A new token standard on Bitcoin: How the Runes protocol works

Original title: 《INTRODUCTION TO RUNES: FUNGIBLE TOKENS ON BITCOIN》

Original author: Bobby Shell, Voltage

Original translation: Lucy, BlockBeats

Editor's note:

Voltage VP of Marketing Bobby Shell introduced the Runes protocol, a new standard for creating and transferring fungible tokens on the Bitcoin blockchain. The launch of the Runes protocol means that the Bitcoin ecosystem will welcome more developers and users, and bring more benefits to miners. However, like inscriptions, Runes have also caused some controversy, and some Bitcoin maximalists believe that token creation will have a negative impact on the essence of Bitcoin.

Bobby Shell has an in-depth discussion on how Runes works, how it compares to existing standards, the impact on the Bitcoin network, and the challenges and criticisms that may face in the future. He pointed out that although the impact of Runes is still unclear, it provides a noteworthy experimental field for exploring the potential and limitations of Bitcoin. BlockBeats compiled the original text as follows:

RUNES Introduction

The Runes protocol is a new standard for natively issuing interchangeable tokens on the Bitcoin blockchain. It allows users to create interchangeable tokens.

Some key concepts:

· Interchangeable tokens: refers to tokens that can be replaced with each other. For example, 1 "beef token" can be equivalent to any other "beef token".

· BRC-20: is an existing standard for issuing interchangeable tokens on Bitcoin.

· Non-fungible tokens (NFT): refers to unique and non-interchangeable tokens, such as a specific "beef NFT" image.

· Ordinality: is a system for assigning unique properties to individual satoshis (the smallest unit of Bitcoin). This makes it possible to implement NFT-like features on Bitcoin.

· UTXO: Unspent transaction output, refers to the amount of Bitcoin authorized by the sender to be spent by the recipient.

The goal of Runes is to provide a simple, efficient way to create and trade mutually fungible tokens on Bitcoin. It improves on existing token standards such as BRC-20 and utilizes UTXO to implement token balances and transfers.

Its purpose is to attract more developer activity and mainstream users to Bitcoin. However, there are concerns about its impact on the capacity and culture of the Bitcoin network.

RUNES Background

Runes was created by Casey Rodarmor, who also created the Ordinals protocol for Bitcoin. Rodarmor had several goals when developing Runes:

· Transaction fee revenue: By increasing the use of the Bitcoin blockchain, Runes will drive transaction fees up. This is profitable for miners, but can be costly for ordinary users.

· Developer Attention: Alternative coin networks such as Ethereum and Solana have attracted many developers. Creating development tools like Runes on Bitcoin can help attract some of this talent to build applications on Bitcoin.

· Attracting Users of Other Chains: Rodarmor believes that creating better use cases for alternative coins on Bitcoin, such as memecoins, will attract these users to switch to Bitcoin.

At a high level, Runes allows users to simply and efficiently create mutually fungible tokens on Bitcoin. This makes capabilities like memecoins possible that were previously not natively possible on Bitcoin.

How Runes Works

Runes is based on the Ordinals protocol, which generates transactions by using Bitcoin's unspent transaction outputs (UTXOs). UTXOs are the amount of Bitcoin left after a transaction, similar to the change left after a cash purchase.

The Runes protocol extends the concept of a UTXO by allowing each UTXO to contain balances of different Runes tokens. For example, a single UTXO could hold 10 units of Rune A, 100 units of Rune B, and 1000 units of Rune C.

This is accomplished by attaching data to UTXOs using a type of Bitcoin transaction called OP_RETURN. This OP_RETURN transaction contains information specifying the Rune balance in that UTXO.

When a transaction occurs, Runes balances can be transferred to new UTXOs. Any remaining UTXO amounts that were not transferred are destroyed.

Runes allow for more efficient transfers than the existing BRC-20 standard. With BRC-20, users can only transfer one token type at a time. However, with Runes, users can transfer any number of Rune balances from inputs to desired outputs in a single transaction.

By building on top of Bitcoin’s base layer functionality, Runes aims to make it simple and efficient to create and transfer fungible tokens natively on Bitcoin.

Impact on the Bitcoin Network

Runes aims to alleviate the UTXO bloat problem caused by BRC-20 tokens and other fungible tokens created on Bitcoin. As more tokens are traded, more small UTXOs are created over time, increasing the overall size of the set of UTXOs that each node in the Bitcoin network needs to track.

For example, the UTXO set grew from 86 million UTXOs (5 GB) in April 2022 to 140 million UTXOs (8.74 GB) in November 2022. The increased data can cause network congestion and, if left unchecked, make transactions more expensive over time.

Runes help solve this problem by allowing users to bundle multiple token transfers into a single transaction. The goal is to reduce the rate of new UTXO creation caused by token transactions.

However, there is an ongoing controversy regarding tokens on the Bitcoin network.

One side believes that Bitcoin should focus on being digital cash and a store of value. They believe that tokens are unnecessary bloat or an attack on Bitcoin's core goals.

The other side believes that Bitcoin should evolve into a multi-purpose blockchain that supports token creation. They believe this expands Bitcoin's utility and makes the network more competitive.

In the long run, it is unclear whether tokens like Runes will irreparably clog Bitcoin, or bring benefits to the network like miner revenue and new users. For now, tokens are likely here to stay, so improvements like Runes may help mitigate their potential drawbacks.

RUNES VS BRC-20

Runes aims to improve upon the existing BRC-20 standard for creating tokens on top of Bitcoin. The key differences between Runes and BRC-20 include:

· Allows more token types and destinations per transaction - With BRC-20, users can only transfer one type of token to one destination in a single transaction. Runes allow users to send multiple token types to multiple destinations in a single transaction, making transactions more efficient.

· Simpler and more efficient than BRC-20 - Due to how inscriptions work, transferring a BRC-20 token requires 3 transactions. Runes are designed to be more efficient, with most operations requiring only one transaction, except for creating a new Rune which requires 2 transactions. Runes also does not rely on the Ordinals protocol, making it a simpler standalone system.

· Avoids UTXO bloat - BRC-20 and other token systems cause Bitcoin's UTXO bloat, increasing storage and bandwidth requirements for running nodes. Runes are designed to avoid creating too many unspent transaction outputs.

Overall, Runes aims to provide a simpler and more efficient system for creating fungible tokens on Bitcoin than existing standards such as BRC-20. Its main advantage is bundling multiple token transfers into a single transaction.

Creating and Transferring Runes

Creating a new Runes token begins with "scratching", which mints new Runes. This is done by sending Bitcoin to an OP_RETURN output containing a Rune definition. (Also known as burning Bitcoin, which can no longer be spent)

To transfer Runes between users, the sender includes the Rune balance they want to send in the transaction input. Runes are then transferred to the recipient by specifying the output address and Rune amount.

Some key advantages of Runes transfers include:

· Users can send multiple Runes in a single transaction, allowing for "fan-out" to multiple recipients.

· Runes transfers require only one transaction, while BRC-20 requires three transactions.

· Transactions are very small and efficient. Only the Runes to be transferred are included, not the entire balance.

· No unspent UTXOs are created, reducing blockchain bloat over time.

· Transfers explicitly specify the Runes to be sent, avoiding accidentally sending the wrong tokens.

Overall, the Runes protocol provides a simple yet powerful system for creating and transferring tokenized assets on Bitcoin. The streamlined process enables use cases like memes, badges, collectibles, and other custom assets without congesting the blockchain.

Adoption Potential

The question surrounding Runes is whether it will drive usage and adoption like Ordinals did. Ordinals was extremely popular, generating over $250 million in mining fees. However, it caused network congestion due to increased transactions.

Runes has the potential to become a more popular project for speculators and gamblers who want to mint tokens on Bitcoin and trade memecoins. The ability to quickly mint fungible tokens will certainly attract the interest of this group.

However, Bitcoin maximalists may not be too fond of Runes. Many maximalists believe that tokens other than the native BTC are unnecessary and negatively impact Bitcoin's core purpose as a store of value. They believe that these tokens waste valuable blockchain space and tarnish Bitcoin's image.

Whether the benefits of increased usage and mining fees will outweigh the downsides of congestion and UTXO bloat is unclear. Runes could potentially bring more developer activity to Bitcoin, but could also push the boundaries of acceptable use.

The extent of Runes adoption will likely depend on the level of interest from speculators and resistance from BTC purists. Its ultimate impact remains uncertain, but it is a fascinating experiment regardless.

Criticisms and Concerns

Runes have been criticized by some members of the Bitcoin community. Here are some of the main concerns that have been raised:

Ethical arguments against gambling/speculation: Some Bitcoin maximalists believe that tokens are unnecessary and enable irresponsible gambling or speculative behavior. They argue that tokens undermine Bitcoin's core purpose as a store of value and digital gold. These are the ethical arguments against encouraging gambling behavior.

Fear of congesting the Bitcoin network: One thing that has been experienced, and is expected, is that Runes could also cause significant congestion in the Bitcoin network. As more tokens are created and traded, this could cause the UTXO set to swell if not managed properly.

Each node must be able to parse the entire UTXO set to validate a transaction. Therefore, a significantly increased UTXO set makes it harder for nodes to run, which could lead to more centralization. This could make using Bitcoin more expensive and harder to validate.

Some people argue that Ordinals and other token projects have added quite a bit of bloat. They worry that if Runes are used in large numbers, it could exacerbate the problem. Supporters argue that Runes are more efficient than other token designs. But the impact has not yet been tested.

Conclusion

Runes is an interesting new protocol launched on the Bitcoin network that allows users to create and transfer fungible tokens, called Runes, natively on Bitcoin. This new feature could attract new developers and users to Bitcoin while generating more fees for miners. However, it remains controversial to some Bitcoin maximalists who believe that token creation is unnecessary and wasteful.

Here are some key takeaways about Runes:

· Runes are fungible tokens that can be created and transferred on the Bitcoin blockchain using a new protocol designed by Casey Rodarmor.

· The protocol is more efficient than existing standards like BRC-20, allowing users to bundle multiple token transfers into a single transaction.

· Runes leverages Bitcoin’s UTXO model and the OP_RETURN function to associate token balances with unspent transaction outputs.

· Supporters believe Runes could bring more developers, users, and transaction fees to Bitcoin. Critics worry it will congest the network and tarnish Bitcoin’s reputation.

· There are questions about whether Runes can alleviate the UTXO bloat problem caused by existing token projects on Bitcoin.

· The launch of Runes coincides with Bitcoin’s next halving event, sparking excitement and speculation within the community.

· Understanding new protocols like Runes is important to tracking Bitcoin’s evolution. While the impact is uncertain, Runes is willing to experiment and expand Bitcoin’s capabilities. However, it also highlights the tension between Bitcoin’s roots as sound money and as a platform for innovation. It will be interesting to see how this plays out in the months and years after Runes goes live.

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