Runes: The Next Evolution of Bitcoin Asset Issuance Standards?

This year has seen a frenzy of development in the Bitcoin ecosystem. First came Ordinals, followed by the wave of BRC-20 tokens that swept through the crypto industry. In just two months, the market capitalization of BRC-20 tokens reached a staggering $1 billion. BRC-20 tokens allow the minting and transfer of fungible tokens using the Ordinals protocol on Bitcoin. However, Casey Rodarmor believes that the issue with BRC-20 tokens is that they use “junk” unused Unspent Transaction Outputs (UTXOs) to spam Bitcoin.

In an article dated September 26th, he explained that BRC-20 tokens have “adverse consequences of UTXO proliferation” and suggested Runes as an alternative solution based on UTXOs.

So, what improvements does this new protocol offer compared to BRC-20? Why did Casey Rodarmor propose this new protocol as the founder of Ordinals? Will the introduction of this new protocol impact BRC-20? In this article, we will delve into the details of the “Runes” protocol.

Why Design the Runes Protocol? Rodarmor claims that 99.9% of fungible tokens on the Bitcoin network are scams and memes. However, he also acknowledges that they won’t disappear quickly because these tokens provide Bitcoin with a robust fungible token protocol, which can generate significant transaction fee income, developer attention, and users.

In fact, BRC-20 transactions faced strong opposition from some Bitcoin developers due to spamming the network. The BRC-20 protocol sparked a meme coin frenzy, congesting the Bitcoin network. This congestion led to historically high minting fees starting in May 2023.

Rodarmor adds, “If the protocol has a smaller on-chain footprint and encourages responsible UTXO management, it may reduce harm compared to existing protocols.” UTXO represents the amount of cryptocurrency remaining in a wallet after completing a transaction, with the balance being used for subsequent transactions and stored in a UTXO database. Bitcoin’s UTXO model plays a role in preventing double spending, making Bitcoin an auditable and transparent ledger. Rodarmor argues that other fungible token protocols on Bitcoin, such as “Really Good for Bitcoin,” “Counterparty,” and “Omni Layer,” also have their own issues. He believes these protocols suffer from complex protocol implementations, poor user experiences, unspent UTXOs, and the need for native tokens.

Comparison of Existing Fungible Token Protocols on Bitcoin Rodarmor’s conclusion is that he’s uncertain whether such protocols should exist on the Bitcoin network. He expresses concern about the deception associated with these Bitcoin fungible token protocols, calling it “a nearly irredeemable pit of deception and greed.” He believes that UTXO-based Runes can address the problems posed by other Bitcoin fungible token protocols.

Runes: A Potential Solution to UTXO Issues

According to Rodarmor, off-chain interchangeable token protocols require coordination between off-chain data and the blockchain, leading to an awkward user experience. Address-based approaches don’t integrate well with Bitcoin’s UTXO-based model, causing similar issues for end-users. Rodarmor describes Runes as a simple, UTXO-based fungible token protocol designed to replace BRC-20, Taproot Assets, RGB, Counterparty, and Omni Layer. The Runes protocol can attract more users to Bitcoin by not relying on off-chain data, not requiring native tokens to operate, and staying in good synchronization with the native UTXO model of Bitcoin.

Runes Transfers: Utilizing OP_RETURN for Returns

The first data output in the protocol message is decoded into a sequence of integers, which are interpreted as (ID, OUTPUT, AMOUNT) tuple sequences. If the decoded number of integers is not a multiple of three, the protocol message is considered invalid. ID represents the Token ID for the transfer, OUTPUT indicates the output index to which it should be allocated (i.e., which output to allocate to), and AMOUNT specifies the amount to be allocated. After processing all tuple allocations, any remaining unallocated Runes Tokens will be allocated to the first non-OP_RETURN output, and the rest can be minted as Runes Tokens by including the Runes protocol in an OP_RETURN output containing the protocol message.

The Ordinals protocol can make transactions cumbersome due to its reliance on witnesses. For example, in a transaction with two inputs, each input has a signature, and additional data can be added to the witnesses for each input. Therefore, if one signs a transaction, another person signing the same transaction can add their witness data. This means that a set of transfer instructions can be signed, and others can do the same. Runes uses OP_RETURN instead of the witness part of transactions, eliminating this issue.

This also means that Runes and the Ordinals protocol are separate. In some ways, this is beneficial as it simplifies development without interdependence. However, the drawback is that Runes cannot leverage the existing user base and decentralization of Ordinals, making it more challenging to bootstrap the node infrastructure.

Runes Issuance: UTXO-Based Homogeneous Token Tracking

If the protocol message includes a second data push, it represents an issuance transaction. The second data push is decoded into two integers, SYMBOL and DECIMALS. If there are any other remaining integers, the protocol message is considered invalid. SYMBOL is a basic 26-character readable symbol, similar to the symbols used in Ordinals names, and currently only valid characters are A to Z. DECIMALS indicates the number of decimal places to be used when displaying Runes. If SYMBOL has not been allocated yet, the Runes Token will be assigned an ID starting from 1. If SYMBOL has already been allocated or is BITCOIN, BTC, or XBT, no new Runes will be created.

This is where the Runes protocol is unique. It doesn’t link balance records to wallet addresses but keeps them within UTXOs themselves. New Runes Tokens start with the issuance transaction, specifying the supply, symbol, and decimal places and allocate that supply to specific UTXOs. UTXOs can contain any number of Runes tokens, regardless of their size. UTXOs are used solely for tracking balances. The transfer function then takes that UTXO, splits it into multiple new UTXOs of arbitrary sizes, containing different amounts of Runes, and sends the records to others.

For example, if someone has a UTXO of 10,000 satoshis (arbitrary), it can contain a million (arbitrary number) Runes. If they want to send 100,000 Runes to each of two friends, they can place tuples specifying these allocations into the OP_RETURN of a Bitcoin transaction. One UTXO goes in, three UTXOs come out: two with 100,000 Runes each for the friends, and one with 800,000 Runes left for themselves.

Runes vs. BRC-20

BRC-20 tokens mix with Bitcoin using UTXOs, causing efficiency issues, while the Runes protocol addresses the UTXO proliferation issue it causes. Runes simplifies and eliminates an extra layer of server consensus compared to BRC-20, making it more straightforward. It also doesn’t rely on off-chain data and has no native tokens, making it highly compatible with Bitcoin’s native UTXO model.

A key emphasis of the Runes protocol is its compatibility with the Lightning Network, which is a significant advantage compared to BRC-20. In essence, users can add Runes to various multisignature wallets and settle their balances with different providers. This introduction of new use cases, developers, and users to the Lightning Network sets Runes apart from BRC-20.

So, is Runes the best solution for issuing tokens on the Bitcoin chain that can fully replace BRC-20 and other existing fungible token protocols? That remains to be seen. While Runes has a more technically robust implementation for fungible tokens on Bitcoin, BRC-20 has already established strong network effects among holders and developers, and it continues to evolve in real-time.

Runes’ Future and Rodarmor’s Vision

The protocol has only been live for a short three days, but 436 Runes protocol tokens have already been deployed.

Runes has enormous potential, but its future remains uncertain. In a recent Twitter Spaces conversation with Ordinals Show co-host Trevor Owens, Rodarmor revealed that he only came up with the idea for Runes last week. He also expressed uncertainty about whether he would further develop this concept.

The proposal for Runes has garnered attention and support. After the conversation, Owens introduced a significant incentive: the BTC Frontier Fund offers a $100,000 investment. Any developer capable of creating a functional Runes application can use this funding to further advance Rodarmor’s innovative proposal.

In Conclusion

While Runes is still in its early stages, its impact on the cryptocurrency community is undeniable. In a climate where people are skeptical about Bitcoin fungible tokens, Rodarmor’s proposal demonstrates ongoing exploration of innovative solutions. Innovators like Rodarmor play a crucial role in shaping its development trajectory, ensuring it remains efficient, transparent, and valuable to users. Only time will tell if Runes will become the next significant event in the Bitcoin world. Despite many associating fungible tokens with fraud and memes, the right protocol can bring significant benefits to the Bitcoin network.