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 and how they differ from BRC-20 tokens.

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. 

However, shortly after Rodarmor clarified that the specifications for the token standard were not finalized and that he was working on an indexer.

How Does the Runes Token Standard Work?

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

Token Issuance and Transfer

Creating a new Rune token begins with an issuance transaction where the symbol, token supply, and number of decimals 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. 

A transfer function is used to split a UTXO into several new UTXOs holding different amounts of Runes to send records to recipients.

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 data in OP_RETURN, a special function used to store data on the Bitcoin blockchain. This factor separates the Ordinals and Runes protocols from each other. 

Runes vs. BRC-20 Tokens: Similarities and Differences

Here is how Runes compare to BRC-20 tokens.

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 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 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.