Rob Behnke
May 30th, 2024
Bitcoin is the original blockchain and deserves a lot of credit for combining the technologies that make decentralized digital ledgers possible. Bitcoin remains the most respected blockchain, as demonstrated by its high price and trailblazing efforts to get SEC approval for spot ETFs.
However, despite its many benefits, Bitcoin has more limited functionality than smart contract platforms such as Ethereum. While Bitcoin scripting exists, it’s deliberately not Turing-complete. As a result, common applications of smart contract platforms — such as creating fungible tokens — are much rarer on the Bitcoin blockchain.
Several protocols exist to build fungible tokens on Bitcoin, but many have their downsides. Bitcoin Runes is the most promising and secure option to date to bring tokens to the Bitcoin blockchain.
Bitcoin Runes is a protocol designed by Casey Rodarmor — the creator of Bitcoin Ordinals — to create fungible tokens on the Bitcoin blockchain. Fungible tokens — like Bitcoin — have no unique value and can be exchanged 1:1. This differs from non-fungible tokens (NFTs) that are unique and are used to track ownership of digital images or real world assets (RWAs) on the blockchain.
Bitcoin Runes are designed to use Bitcoin’s native unspent transaction output (UTXO) model. UTXOs represent unspent portions of a Bitcoin transaction that can be used as an input to a new transaction without double-spending. With Bitcoin Runes, data about token creation and transfer events are built into Bitcoin transactions using the UXTO model.
This is accomplished by taking advantage of Bitcoin’s OP_RETURN opcode. OP_RETURN allows up to 80 bytes of data to be written into a transaction without changing the transaction’s core function or validity. While it’s a small amount of space (a single character takes up a byte of data), it’s enough to build a new token standard within Bitcoin.
Using the space within OP_RETURN, the Bitcoin Runes protocol creates Runestones, which are the messages embedded in this space.
3 types of Runestones exist, including:
Etching: Defines the creation of a new Rune token, including token name, symbol, initial supply, and divisibility.
Transfer: Allows Rune tokens to be transferred as part of a transaction. This message includes the rune token’s identifier, the output number, and the amount of the Rune token to be transferred.
Burn: Permanently destroys some Rune tokens to manage the token supply, enable minting of new tokens, etc.
By taking advantage of the space available in OP_RETURN, Runestones enable the creation of stablecoins, governance tokens, and other DeFi primitives. While they lack the capabilities of smart contracts built on a platform like Ethereum, they dramatically expand what is possible using Bitcoin.
The Bitcoin blockchain is designed to support the Bitcoin cryptocurrency. However, other protocols like Runes have built on top of the Bitcoin infrastructure to define other types of tokens that also run on blockchain.
One of the most significant differences between Bitcoin Runes and other Bitcoin tokens is that BRC-20 tokens and Bitcoin Ordinals are both based on the Ordinals protocols. Bitcoin Ordinals work by adding data to individual Satoshis, which are the smallest units that Bitcoin can be divided into. BRC-20 is a fungible token protocol, while Bitcoin Ordinals implement NFTs.
This difference introduces pros and cons for each protocol. On the positive side, Bitcoin Runes are generally more efficient and secure than the alternatives. However, the small space available within the OP_RETURN for Runestones means that they have limited programmability.
Bitcoin Runes repurpose an unused part of a Bitcoin transaction to implement fungible tokens on top of the Bitcoin protocol.
Some of the key advantages of Bitcoin Runes over similar protocols include:
Tight Bitcoin Integration: Bitcoin Runes uses Bitcoin’s UTXO model and OP_RETURN opcode to implement tokens and smart contract support. This tight integration enables easier integration within existing Bitcoin solutions and enables it to take advantage of many of the benefits of the Bitcoin blockchain.
Protocol Compatibility: Bitcoin Runes fits into the larger Bitcoin ecosystem by using built-in Bitcoin primitives to implement additional fungible tokens. By doing so, they also increase their compatibility with other elements of the Bitcoin ecosystem, such as the Lightning Network.
Efficiency: Bitcoin Runes take advantage of unused space within Bitcoin transactions to implement tokens. This reduces the overhead associated with Runes transactions and the fees needed to transfer Runes.
Decentralization: Bitcoin Runes are integrated with Bitcoin infrastructure and are simply written into Bitcoin transactions. This creates a fungible token system that lacks potential centralized single points of failure.
Transparency: Since Bitcoin Runes are written into a transaction, they can be read by any software capable of viewing the OP_RETURN opcode in a Bitcoin transaction. This increases the transparency of the Bitcoin Runes protocol.
Bitcoin Runes aren’t the first protocol designed to build tokens on Bitcoin. However, they are the most closely integrated with the underlying Bitcoin architecture. Bitcoin Ordinals build a new protocol within Satoshis, and BRC-20 tokens are built on top of the Ordinals protocol.
The tight integration between Bitcoin Runes and the Bitcoin blockchain means that it offers significant security benefits when compared to other options. By taking advantage of Bitcoin’s built-in capabilities — such as the UTXO model — Bitcoin Runes also benefits from Bitcoin’s built-in security and decentralization guarantees.
In contrast, other protocols for implementing tokens on Bitcoin typically create some form of Layer 2 overlaid on top of the Bitcoin blockchain. This additional layer of abstraction can decrease a protocol’s ability to take advantage of the benefits of the underlying blockchain and may introduce additional security risks due to design or implementation errors.
Bitcoin Runes address one of the major shortcomings of BItcoin: the inability to create fungible tokens that take advantage of Bitcoin’s strong security, decentralization, and userbase. By providing an option that integrates closely with the Bitcoin protocol, Bitcoin Runes enhance the efficiency and security of the Bitcoin ecosystem by eliminating the need for other solutions that have the potential to bloat the blockchain or introduce additional complexity and security risks.