers. Moreover, Runealpha provides a toolbox for etching and minting tokens, as well as a marketplace for traders to buy or sell runes.

Ord.io

Ord_io is a data explorer and tooling platform for sharing or discovering runes and ordinals. Recently, it has also introduced the Degen Chat, which includes rune-gated live chats, holder rank, and mint count flairs. The platform has a special feature that can identify and tag inscriptions with relevant labels using the latest object recognition software. 

Runes vs. BRC-20 Tokens: Similarities and Differences

Here is how Runes compares to BRC-20 tokens.

The Runes protocol improves the Ordinals-based BRC-20 token standard by adopting Bitcoin's UTXO model. This allows it to operate within Bitcoin Layer 1, or the base blockchain, and reduce the production of unnecessary UTXOs. Therefore, Runes has a minimal on-chain footprint and improves overall efficiency. 

On the contrary, BRC-20 is based on Ordinal Theory, which is not native to Bitcoin. The protocol’s token issuance approach also leads to UTXO proliferation and network congestion. 

Another key difference between the two protocols is that Runes burns tokens created or minted using transactions with errors or cenotaphs, motivating users to exercise correct UTXO management. Conversely, the BRC-20 protocol permits users to try again when they make mistakes.

Benefits And Challenges of Runes

Let’s take a look at the benefits and challenges of Runes.

Benefits

• Minimizes on-chain footprint thanks to the UTXO-based model
• Simplifies the issuance of native fungible tokens on Bitcoin
• Its simplicity could promote innovation in the Bitcoin ecosystem
• Doesn’t require off-chain data to operate
• Allows open minting within terms set by the etcher

Challenges

• Competition from the widely accepted BRC-20 token standard
• Token burns triggered by errors can adversely affect user experience
• Yet to establish itself as a viable Bitcoin token standard 

The Rise of Fungible Tokens on Bitcoin

The rise of fungible tokens on Bitcoin has advanced significantly in 2023 since the launch of the Ordinals protocol, which ushered in the concept of numbering satoshis (sats) in the order in which they are mined. 

This numbering scheme, called Ordinal Theory, was initially used to create non-fungible tokens directly on the Bitcoin blockchain by inscribing arbitrary data to individual sats. These NFTs were referred to as Ordinal inscriptions or digital artifacts, differentiating them from NFTs minted on other chains. 

Shortly after Ordinal inscriptions rose to popularity in early 2023, the experimental BRC-20 token standard was rolled out in March based on the Ordinal Theory. It brought fungible tokens directly to Bitcoin and led to the explosion of meme tokens. However, the BRC-20 token standard was inefficient and complex because it required users first to mint an NFT to create a BRC-20 token. 

As a result, the ORC-20 token standard was introduced a month later to address the inefficiency issues of BRC-20 and to solve other challenges, such as the naming system, which was limited to 4 letters, and the lack of a sufficient anti-double-spending mechanism.

With the Runes protocol now in the picture, the issuance of fungible tokens on Bitcoin is becoming more and more polished. This shows that developers are eager to find the best way to issue fungible tokens on the Bitcoin base layer with as few adverse effects as possible.

‍To safely and securely manage your runes tokens, download Xverse today!

FAQs 

What Are Runes In BTC?

Runes are fungible tokens native to Bitcoin based on the Runes protocol. The protocol promises to enhance fungible token issuance on Bitcoin through proper UTXO management and 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 seeks to be more efficient than the BRC-20 token standard by providing correct UTXO management and lowering the on-chain footprint. The Runes protocol achieves this by leveraging a UTXO-based model that fits naturally into Bitcoin’s architecture. Runes was proposed in September 2023 and will launch in April 2024. 

How to Invest In Runes?

You can invest in Runes by purchasing the various runes tokens. Alternatively, using runes lending protocols, you can earn interest by lending your Runes tokens. If you are considering investing in runes, remember that these tokens are highly risky. Therefore, conduct thorough research before buying any runes token.

What Is the Primary Utility of Bitcoin Runes?

The primary purpose of the Bitcoin Runes protocol is to provide a more efficient method for minting and trading tokens on the Bitcoin blockchain. It facilitates the creation and management of fungible tokens by implementing unspendable UTXOs (unspent transaction outputs) and avoiding so-called "junk UTXOs" specific to BRC-20 tokens, which have historically clogged the Bitcoin network.

How to Buy BTC Runes?

Deposit funds to a Bitcoin wallet that supports runes, such as Xverse. Visit a marketplace like Magic Eden, where you will find a diverse range of Bitcoin runes, choose the tokens you want, and select a needed amount before clicking the Buy button.