The last 18 months have been a whirlwind of innovation and development within the Bitcoin ecosystem. From the emergence of Ordinals to the creation of BRC-20 tokens, we've witnessed a continuous evolution aimed at expanding Bitcoin's utility beyond being just a store of value. On April 19, 2024, alongside the Bitcoin halving, another innovative standard for fungible tokens launched in the Bitcoin ecosystem: Bitcoin Runes.

Runes, the brainchild of Casey Rodarmor, founder of the Ordinals protocol, represent a novel approach to issuing fungible tokens on the Bitcoin network. Unlike its predecessors, Runes protocol aims to streamline token issuance and management without inheriting the complexities of Ordinals. The motive behind Runes is to create a dedicated protocol solely focused on fungible tokens. Before diving into the intricacies of Runes, it's crucial to grasp the concept of Unspent Transaction Outputs (UTXOs), which form the backbone of Bitcoin's transaction model.

Imagine you have a wallet with some money in it, just like your real-life wallet. In the world of cryptocurrencies like Bitcoin, this wallet doesn't hold coins like physical currency. Instead, it keeps track of "outputs" from previous transactions that have been sent to your wallet. Now, when you want to send some cryptocurrency to someone else, you use these outputs, kind of like breaking a big bill into smaller ones to pay someone. But here's the catch: when you send cryptocurrency, you have to use up the entire output you received in a previous transaction. You can't just use part of it like with physical money. So, let's say you received 1 Bitcoin in a transaction. If you want to send only 0.5 Bitcoin to someone, you have to use up that entire 1 Bitcoin output and then send 0.5 Bitcoin to the recipient. The remaining 0.5 Bitcoin from the original output becomes a new output, which is sent back to you as "change." This system of using up entire outputs for transactions and generating new ones as change is what UTXOs are all about. They keep track of the unspent outputs in your wallet, making sure you don't spend more than you have and ensuring that transactions are secure and verifiable on the blockchain.

Building upon the foundation of UTXOs, the Runes protocol extends Bitcoin's transactional capabilities to include the issuance and exchange of fungible tokens. At its core, Runes operate within the existing framework of Bitcoin transactions, utilizing UTXOs to represent balances of arbitrary fungible tokens alongside Bitcoin's native currency. This seamless integration with Bitcoin's UTXO model ensures compatibility with existing network infrastructure while providing a robust foundation for the issuance and transfer of digital assets. Unlike its predecessors, Runes utilize block space more efficiently, contributing less to state bloat and minimizing transactional overhead.

Fungible token market on Bitcoin has a lot of potential for growth

Source: Binance Research

When comparing BRC-20 and Runes, it's clear that they take different approaches to tokenization on the Bitcoin network. BRC-20, being a meta-protocol built on top of Ordinals, introduces an additional layer of complexity by combining fungible tokens with a non-fungible token protocol. In contrast, Runes are purposefully designed for fungible tokens, stripping away the complexity inherited from Ordinals, making them straightforward and efficient. In terms of data storage, BRC-20's use can lead to a higher on-chain footprint, especially with larger transactions of up to 4MB. On the other hand, Runes is more efficient with a limit of 80 bytes, reducing load on the Bitcoin blockchain. Additionally, Runes offer greater efficiency in transaction processing, requiring only one on-chain transaction for every transfer, whereas BRC-20 tokens necessitate two transactions. This streamlined process makes Runes a more cost-effective and user-friendly option.

Runes also provide greater flexibility in distribution methods, supporting various approaches such as open mints, pre-mining, and delayed mints. This versatility enables projects to tailor their token distribution strategies to their specific needs. There have been over 3.3 million Runes token transaction since their launch, comprising the majority share of all Bitcoin transactions on multiple days and more than 10 times of Ordinals and BRC-20 transactions combined. All of these transactions are currently coming from traders buying and selling memecoins made using the Runes protocol with no major token capturing attention as of yet.

Runes has the potential to introduce a significant shift in the Bitcoin ecosystem. By enabling the creation and exchange of diverse fungible tokens, Runes attract new users, increase transaction volume, and enhance miner revenue through transaction fees. As Bitcoin transitions from a mere store of value to a base asset for trading Bitcoin native altcoins, the sustainability of miner rewards through successive halvings becomes more feasible with protocols like Runes. A ninefold increase in miner revenues from transaction fees would make it the majority source of revenue, eliminating the dependence on block subsidy for miners. A ninefold increase is easily possible given the nascent stage of the Bitcoin ecosystem as a whole. Runes is expected to be a major contributor to this.

The Runes Protocol represents a significant advancement in the evolution of the Bitcoin ecosystem. Two key factors highlight its significance: firstly, the collective impact of Ordinals, Inscriptions, BRC-20s, and Runes on Bitcoin's fee structure addresses long-term security budget concerns. Secondly, these innovative primitives stimulate further Bitcoin development, fostering a culture of innovation around the cryptocurrency. Moreover, they serve as an entry point for new users and builders, contributing to the broader adoption and popularity of Bitcoin.

The launch of Runes has led to a spike in transaction fees going to Bitcoin miners

Source: The Block