What Are Bitcoin Runes? A Beginner's Guide to the New BRC-20 Token Alternative

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. 

Rodarmor has also been working on the specifications for the token standard and recently released them ahead of the April 2024 launch, where the Runes protocol will be activated on Bitcoin block 840,000. This rollout will take place on the same day as the Bitcoin halving event. 

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.

How to Setup a Bitcoin Node and Mint Runes

Xverse encourages everyone to setup a Bitcoin node to reinforce Bitcoin's principles of decentralization. Running a node for minting and etching Runes is only recommended for those who know how to run a command line and have advanced technical experience.

Xverse is working with many partners in the ecosystem to offer all the same services and more to make it easy for anyone to get started with Runes. While the ecosystem of Runes minting and etching services is swiftly growing, some users may still prefer to run their own Bitcoin node rather than rely on third-party services.

Here's a quick tutorial on how to setup a Bitcoin node and mint Runes.

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:

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. 

The Runes Ecosystem Is Growing

With Runes scheduled to go live on the date of the next Bitcoin halving, Bitcoin builders are already gearing up for the launch by building the supporting infrastructure for Runes tokens. 

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

Runes Marketplaces 

Runes marketplaces are platforms where users can buy and sell runes with their Xverse wallets once the protocol launches.

However, investors can currently trade pre-rune tokens like Runestone, RSIC, Rune Pups, and RuneX: Unnamed on Magic Eden. 

Runes Launchpads

Runes launchpads are websites where projects can launch and drop their tokens. Both Magic Eden and BitX have launchpads that offer marketing support to projects. However, Runes token projects can also launch on Meta Runes, CraftRunes, and Runes Terminal. 

The Meta Runes and CraftRunes launchpads are currently accepting project applications, while the Runes Terminal launchpad hasn’t yet been rolled out. 

Runes Lending Platforms

Runes lending platforms are decentralized applications (dApps) that enable users to lend and borrow runes directly with their Xverse wallets. 

Fluid Tokens is an example of a runes lending dApp on Bitcoin. It offers the permissionless lending and borrowing of both runes and Ordinals. Some pre-rune tokens you can borrow are RSIC, The Rune Guardians, and Runestones.  

Runes vs. BRC-20 Tokens: Similarities and Differences

Here is how Runes compare 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.