A New Token Standard on Bitcoin: Understand How the Runes Protocol Works in One Article

BlockBeats
2024-04-21 20:37:58
Collection
Runes will attract new developers and users to use Bitcoin, while bringing more fees to miners.

Original Title: INTRODUCTION TO RUNES: FUNGIBLE TOKENS ON BITCOIN

Original Author: Bobby Shell, Voltage

Original Compiler: Luccy, BlockBeats

Editor's Note: Voltage's Vice President of Marketing Bobby Shell introduces the Runes protocol, a new standard for creating and transferring fungible tokens on the Bitcoin blockchain. The launch of the Runes protocol signifies that the Bitcoin ecosystem will welcome more developers and users, bringing additional revenue for miners. However, like inscriptions, Runes has also sparked some controversy, with some Bitcoin extremists believing that token creation could negatively impact the essence of Bitcoin. Bobby Shell delves into how Runes works, compares it to existing standards, its impact on the Bitcoin network, and the challenges and criticisms it may face in the future. He notes that while the impact of Runes is still unclear, it provides a noteworthy experimental ground for exploring Bitcoin's potential and limitations. BlockBeats compiles the original text as follows:

INTRODUCTION TO RUNES

The Runes protocol is a newly proposed standard for the native issuance of fungible tokens on the Bitcoin blockchain. It allows users to create interchangeable tokens.

Some key concepts:

  • Fungible tokens: Tokens that can be exchanged for one another. For example, 1 "beef token" can be equivalent to any other "beef token."

  • BRC-20: An existing standard for issuing fungible tokens on Bitcoin.

  • Non-fungible tokens (NFTs): Unique and non-interchangeable tokens, such as a specific "beef NFT" image.

  • Ordinal: A system that assigns unique attributes to individual satoshis (the smallest unit of Bitcoin). This makes it possible to implement NFT-like functionality on Bitcoin.

  • UTXO: Unspent transaction output, referring to the amount of Bitcoin authorized by the sender that can be controlled by the recipient.

The goal of Runes is to provide a simple and efficient way to create and trade fungible tokens on Bitcoin. It improves upon existing token standards like BRC-20 and utilizes UTXOs to manage token balances and transfers.

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

BACKGROUND OF RUNES

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

  • Transaction fee revenue: By increasing the usage of the Bitcoin blockchain, Runes will drive up transaction fees. This is profitable for miners but could be costly for regular users.

  • Developer attention: Alternative token networks like Ethereum and Solana have attracted many developers. Creating development tools like Runes on Bitcoin can help attract some talent to build applications on Bitcoin.

  • Attracting users from other chains: Rodarmor believes that creating better alternative token use cases, such as meme coins, on Bitcoin will draw these users to use Bitcoin.

At a high level, Runes allows users to easily and efficiently create fungible tokens on Bitcoin. This enables capabilities like meme coins that were previously not natively achievable on Bitcoin.

HOW RUNES WORK

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

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

This is achieved by attaching data to UTXOs using a type of Bitcoin transaction called OPRETURN. This OPRETURN transaction contains information specifying the Rune balances within that UTXO.

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

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

By building on the foundational capabilities of Bitcoin, Runes aims to achieve simple and efficient native creation and transfer of fungible tokens on Bitcoin.

IMPACT ON THE BITCOIN NETWORK

Runes aims to mitigate the UTXO bloat caused by BRC-20 tokens and other fungible tokens created on Bitcoin. As more tokens are traded, more small UTXOs will be created over time, increasing the overall size of the UTXO set 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 lead to network congestion and, if left unchecked, make transactions more expensive over time.

Each node must be able to parse the entire UTXO set to validate transactions. Therefore, a significantly increased UTXO set makes it harder for nodes to operate, potentially leading to more centralization. This could make using Bitcoin more expensive and harder to verify.

Some believe that Ordinals and other token projects have already contributed to significant bloat. They worry that if Runes is widely adopted, it could exacerbate this issue. Supporters argue that Runes is more efficient than other token designs. However, the impact has yet to be tested.

RUNES VS BRC-20

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

  • 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 allows users to send multiple types of tokens to multiple destinations in a single transaction, making it more efficient.

  • Simpler and more efficient than BRC-20: Due to how inscriptions work, transferring BRC-20 tokens requires three transactions. Runes is designed to be more efficient, with most operations requiring only one transaction, except for creating new Runes, which requires two transactions. Runes also does not rely on the Ordinals protocol, making it a simpler standalone system.

  • Avoiding UTXO bloat: BRC-20 and other token systems lead to UTXO bloat on Bitcoin, increasing the storage and bandwidth requirements for running nodes. Runes aims to avoid creating excessive unspent transaction outputs.

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

CREATING AND TRANSFERRING RUNES

Creating new Runes tokens begins with "inscribing," which mints the new Runes. This is accomplished by sending Bitcoin to an OP_RETURN output that contains the Rune definition. (This is also referred to as burning Bitcoin, as it cannot be used again.)

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

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

  • Transactions are very small and efficient, only including the Runes to be transferred rather than the entire balance.

  • No unused UTXOs are created, reducing blockchain bloat over time.

  • Transfers explicitly specify which Runes are to be sent, avoiding accidental sending of incorrect tokens.

Overall, the Runes protocol provides a simple and 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 became very popular, generating over $250 million in miner fees. However, the increase in transactions led to network congestion.

Runes has the potential to become a project favored by speculators and gamblers looking to mint tokens and trade meme coins on Bitcoin. The ability to quickly mint fungible tokens will certainly attract the interest of this group.

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

It remains unclear whether the benefits of increased usage and miner fees will outweigh the downsides of congestion and UTXO bloat. Runes may bring more developer activity to Bitcoin, but it could also push the boundaries of acceptable use.

The level of adoption for Runes may depend on the interest of speculators and the resistance from BTC purists. Its ultimate impact remains uncertain, but it is nonetheless an intriguing experiment.

CRITICISMS AND CONCERNS

Runes has faced criticism from some members of the Bitcoin community. Here are some of the main concerns that have been raised:

  • Moral arguments against gambling/speculation: Some Bitcoin extremists believe that tokens are unnecessary and promote irresponsible gambling or speculative behavior. They argue that tokens undermine Bitcoin's core purpose as a store of value and digital gold. These are moral arguments against encouraging gambling behavior.

  • Concerns about congesting the Bitcoin network: One thing that has already been experienced, and is expected to happen with Runes, is that it may lead to severe congestion on the Bitcoin network. As more tokens are created and traded, this could lead to UTXO set bloat if not properly managed.

Each node must be able to parse the entire UTXO set to validate transactions. Therefore, a significantly increased UTXO set makes it harder for nodes to operate, potentially leading to more centralization. This could make using Bitcoin more expensive and harder to verify.

Some believe that Ordinals and other token projects have already contributed to significant bloat. They worry that if Runes is widely used, it could exacerbate this issue. Supporters argue that Runes is more efficient than other token designs. But the impact has yet to be tested.

CONCLUSION

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

Here are some key points 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 leverage Bitcoin's UTXO model and OP_RETURN functionality to associate token balances with unspent transaction outputs.

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

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

  • The launch of Runes coincides with Bitcoin's next halving event, generating excitement and speculation within the community.

  • Understanding new protocols like Runes is important for tracking the evolution of Bitcoin. While the impact remains uncertain, Runes is willing to experiment and expand Bitcoin's capabilities. However, this also highlights the tension between Bitcoin's roots as a robust currency and its role as an innovative platform. It will be fascinating to see how all of this unfolds in the months and even years following the launch of Runes.

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