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John Martin 12 May 2024 ◦ 7 min read

Bitcoin Runes: what are they and what are they good for

Bitcoin Runes: what are they and what are they good for

With the recent surge in commission prices post the launch of the Runes protocol, peaking at over $100 per transaction, all eyes are now turning towards Bitcoin Runes as the next big trend in the cryptocurrency realm. In this article, we delve into the intricacies of Bitcoin Runes, exploring what they are and the potential benefits they bring to the table. 

Understanding Bitcoin Runes

The Ordinals Project, spearheaded by Casey Rodamore in January 2023, marks a groundbreaking initiative to securely encrypt data directly into the Bitcoin blockchain, assigning each Satoshi a unique "ordinal" number to define its position in the sequence of all created Satoshis. Through Ordinals records, a wide array of data types including images and text can be seamlessly integrated into the Bitcoin blockchain, paving the way for the generation and safekeeping of one-of-a-kind digital assets akin to NFTs.

The concept of ordinals underwent further development when, in March 2023, a blockchain analyst known as Domo introduced BRC-20 tokens by leveraging the ordinal labeling mechanism. This facilitated the creation and transfer of interchangeable tokens on the Bitcoin blockchain, fueling the expansion of the NFT market within the network.

The integration of ordinals played a crucial role in supporting Bitcoin prices, preventing them from dropping below $15,000 and propelling them above $20,000 in the first half of 2023. The growing interest in NFTs within the Bitcoin network resulted in heightened transaction fees, leading to increased network support as participants had to acquire more Bitcoin to engage in the NFT market.

On April 20, Casey Rodamore introduced another protocol on the Bitcoin network called Runes. Unlike BRC-20 tokens that rely on the Ordinals record engine, Runes utilizes the UTXO (Unspent Transaction Outputs) technology, positioning itself as an alternative to BRC-20 tokens within the network. 

How Bitcoin Runes work

The Bitcoin Runes protocol operates on the foundation of two essential components: 

  1. The Bitcoin Unspent Transaction Outputs (UTXO) Model
  2. OP_RETURN operation code

By integrating these elements, Runes presents a novel method for incorporating interchangeable tokens into the Bitcoin network while emphasizing simplicity and alignment with the Bitcoin system's inherent features.

Within the Runes protocol, tokens are managed within the Bitcoin UTXO system, enabling the storage of various runes within specific UTXOs. 

To distinguish rune transactions, the protocol employs a specialized structure characterized by an output containing OP_RETURN, followed by protocol message data. This structure ensures the integrity and clarity of rune transactions across the Bitcoin network.

The transfer and assignment of runes are streamlined through the use of encoded "tuples" within transactions, providing clear instructions for the ID, exit output index, and amount of runes being transferred:

  • ID: Numeric identifier of the assigned rune.
  • exit: Output index for getting the rune.
  • AMOUNT: Number of runes to be transferred.

The release of new runes takes place through special issue transactions that determine the symbol and decimal precision of the new asset. If the symbol is unique, a new identifier is assigned to it, indicating the birth of a new rune in the system. This process contributes to network growth by diversifying and expanding the potential use of runes.

Practical applications of Bitcoin Runes

Practical applications of Bitcoin Runes include the creation of smart contracts. Smart contracts are self-executing contracts that automatically enforce the terms of the agreement between the two parties. This eliminates the need for intermediaries such as lawyers or banks and reduces the risk of fraud or miscommunication.

For example, a smart contract can be used to create a decentralized escrow service. A buyer could send their Bitcoin to a smart contract, and the seller would only receive funds once they have delivered the goods or services. This ensures that both parties fulfill their obligations without the need for a third party to mediate the transaction.

Another practical application of Bitcoin runs is the creation of decentralized applications (dApps) on Bitcoin blockchains. Decentralized applications (dApps) can be used to develop decentralized marketplaces, social networks, and other applications that are not controlled by a single entity.

Challenges and limitations

Although Bitcoin Runes have significant potential, there are also challenges and limitations to their use. 

One of the main challenges is the complexity of a fourth programming language. While Forth is a powerful language, it is not as user-friendly as other programming languages such as JavaScript or Python. This means that there is a steep learning curve for developers who want to use Bitcoin Runes. 

Another challenge is the limited scalability of Bitcoin blockchains. The Bitcoin blockchain can only handle a limited number of transactions per second, which makes it challenging to use Bitcoin Runes for complex applications that require a high volume of transactions.

Pros and cons of Bitcoin Runes

Pros

  • The occupied space in the chain is minimized using the UTXO-based model.
  • Simplifies the issuance of interchangeable tokens on Bitcoin.
  • Its simplicity can contribute to innovation in the Bitcoin ecosystem.
  • No offline data were required for the operation.
  • Allows open coinage within the time limits set by the creator.

Cons

  • Competition for the widespread BRC-20 token standard.
  • Burning tokens caused by errors can negatively affect user interaction.
  • It has yet to be established as a viable Bitcoin token standard.

Conclusion

The success of the Runes protocol depends entirely on its main features: 

  • simplicity;
  • sustainable design;
  • its own UTXO model. 

While the reaction from major investors remains uncertain, crypto enthusiasts can benefit from exploring the expanded opportunities offered by the Bitcoin Runes network.

The Bitcoin Runes project is still in its early developmental phase, and as with any new implementation, it is susceptible to significant changes and performance fluctuations. Projects utilizing this technology and integrating with the Bitcoin Runes ecosystem are currently highly speculative. While this protocol offers a straightforward alternative to interchangeable token systems, its success or failure will depend on its acceptance within the blockchain and crypto communities. Its widespread adoption within a year is uncertain, and only time will tell how it will be received. What is certain is that we are at the nascent stages of this protocol's journey.

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