What is Bitcoin Runes?

Bitcoin Runes are a new protocol for creating fungible tokens on the Bitcoin blockchain. Launched in April 2024 alongside the Bitcoin halving, Runes aim to simplify the creation and management of tokens while improving efficiency and reducing network load compared to previous standards like BRC-20.

Related Readings: What is BRC-20?

Key features of Bitcoin Runes include:

• Improved efficiency in token creation and management. Runes utilize Bitcoin's UTXO model to issue and manage tokens, avoiding the excessive UTXO proliferation that plagued previous standards like BRC-20. This results in a minimal on-chain footprint and better overall efficiency;
• Reduced network load. By minimizing the data used for token transactions, Runes help reduce network congestion, making Bitcoin more scalable and user-friendly;
• Compatibility with the Lightning Network. Runes are natively compatible with Lightning Network, enabling faster and cheaper token transactions. This opens up new decentralized finance (DeFi) possibilities on Bitcoin;
• Simplified token creation and management for developers. Runes make it easier for developers to create tokens with customizable properties;
• Automatic token burning for transactions with errors. Runes automatically burn tokens created with mistakes, incentivizing users to properly manage UTXOs. This differs from BRC-20 which allows users to simply try again;

Mechanism of Bitcoin Runes

Bitcoin Runes work by utilizing Bitcoin's UTXO (Unspent Transaction Output) model to create and manage fungible tokens on the Bitcoin blockchain. The process works as below:

1. Etching: A developer, known as an "etcher", creates a "genesis" UTXO that includes details about the Rune, such as its name, symbol, decimals, and total supply. This information is permanently recorded on the Bitcoin blockchain.
2. Minting: The etcher can then mint new Runes by sending out transactions that create fractionalized, fungible pieces of the original UTXO. These new pieces are called Runes and inherit the properties defined in the genesis UTXO.
3. Trading: Users can trade Runes by sending transactions that move the Runes between addresses. The Runes remain fungible, meaning each token is interchangeable with others of the same type.
4. Burning: Runes can be permanently removed from circulation by sending them to an unspendable address. This is known as "burning" the tokens.

The Runes protocol is poised to have a significant impact on the future development of the Bitcoin ecosystem in several key ways. Runes enables the creation of various types of fungible tokens, such as security tokens, stablecoins, and governance tokens, directly on the Bitcoin network. This could significantly expand the utility of Bitcoin and attract a broader user base to the ecosystem. The launch of Runes coincides with the Bitcoin halving event, which reduces the block reward for miners. Runes is expected to drive up activity and demand for block space, leading to higher transaction fees for miners. This could help offset the reduction in block rewards and maintain the long-term security of the Bitcoin network.