Bitcoin Runes: New Fungible Token Standard to Power Bitcoin DeFi

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Runes, an improved fungible token protocol for Bitcoin (BTC), launched on April 20, 2024, as the Bitcoin blockchain underwent its fourth halving event.

There are a lot of expectations from Runes. The chief among them is the hope that the Runes will power the Bitcoin decentralized finance (DeFi) ecosystem in the near future.

Lucas Outumuro, Head of Research at IntoTheBlock, said on April 21:

“It’s been less than 48 hours since the launch of Runes and it has already made an impact of historic proportions. We’ll see how much of the early momentum will persist, but so far, it seems like $BTC’s long-term security problem is getting solved by sh*tcoins.”

Key Takeaways

  • Runes was created by Ordinals creator Casey Rodarmor.
  • Runes improves on existing Bitcoin fungible token standards such as BRC-20.
  • Franklin Templeton said Runes could help Bitcoin close the gap on more established fungible token marketplaces such as Ethereum and Solana.
  • 24 hours after the Bitcoin halving, transaction fees spiked 1,200% due to Runes.
  • Miners made a record $100 million+ in revenue on April 20, 2024.

What Is Bitcoin Runes Protocol?

Runes is a token protocol that allows the creation of UTXO-based fungible tokens on the Bitcoin blockchain.

It is an improvement on the popular BRC-20 token standard. The latter has been criticized for its complexity and non-UTXO design.

Runes was created by Casey Rodarmor in September 2023. Rodarmor is also the developer behind a Bitcoin numbering technique called Ordinals theory, which enabled the creation of non-fungible tokens (NFT) for the first time on Bitcoin in December 2022.

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Why Should You Care About Runes?

To understand the importance of Runes, we need to talk about the history of Bitcoin.

When the pseudonymous Satoshi Nakamoto published the Bitcoin white paper in 2008, the paper spoke of a peer-to-peer (P2P) payment system free from the control of centralized intermediaries.

To this day, a strong number within the Bitcoin community believe that the Bitcoin network must adhere to its original vision and should only be used for decentralized P2P payments.

When the Ordinals theory was introduced in December 2022, it added a new functionality to Bitcoin by allowing the creation of NFTs on the blockchain.

Ordinals NFTs became so popular that weekly sales of NFTs on Bitcoin surpassed those on NFT hotbeds such as Ethereum (ETH) and Solana (SOL). Additionally, ERC-20-equivalent tokens called BRC-20 tokens were introduced on the Bitcoin blockchain.

Not only did Ordinals create a whole new industry on top of the Bitcoin blockchain, but it also showcased its potential to play a crucial role in maintaining the security of Bitcoin by increasing miner revenue.

You see, Bitcoin is designed to cut block rewards by half every four years in a process called halving. In 2140, Bitcoin is expected to undergo its last halving, following which no new Bitcoin will be rewarded to miners for securing the blockchain.

Bitcoin miners will then have to rely solely on transaction fees for their revenue.

The spike in on-chain activity following the introduction of Ordinals resulted in a surge in transaction fee revenue for miners.

The increased transaction fees generated from Ordinals-related activity are expected to make Bitcoin more sustainable over the long run.

IntoTheBlock’s Outumuro said:

“Miners are now earning more than before the halving. 24 hours after the halving, inflationary rewards have dropped by 50%, but transaction fees spiked 1,200% due to Runes. Miners made a record $100M+ in revenue on 4/20.”

Miner Rewards on April 20, 2024.
Miner Rewards on April 20, 2024. Source: IntoTheBlock

Why Was Runes Created?

Not everyone is happy about the emergence of Ordinals.

Many have berated Ordinals for straying away from Bitcoin’s original mission, while others criticized it for bloating the blockchain and causing slower transaction times and gas fee spikes.

Critics also pointed out that the complexity involved in creating Ordinal inscriptions led to new challenges for the Bitcoin blockchain.

So when the thought of an improved token protocol came to Ordinals creator Rodarmor, he was unsure whether it was a good idea.

“I’m not sure creating a new fungible token protocol for Bitcoin is a good idea. Fungible tokens are 99.9% scams and memes. However, they don’t appear to be going away any time soon, similar to the way in which casinos don’t appear to be going away any time soon. Creating a good fungible token protocol for Bitcoin might bring significant transaction fee revenue, developer mindshare, and users to Bitcoin,” wrote Rodarmor.

On September 25, 2023, Rodarmor introduced the Runes token protocol to the world.

The Runes protocol is designed to be easy to implement, fit more naturally into the Bitcoin blockchain, and minimize on-chain footprint.

Franklin Templeton Digital Assets explained the Runes protocol in a research note:

“The major difference between BRC-20 and Runes is that BRC-20 was designed to leverage pre-existing protocols to fill the need for fungible tokens on Bitcoin, where as, Runes is designed from the ground up specifically built for fungible tokens on Bitcoin.

 

“Unlike Runes, BRC-20s are able to create fungible tokens on Bitcoin but the design is account-based similar to Ethereum’s ERC-20s. The issue with BRC-20s is that through the burn and minting process of fungible tokens, a significant amount of junk UTXOs are created, bloating the blockchain and increasing fees. This is like the idea of a processing plant, where during the operations there is a lot of waste or junk left over that has no use case.”

According to Franklin Templeton Digital Assets, the main improvements of the Runes token protocol are:

  • Runes prevents the creation of “junk” UTXO, which can bloat the Bitcoin network and push gas fees higher.
  • Runes does not rely on off-chain data.
  • Runes does not require an additional native token.
  • Runes is compatible with Bitcoin scaling solutions such as the Lightning Network.
  • Runes increase privacy as data is hidden with UTXOs.

Understanding UTXO

Let’s briefly learn about the UTXO model that Bitcoin uses to track user balances.

The UTXO model that Bitcoin uses is different from the account models used by Ethereum and the majority of other blockchain networks.

The account model is easy to understand. Think of it as your bank account that tracks the amount of money credited and debited from your account.

UTXO model is a little more complex. UTXO model tracks the unspent amount of a Bitcoin transaction.

For example:

  • Alice has 5 BTC.
  • She sends 3 BTC to Bob.
  • Bob receives a UTXO worth 3 BTC.
  • Bob then receives a separate UTXO worth 5 BTC from Chad.
  • In the end, Bob will own 2 UTXOs that allow him to spend 8 BTC.

Crypto company Alchemy wrote in a blog post:

“So when people say: “I own 3 bitcoins”, they should really be saying: “I own some UTXOs that allow me to spend 3 bitcoins.”

According to Alchemy, each UTXO has a hard-programmed code called script associated with it. The script contains conditions (e.g., digital signatures) based on which the UTXO can be unlocked for further spending.

Runes Potential for Investors

Runes, the new, improved fungible token protocol for Bitcoin, is expected to power an ecosystem of Bitcoin-native tokens.

The creation of Bitcoin-based meme coins will be an obvious use case of the Runes token protocol. We could see wrapped tokens that represent cryptocurrencies existing in other blockchains appear on Bitcoin.

With advancements in the Bitcoin L2 and Bitcoin DeFi sector, we could even see bitcoin-native tokens that power decentralized applications.

According to Franklin Templeton Digital Assets, “Currently the fungible token market for Bitcoin is quite small in comparison to ETH and SOL; however, with the launch of more efficient token standard (Runes), Bitcoin is positioned to close the gap between its fungible market cap versus that of other blockchains.

“If DeFi on Bitcoin is to see the exponential growth that many in the industry are forecasting, a widely adopted fungible token standard is a prerequisite … We are excited to see if Runes can do for Bitcoin’s Fungible token and DeFi market what Ordinals did for Bitcoin’s Non-fungible token market.”

The Bottom Line

On X, there are several Bitcoin-based projects that are preparing for the launch of Runes-based meme coins.

While the meme coin season on Ethereum and Solana has mellowed down from their highs, we could be at the start of a meme coin euphoria on Bitcoin.

FAQs

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Mensholong Lepcha
Crypto & Blockchain Writer
Mensholong Lepcha
Crypto & Blockchain Writer

Mensholong is an experienced crypto and blockchain journalist, now a full-time writer at Techopedia. He has previously contributed news coverage and in-depth market analysis to Capital.com, StockTwits, XBO, and other publications. He started his writing career at Reuters in 2017, covering global equity markets. In his free time, Mensholong loves watching football, finding new music, and buying BTC and ETH for his crypto portfolio.