What is the Bitcoin Runes protocol, exactly?

The Bitcoin Runes protocol is a fungible token standard on Bitcoin.

The Runes Protocol proposes a new token standard that simplifies the process of creating fungible (replaceable by an identical item) tokens that can be used and managed on the Bitcoin network.

Casey Rodarmor, the founder of the Ordinal Protocol, created the protocol with an eye towards a more Bitcoin-integrated token system compared to BRC-20s.

Similar to Ordinals, BRC-20 tokens rely on inscribing data on individual satoshis (sat), Bitcoin's smallest unit. This means that once data is attached to a sat, it becomes permanently associated with it as it travels through the Bitcoin network.

Runes, on the other hand, leverages the way Bitcoin already works with its Unspent Transaction Output (UTXO) model. Leveraging Bitcoin's existing infrastructure is key because it helps minimize the amount of additional data stored on the blockchain.

In essence, Runes functions as a specialized layer on top of the Bitcoin network and allows anyone to easily generate and manage their fungible tokens.

Casey Rodarmor is a prominent figure in Bitcoin innovation, renowned for his work on the Ordinals protocol. As a software developer with a profound interest in decentralized technologies, he has established a strong reputation in the Bitcoin ecosystem.

Casey Rodarmor posted a blog post in September 2023 detailing the idea for a token standard called Runes. He went on to build and implement the protocol under the same client as the ordinals theory and was hard-coded on block 840,000 in April 2024.

He created Ordinals, a technology that allows the creation of indelible inscriptions on individual satoshis – effectively creating NFTs on Bitcoin, thanks to his knowledge of Bitcoin's scripting language and workings. The breakthrough subsequently grew into the Runes standard, which provides an optimal Bitcoin-native approach to producing and managing fungible tokens.

The BRC-20 token standard was created in March 2023 by a pseudonymous creator named Domo with the aim of providing a blueprint for the creation of fungible tokens on the Bitcoin network.

BRC-20s, named after their Ethereum counterpart ERC-20s, became possible thanks to the Ordinals protocol, which uses the inscription model to permanently record information about tokens onto individual satoshis.

BRC-20 tokens are a special type of inscription in that they contain a specific code written in JSON format. This code acts like a set of instructions, telling the Bitcoin network how to create, manage, and move fungible tokens. Think of these as interchangeable units of value, similar to how two US Dollar bills can be exchanged like-for-like.

While all BRC-20 tokens are inscriptions, not all inscriptions are BRC-20 tokens. You could write whatever you like on a satoshi, but only those with the special JSON code turn it into a BRC-20 token with the ability to be tracked and traded like other fungible assets.

UTXO model

While BRC-20 uses an account model based on the Ordinal protocol, Runes adopts BTC's UTXO model.

If you're unfamiliar, a UTXO is an unspent chunk of Bitcoin resulting from previous transactions. Consider them like change left over in your pocket. Every Bitcoin transaction essentially takes existing UTXOs as inputs (like the money you use to buy something) and creates new UTXOs as outputs (like the change you receive back).

The Bitcoin network, at its core, is a digital ledger that records all of these UTXOs and who currently holds them.

Runes transactions leverage Bitcoin's existing UTXO model. Each transaction consumes the total asset held in a user's wallet, and the algorithm computes the new balance after transferring the intended amount of tokens to the recipient.

Think of it like paying for a can of soda with a $20 bill. In this transaction, you give the shopkeeper the $20 bill and they hand you back an amount of new currency as change.

You can't tear up the $20 note into smaller units. It must be given in its entirety. The same goes for Runes transactions.

OP_RETURN

Runes transactions use a special area of Bitcoin transactions called OP_RETURN to store their instructions. OP_RETURN acts like a manual, telling the network the Rune's name, symbol, quantity, and actions to perform (like transferring or splitting).

One Rune transaction can efficiently manage actions for multiple Runes. To maintain the system's integrity, Runes transactions have a built-in safety feature.

If a Rune transaction contains errors or invalid instructions, the associated Runes are permanently removed from circulation – a process known as "burning."

Etching

Etching is the process of creating a Rune and setting its properties, such as its name, symbol, and divisibility.

Once a Rune is etched, the etcher has flexibility in how they distribute it:

• Pre-Mining – Some projects rewarded early supporters by airdropping tokens to those who held a specific Bitcoin Ordinal before the Bitcoin halving.
• Minting – The etcher sets a total supply limit ("mint limit"), and individuals can go to a platform to mint tokens. Once that limit is reached, the mint closes and no new tokens can be created.

Check out our Kraken Learn Center guide for more information on, What are crypto airdrops?

While both Bitcoin Runes and BRC-20 tokens serve as fungible assets on the Bitcoin network, several distinctions set them apart.

BRC-20 tokens have long been the standard for creating tokens on Bitcoin, but they have a big downside: they create a lot of unnecessary data on the network – called 'junk UTXOs'.

This can make the user experience clunky and, more importantly, slow down the Bitcoin network, which can cause higher transaction fees.

The Rune standard seeks to avoid this. By working within Bitcoin's existing UTXO model, anyone can create and manage tokens with minimal impact on the blockchain. This leads to a smoother and faster user experience. Additionally, Runes offer better privacy since essential data is embedded within UTXOs rather than being openly broadcast.

Runes are also compatible with Bitcoin's Lightning Network, a solution designed to handle many transactions quickly and with low fees. This means Runes can reduce the strain on the main Bitcoin network, which many regard as being key for long-term growth.

In the first week following the Bitcoin halving, over 40,000 Runes were etched, and users made over 3 million transactions.

Several projects have rewarded early adopters by airdropping Rune tokens to those who held their respective Bitcoin Ordinals. The airdrops were determined through several eligibility criteria:

• Snapshots: Some collections, like Runestone, took a one-time "snapshot" of Ordinal holders and distributed their tokens (DOG•GO•TO•THE•MOON for Runestones) after Bitcoin's halving event.

• Time-Based Rewards: Some collections, like RSIC, prioritized longtime holders, who "mined" the Rune tokens prior to the launch of the protocol. The longer an Ordinal was held, the more tokens (RSIC•GENESIS•RUNE for RSIC) that holder was airdropped once the protocol went live.

• BRC-20 migration: Some BRC-20 projects, like WZRD and PUPS, intended to migrate to the Runes standard. Owning the BRC-20 token would grant holders the Rune tokens (PUPS•WORLD•PEACE for PUPS and MAGIC•INTERNET•MONEY for WZRD) once the migration is complete.

When Casey Rodarmor launched the Runes protocol after the Bitcoin halving, he hard coded the first project, UNCOMMON•GOODS.

While there's no maximum limit on the number of UNCOMMON•GOODS tokens, people can only mint them until the next Bitcoin halving event (approximately around March 2028).

Other notable Rune tokens include:

• Z•Z•Z•Z•Z•FEHU•Z•Z•Z•Z•Z – The first Rune created after Rodarmor's hard-coded Rune #0.

• SATOSHI•NAKAMOTO – This Rune #6 saw a lot of traction when the Runes protocol went live. It reached one of the highest market caps in the first week of trading.

• WANKO•MANKO•RUNES –Considered the first Rune memecoin, WANKO•MANKO•RUNES ascended the Rune ranks despite it not being an early-etched project.

Runes enables a way to create fungible tokens on the Bitcoin network, all the while leveraging its security and global reach.

With Runes, the door is wide open for anyone to innovate. People can create tokens for powering their own decentralized organizations (DAOs), as gaming assets, or even for launching the next viral memecoin – all with the robust backing of Bitcoin's network behind it.

The relative simplicity of the Runes standard compared to BRC-20 could make it easier for developers to build innovative applications. This could attract new talent to Bitcoin, fostering a wave of fresh ideas and projects centered around Runes.

In summary, Bitcoin Runes represent an exciting development in the Bitcoin landscape by transforming the way we view fungible tokens on Bitcoin. Runes have the potential to significantly expand the utility of Bitcoin from its single original application of a peer-to-peer electronic cash system.

The Runes protocol directly leverages many of Bitcoin's strengths, such as its decentralization, robust security, and the UTXO model, and holds the potential to extend Bitcoin's capabilities beyond its origins as a peer-to-peer payment system.

From community currencies and innovative DeFi applications to the next generation of gaming assets and memecoins, Runes allow endless possibilities on the Bitcoin network.

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