What are Bitcoin Runes, and how do they differ from BRC-20 tokens?

Bitcoin Runes, explained

Bitcoin, the first cryptocurrency, has been widely viewed as a digital store of value, with decentralization and blockchain at its core. With Bitcoin, its mysterious creator, Satoshi Nakamoto, introduced an open-source distributed network with a shared ledger known as the blockchain that tracks every transaction.

As Bitcoin rose in popularity as a store of value and the leading crypto asset by market cap, the scripting language constraints on the Bitcoin blockchain prevented the development of smart contracts and other fungible tokens. As a result, alternative blockchain networks such as Ethereum, Solana, Cardano, Polkadot and others gained popularity, offering developers a chance to create decentralized applications (DApps) and a more adaptable environment appealing to a broader audience.

However, this changed in 2023 with the introduction of BRC-20 tokens, followed by the April 2024 release of Bitcoin Runes, opening the door to the creation of fungible tokens and community-driven projects directly on the Bitcoin network.

This article explores the latest innovations on the Bitcoin blockchain, including token standards and development, the Bitcoin Runes protocol, how Runes differ from BRC-20 tokens and Bitcoin Ordinals, and the benefits Runes offer. It also includes a detailed step-by-step guide on how to buy Bitcoin Runes.

How do Bitcoin Runes differ from BRC-20 tokens and Bitcoin Ordinals?

To understand the Runes protocol, one may need to first examine Bitcoin Ordinals and the BRC-20 token standard.

Bitcoin Ordinals protocol

Bitcoin Ordinals, introduced on the Bitcoin mainnet on Jan. 20, 2023 by Bitcoin developer Casey Rodarmor, marked a significant milestone in the evolution of tokenization on the Bitcoin blockchain.

The protocol allows users to inscribe various types of data — including text, images, videos and even smart contracts — directly onto the Bitcoin blockchain. Ordinals, also known as Bitcoin nonfungible tokens (NFTs), attracted interest from the cryptocurrency community and generated a mix of enthusiasm and skepticism.

The inception of Ordinals was made possible by key upgrades to the Bitcoin network, namely the 2017 Segregated Witness (SegWit) upgrade and the 2021 Taproot upgrade. These upgrades enhanced Bitcoin’s smart contract capabilities by enabling the inscription of large amounts of data on the blockchain. Inscriptions refer to information integrated into satoshis, the smallest units of Bitcoin.

Ordinals introduced a novel way to add utility and value to Bitcoin beyond its role as a store of value through this unique system of inscribing data on satoshis, thus allowing for the creation of Bitcoin NFTs. This added a new layer of functionality to the network, enabling the creation, ownership and transfer of unique digital assets securely on the blockchain.

BRC-20 tokens

Following the introduction of Ordinals, the BRC-20 standard was created in early March 2023 by Domo, a pseudonymous developer. Like Ethereum’s ERC-20 standard, the BRC-20 token standard enabled the generation and transfer of fungible tokens directly on the Bitcoin network via Ordinal inscriptions.

Within three months, BRC-20 tokens saw an exponential rise, reaching a $1 billion market cap. However, the tokens caused network congestion due to an excessive amount of unspent transaction outputs (UTXOs) being produced, which clogged the network.

UTXOs are the amounts of BTC left over after a transaction, similar to the change remaining after a cash purchase.

Bitcoin Runes

Bitcoin Runes aims to simplify fungible token creation on the Bitcoin blockchain and mitigate challenges such as the UTXO bloat issues caused by BRC-20 tokens. On Runes, each transaction starts by identifying UTXOs that have not been spent — similar to gathering spare change — and then uses these to create new transactions.

How do Bitcoin Runes work?

At its core, the Runes protocol uses Bitcoin’s UTXO model and the OP_RETURN opcode to simplify the creation of fungible tokens on the Bitcoin blockchain. A Rune, a unique digital asset, is assigned to a UTXO using a protocol message with specific details such as the Rune ID, output index and amount, all stored in an OP_RETURN output.

In contrast to protocols reliant on off-chain data or specialized tokens, the Runes protocol leverages Bitcoin’s inherent capabilities for on-chain data storage. This approach minimizes the occurrence of undesirable “junk” UTXOs, which can congest the network, leading to slower, costlier, less dependable transactions.

Furthermore, Rune balances are tracked within UTXOs rather than linked to wallet addresses. Runes are transferred using Bitcoin transactions with OP_RETURN outputs specifying the transfer details.

Runes can be etched (created), minted (generated) and transferred using runestones, which are messages stored in Bitcoin transaction outputs. Etching involves setting properties like name, divisibility and symbol. Minting creates new tokens based on etched properties. Transferring Runes involves edicts specifying transfer details like output number, Rune ID and amount.

How to buy Bitcoin Runes?

The Bitcoin Runes protocol does not have its own specific token. Also, it is not to be confused with THORChain’s RUNE token, which is a separate, distinct cryptocurrency used within the THORChain ecosystem.

Pioneering Runes-themed Bitcoin NFT collections based on the Bitcoin Ordinals protocol include Satoshi•Nakamoto, RSIC•Genesis•Rune, Meme•Economics, Dog•Go•To•The•Moon and others.

To buy or sell Runes, one may follow the below steps:

Step 1: Choose a Bitcoin wallet compatible with Runes. Popular wallet options include XVerse and Magic Eden.

Step 2: The Runes protocol operates on the Bitcoin network, so it is necessary to possess BTC to send Runes and cover transaction fees.

Step 3: Connect to a marketplace that supports Runes, such as UniSat, OKX or Magic Eden. Select a Runes project, check its trading activity (e.g., trading volume, order book and price history) and fees, and continue to trade. \

It is important to note that it is not possible to buy an individual Rune; rather, one must buy in “bags,” typically a minimum of 100. However, this may change in the future.

The future of the Bitcoin DeFi ecosystem

The Bitcoin decentralized finance (DeFi) ecosystem looks promising, driven by notable technological breakthroughs. Taproot, implemented in 2021, enhances Bitcoin’s scalability and privacy, enabling more complex transaction conditions while maintaining efficiency.

SegWit, another crucial upgrade, helped the Bitcoin network increase transaction capacity and reduce fees by optimizing block space utilization. The introduction of Ordinals created new opportunities for NFT-like applications on the network by directly inscribing digital artifacts on Bitcoin.

Moreover, novel concepts such as the Bitcoin Runes protocol have introduced the creation of fungible tokens on the Bitcoin blockchain. However, the Runes protocol is at an early stage of development and is, therefore, still likely to experience major changes and evolutions. As such, it’s important to stay updated on the latest updates before making any investments.

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