A Beginner’s Guide to Runes: Fungible Tokens in the Bitcoin Blockchain

Ever heard of fungible tokens (like meme coins or governance tokens) but wondered why they weren’t on Bitcoin? Runes are a new protocol set to change that! This beginner’s guide will break down Runes in simple terms.

Runes: A Minimalist Approach

Runes is a recently launched innovation in the Bitcoin world. It was launched at the Bitcoin Halving in block 840,000. Runes is a new standard for creating fungible tokens directly on the Bitcoin blockchain. It was created by the mind behind Ordinal theory, Casey Rodamor. In his words, Runes is a better and simpler alternative to the experimental BRC-20 standard for fungible tokens. 

What are Fungible Tokens?

Imagine money where every dollar bill is identical and interchangeable. That’s fungibility! These tokens exist on other blockchains but not Bitcoin (due to no smart contracts). Fungible tokens are digital assets like stablecoins or meme coins that can be easily traded on a one-to-one basis.

What are UTXOs?

UTXOs stand for Unspent Transaction Outputs. They’re like individual, tamper-proof coins. Each time you receive Bitcoin, a new UTXO is created with a specific amount attached. These UTXOs become the building blocks for your future transactions.

Think of spending Bitcoin like using actual cash. You wouldn’t hand over your entire wallet; you’d use specific bills and receive change in smaller denominations. Similarly, spending Bitcoin involves using specific UTXOs. Any leftover amount is returned as a new UTXO. 

A better alternative than BRC-20s

Runes are considered a better alternative to BRC-20s for several reasons. Runes utilizes a UTXO-based protocol designed to minimize on-chain footprint. So, it reduces UTXOs by storing multiple rune balances on a single UTXO, making Bitcoin nodes cheaper to run.

In contrast, BRC-20s caused congestion on the Bitcoin network by creating a bunch of unnecessary UTXOs. This inefficiency is because it is based on the ordinal protocol which requires the minting of NFTs so they can generate the token.

Additionally, unlike other Bitcoin token protocols, Runes doesn’t rely on off-chain data or a separate token to function. For example, the Taproot Assets Protocol uses UTXOs but stores data off-chain, while Counterparty requires a native token and isn’t UTXO-based, creating extra complexities.

Runes also employs a token-burning mechanism, where any tokens generated as a result of errors or improper UTXO management are permanently removed from circulation. This approach incentivizes users to exercise caution and precision when managing their UTXOs, as mistakes can lead to the irreversible loss of tokens. This flexibility comes at the cost of potentially contributing to token inflation or supply inconsistencies within the ecosystem.

Quick Overview of How Runes Work

Instead of entirely new coins, Runes encodes data onto individual Satoshis (the smallest unit of Bitcoin). This data represents the tokens. These are the pillars of the functionality.

• Runestones: Messages defining actions (creating, minting, transferring) runes.
• OP_RETURN: Runestones are embedded here in Bitcoin transactions (more efficient than ordinals).
• UTXOs: These track data for runes, but don’t actually store it.

Runes Launchpads

These are specialized platforms designed to facilitate the launch and distribution of new cryptocurrency tokens within the Runes ecosystem. These launchpads provide a streamlined process for projects to introduce their tokens to the market, offering a range of services and support to ensure a successful launch.

Prominent Runes launchpads include Magic Eden and BitX, which offer comprehensive marketing support and resources to help projects gain visibility and attract potential investors. However, Runes token projects are not limited to these platforms and can also launch on dedicated launchpads such as Meta Runes, CraftRunes, and the upcoming Runes Terminal.

Currently, Meta Runes and CraftRunes are actively accepting project applications, allowing teams to submit their proposals and undergo a vetting process to determine their eligibility for launching on these platforms. On the other hand, the highly anticipated Runes Terminal launchpad has not yet been rolled out, but it is expected to provide an additional avenue for projects seeking to enter the Runes ecosystem.

The First Weeks of Launch

Although some see the project as very new and that it has a long way to go to become established, the truth is that in the first week was able to generate 2129 bitcoins (135 million) in transaction fees.

According to a Dune dashboard, Rune-related transactions comprised a significant portion, reaching 45% compared to regular transactions at 51%. This follows the introduction of Runes, with the network processing over 3 million transactions involving them since launch.

Also data from Unisat, indicates that over 11,000 Runes have been minted so far. This minting process has driven demand for space on the Bitcoin network to store transaction data, which has in turn pushed up network fees.

Conclusion

Runes mark a significant step forward for the Bitcoin ecosystem. By enabling the creation of fungible tokens directly on the Bitcoin blockchain, Runes opens doors to a wider range of applications and functionalities. Its focus on efficiency and minimalism makes it a strong contender in the race for the go-to standard for Bitcoin tokens. With its recent launch and growing launchpad infrastructure, the future of Runes appears bright. However, it’s important to stay informed about potential challenges surrounding token burning and inflation within the ecosystem. As with any new technology, time will tell how widely adopted Runes will become, but its potential to bring the versatility of fungible tokens to Bitcoin is undeniable.

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