Why the Design of the Runes Protocol is Necessary

Rodarmor claims that 99.9% of the alternative tokens on the Bitcoin network are scams and memes. However, Rodarmor notes that they won’t vanish anytime soon because these tokens provide a robust alternative token protocol for Bitcoin and might generate considerable transaction fee revenue, attract developer attention, and gain users.

Indeed, the BRC-20 transactions have been vehemently opposed by some Bitcoin developers for spamming the network. The BRC-20 protocol triggered a meme coin frenzy, clogging the Bitcoin network. Due to this congestion, daily minting costs have been reaching historical highs since May 2023.

Rodarmor adds, “If the protocol had a smaller on-chain footprint and encouraged responsible UTXO management, it might be less harmful than existing ones.” UTXO stands for the amount of cryptocurrency remaining in a wallet after a transaction is completed. This balance is used for subsequent transactions and stored in the UTXO database. Bitcoin’s UTXO model has played a part in making Bitcoin an auditable and transparent ledger by preventing double-spending. Rodarmor points out that other alternative token protocols on Bitcoin, such as “Really Good for Bitcoin,” “Counterparty,” and “Omni Layer,” have their own issues. He believes these protocols suffer from complex implementations, poor user experiences, excessive unspent transaction outputs (UTXOs), and the requirement of native tokens for operations.

• BRC-20: Not based on UTXO and is quite intricate, as it requires ordinal number theory for certain operations.
• RGB: Highly complex, reliant on off-chain data, and despite prolonged development, it has not been adopted.
• Counterparty: Uses a native token for specific operations, rather than being based on UTXO.
• Omni Layer: Features a local token required for specific operations, not based on UTXO.
• Taproot Assets: Somewhat intricate, dependent on off-chain data.

Rodarmor’s conclusion is that he’s unsure if such protocols should even exist on the Bitcoin network. He expresses concerns about the deceit inherent in these Bitcoin alternative token protocols, describing it as “an almost irredeemable pit of deception and greed.” He suggests that the UTXO-based Runes could address the problems brought by other alternative token protocols on Bitcoin.

Runes: A Potential Solution to the UTXO Problem

According to Rodarmor, off-chain swappable token protocols require you to coordinate off-chain data with the blockchain, resulting in an awkward user experience. Address-based approaches don’t align well with Bitcoin’s UTXO-based methodology, creating similar inconveniences for end users. Rodarmor introduces Runes as a simple, UTXO-based token protocol offering a seamless Bitcoin user experience, aimed to replace BRC-20, Taproot Assets, RGB, Counterparty, and Omni Layer. The Runes protocol aims to attract more Bitcoin users by not depending on off-chain data, operating without native tokens, and synchronizing well with the native UTXO model.

Runes Transfers: Utilizing OP_RETURN Outputs

The first data output in the protocol message is decoded into a sequence of integers, which are interpreted as a series of (ID, OUTPUT, AMOUNT) tuples. If the decoded number of integers is not a multiple of three, the protocol message is deemed invalid. ID represents the Token ID for the transfer, OUTPUT denotes the output index to assign to (i.e., which output to allocate to), and AMOUNT signifies the quantity to allocate. After processing all tuple allocations, any unallocated Runes Tokens are assigned to the first non-OP_RETURN output. Remaining tokens can be burned by allocating the Runes protocol to the OP_RETURN output containing the protocol message. The Ordinals protocol becomes tricky when using witnesses. For instance, if you have a transaction with two inputs, each input has a signature, and additional data can be added to the witness for each input. So, when signing a transaction, another individual signing the same transaction can add their own witness data. This implies that one can sign with a set of transfer instructions, and others can do the same. By using OP_RETURN, instead of the transaction’s witness section, this issue is avoided with Runes.

This also means that Runes and the Ordinals protocol are separate. In some ways, this is beneficial: the separation between Ordinals and Runes simplifies development without mutual dependencies. The downside is that Runes can’t leverage the existing user base and the decentralization of Ordinals, making the launch of nodes more challenging.

Issuance of Runes: Tracking Homogeneous Tokens Based on UTXO

If a protocol message has a second data push, it signifies 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 deemed invalid. SYMBOL is a basic 26-bit readable character, similar to symbols used in Ordinals names. Currently, the only valid characters are A to Z. DECIMALS indicates the number of digits to be displayed after the decimal point when issuing Runes. If SYMBOL hasn’t been allocated, the Runes Token is assigned an ID value, starting from 1. If SYMBOL has already been allocated or matches BITCOIN, BTC, or XBT, a new rune won’t be created.

This is where the uniqueness of the Runes protocol lies. Instead of linking the balance records to wallet addresses, it places the records within the UTXO itself. A new Runes Token starts with an issuance transaction, specifying the supply, symbol, and decimal places, then allocates that supply to a specific UTXO. A UTXO can contain any number of Runes Tokens, regardless of its size. UTXO is solely used for tracking balances. Subsequently, the transfer function utilizes that UTXO, splitting it into multiple new UTXOs of arbitrary sizes, containing varying amounts of runes, to record transfers to others.

For instance, if someone uses a UTXO of 10,000 satoshis (an arbitrary amount), it could contain a million (any given number) of runes. If they wish to send 100k Runes each to two friends, they can insert the tuples specifying these runes into the OP_RETURN of a Bitcoin transaction. Starting with one UTXO, the result is three UTXOs: two are allocated to friends with 100k Runes each, while the remaining one retains 800k Runes for the sender.

Source: geniidata

Runes VS BRC-20

BRC-20 tokens mix Bitcoin with unwanted UTXO, leading to efficiency issues. In contrast, the Runes protocol, based on UTXO, addresses the UTXO dispersion problem. Compared to BRC-20, Runes eliminates an extra layer of server consensus, simplifying the process. It doesn’t rely on off-chain data, lacks a native token, and aligns well with Bitcoin’s native UTXO model.

The core idea behind Runes is to minimize its on-chain footprint and encourage users and developers to adopt best practices for UTXO utilization. Its goal is to integrate seamlessly with Bitcoin’s fundamental architecture. A primary advantage of Runes is its potential to promote responsible UTXO management and curb the creation of detrimental UTXOs that currently congest the Bitcoin network. In doing so, Runes contributes to the overall health and efficiency of the Bitcoin blockchain.

A significant advantage of the Runes protocol is its compatibility with the Lightning Network, clearly setting it apart from BRC-20. In essence, users can add Runes to various multi-signature wallets and settle balances to different providers, introducing new use cases, developers, and users to the Lightning Network.

So, is Runes the optimal on-chain issuance solution for Bitcoin, capable of completely replacing BRC-20 and other existing token protocols? It remains to be seen. While Runes boasts a superior technical implementation for tokens on Bitcoin, BRC-20 has already established a robust network effect with holders and developers and continues to undergo real-time adjustments.

Related reading: The onslaught of various “X”RC-20 standards – are they the future of Bitcoin?

The Future of Runes and Rodarmor’s Vision

Just three days since the protocol’s inception, 436 Runes protocol tokens have already been deployed.

Source: geniidata.

Runes holds immense potential, but its future remains uncertain. In a recent Twitter Spaces conversation co-hosted with Trevor Owens from the Ordinals Show, Rodarmor revealed that he only conceived the idea of Runes last week. He also expressed uncertainty about whether he would continue to develop this concept further.

The proposal for Runes has gained attention and backing. After the conversation, Owens introduced a significant incentive: the BTC Frontier Fund offering an investment of $100,000. Any developer capable of creating functional Runes applications can utilize this fund, further propelling Rodarmor’s innovative proposal.

Conclusion

Even though Runes is still in its nascent stage, its buzz in the cryptocurrency community is undeniable. Amidst skepticism towards Bitcoin’s alternative tokens, Rodarmor’s proposition showcases the continued exploration for innovative solutions. Innovators like Rodarmor play a pivotal role in shaping its trajectory, ensuring it remains efficient, transparent, and valuable to users. Only time will tell if Runes will become the next big event in the Bitcoin world. While many associate alternative tokens with fraud and memes, the right protocols can bring immense benefits to the Bitcoin network.

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