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A Casual Runes Primer

⏩️ One-liner

The Runes protocol, a new standard for issuing fungible tokens natively on bitcoin, is going live coinciding with the bitcoin halving this week (at time of writing, estimated ~9pm Pacific Time April 19).

⚠️ Disclaimer

Tokens on bitcoin is a controversial subject, and we’re not advocating any particular position. Nor do we have any financial involvement in Runes.

However, given the likelihood of Runes meaningfully affecting on-chain activity and fees in the short-term, we believe it’s worth understanding what’s going on.

📚️Definitions

If this is your first encounter with this stuff, some definitions might help:

Fungible token: Fungible tokens are interchangeable. Like, imagine something called ‘Cat coin’. You can have one Cat coin, or 10 Cat coins. My one Cat coin is the same as your one Cat coin. Hence; they’re fungible.

BRC-20: a standard for producing fungible tokens on the bitcoin blockchain. Data is inscribed on to Ordinals numbers (see below), that are then associated with individual Satoshis, which can be traded as tokens.

Non-fungible token: Tokens that are 1-of-1 and not interchangeable with others. For example, ‘Cat NFT’, which is a picture of a cat. In theory, there is only one of it. It’s not fungible with anything else.

Ordinals: A system for ordering Satoshis which attaches individual properties to them (e.g. the first sat mined in the first block after the halving). This system is called Ordinals Theory.

UTXO: A UTXO is a ‘piece’ of bitcoin. It’s analogous to physical coins: each one is worth a different amount, and are different sizes. When UTXOs are used in a transaction, they are destroyed and new UTXOs are created. Every node keeps track of all the UTXOs - which is how your node can verify that transactions are valid not attempting a double spend.

⏳️ Runes backstory

Casey Rodarmor first announced Runes in a blog post in September of last year. Casey is the founder not only of Runes, but also of Ordinals.

Why did he create the protocol? In his own words: “Creating a good fungible token protocol for Bitcoin might bring significant transaction fee revenue, developer mindshare, and users to Bitcoin.”

To expand on each of these:

• Fee revenue: The more usage of the main-chain of bitcoin, the higher the fees go. Not great if you want to use it every day for smaller transactions, but very lucrative if you’re a miner.

• Developer mindshare: One of the common critiques of bitcoin you hear from altcoiners is that you can ‘build more’ on other chains. Whether or not that’s true in theory, in practice networks like Solana and Ethereum have attracted large cohorts of developers. In short: every dev working over there, is a dev we could have working on and improving bitcoin.

• Users: Casey is not a fan of other cryptocurrencies, and believes that creating better versions of their primary use case (degen gambling) on bitcoin, will capture their users.

These second order consequences may or may not eventuate. On the ground today, Runes seem to be understood by the community in simpler terms.

As one Runes enthusiast explains: “Runes allow us to make memecoins on Bitcoin…it’s all just a casino and we’re gambling in it.”

Of course, Casey himself was aware of this: “I'm not sure creating a new fungible token protocol for Bitcoin is a good idea. Fungible tokens are 99.9% scams and memes.”

His argument for creating a protocol for them on bitcoin in spite of this (apart from the goals above), is essentially that:

1. There will always be demand for ‘degen’ gambling.

2. This behavior already exists on bitcoin anyway, in the form of BRC-20 tokens.

3. If people are going to do it on bitcoin, they may as well do it on a protocol that has good UX, is simple, and minimizes certain negative effects on the bitcoin network (explained more below).

🛠️ Under the hood

Runes are ‘UTXO-based’, meaning any UTXO can contain within it data that represents not only the amount of bitcoin that it’s worth, but also a balance of runes.

These balances are attached to a UTXO by using a type of transaction called OP_RETURN, which is just a way of including some arbitrary data along with a bitcoin transaction. In this case, the data says something like: “This UTXO contains 50 Dog Runes.”

Ordinals on the other hand, are based on Ordinal Theory, which picks out and orders the individuals sats within a UTXO.

This has real practical implications for the bitcoin network (and relates to a key controversy surrounding the world of bitcoin tokens).

Long-story short, ordinals and BRC-20 tokens in particular have the effect of creating more and more small UTXOs over time, as more are traded.

Think of it like starting with a $100 bill, but then breaking it in to smaller and smaller pieces of change. First two $50 notes, and again until you have 10,000 pennies.

The problem is that this increases the size of the UTXO set. This is call ‘UTXO bloat’.

For example laster year, the UTXO set increased from 86 million UTXOs (5 GB) in April to 140 million UTXOs (8.74 GB) in November.

And as we mentioned, every node must parse every UTXO to validate transactions. More UTXOs means more data which means a more congested network. Over time, this could harm the degree to which it can be decentralized.

If the use and trading of fungible tokens move from BRC-20 to Runes, this may mitigate the congestion issue. Or maybe not.

🔭 Zooming Out

This UTXO bloat issue gets to the essential controversy of tokens on bitcoin. (Aside from moralistic arguments about the ethics of gambling).

On one side, you have speculators and gamblers and the communities creating tokens and art pieces and inscribing them on to bitcoin for whatever reason. Bitcoin is permissionless, and they are using it how they see fit.

On the other side, you have ‘monetary maximalists’ who see this is as frivolous use of precious blockchain space at best, and an outright attack on bitcoin at worst.

In the long run, perhaps Runes will help ‘defeat’ competing chains like Ethereum and Solana, bring theirs users to bitcoin, ensure miner profitability, and be net-beneficial to bitcoin.

On the other hand, this might all congest the network irreparably, make transacting on the base layer unaffordable, and tarnish bitcoin’s reputation.

The only thing that’s certain right now is that tokens on bitcoin are here for the foreseeable future.

Whether you’re a hodler, trader, or just an observer, they’re worth understanding.

Weekly snapshot of Bitcoin ETF flows

📈 Biggest Stacker: Blackrock (IBIT), with 7000k BTC inflows.

📉 Biggest Loser: Grayscale (GBTC), with -11000k BTC outflows.

🧮 Net Total: 1100 BTC ($72m) BTC outflows

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