What is the Bitcoin Runes protocol?

The Bitcoin ecosystem is constantly evolving, looking for ways to expand its functionality and usefulness without compromising the security and decentralization that characterizes it. In this context, the Runes Protocol emerges as an innovative proposal that promises to revolutionize the way in which documents are issued and managed fungible tokens on the Bitcoin network.

In this article, we will explore in detail what the Runes Protocol is, who is behind its creation, its main objective, and how it can completely transform the Bitcoin landscape.

What is the Runes Protocol?

El Bitcoin Runes Protocol is a proposed standard for the creation and management of fungible tokens (or Runestones as they are known within the protocol) directly on the Bitcoin blockchain. It differs from other tokenization standards due to its more harmonious integration with the model. UTXO (Unspent Transaction Output) of Bitcoin, seeking efficiency and minimization of network congestion.

Among the main characteristics of this new protocol we can mention:

1. Integration with UTXO. The Runes Protocol is designed to work hand-in-hand with the Bitcoin transaction model, preventing excessive generation of unwanted UTXOs, contributing to a cleaner and less congested network. This was a weak point of the implementations of Ordinals y BRC-20, since in these protocols the UTXO integration generated a lot of unnecessary information that negatively affected the overall UTXO of the Bitcoin blockchain.
2. Better fungibility. Another interesting point about the Runes Protocol is that it facilitates the creation of tokens that are interchangeable with each other, without differentiating one from the other, which is essential for currencies, stablecoins, and other digital assets. This change is essential if, for example, we want to start building DeFi applications (like a DEX or a lending platform) directly on Bitcoin or on its Layer2 (but without requiring technologies external to Bitcoin).
3. Network efficiency. By optimizing the way tokens are handled within the Bitcoin blockchain, we seek to reduce the impact on transaction speed and costs.
4. Lightning Network compatibility. Another point in favor of the Runes Protocol is that, unlike BRC-20 and Ordinals, it is compatible with the Lightning Network. This means that we can take our Runestones and send them to the Lightning Network where we can use them as if it were any satoshi/bitcoin. In this way, the Runes Protocol enables a use case that was previously impossible to achieve. Likewise, Runes can also work with DLC and other Layers2 (such as RSK or Stacks).
5. It can burn. Another great feature of the Runes Protocol is that its tokens (Runestones) can be burned, using the Op_code, OP_RETURN, in which "malformed" information is injected to leave the Runestone disabled.

Main objective of the Runes Protocol

The Runes Protocol was proposed by Casey Rodarmor, a Bitcoin developer known for his work on the Ordinals protocol. Rodarmor introduced Runes in September 2023, with the vision of improving the standard of issuing fungible assets in Bitcoin, and has been working on its development since then. Since then, Rodarmor has been working to fine-tune the details of this Bitcoin protocol which was activated during the mining of Bitcoin block #840000, the same block in which the fourth Bitcoin halving, on April 20, 2024.

Thanks to all this, the Runes Protocol aims to expand the capabilities of Bitcoin beyond being a simple digital currency or store of value, allowing the issuance of various types of digital assets in a safe and efficient manner. This opens the door to new financial applications and business models on the Bitcoin network, while maintaining its characteristic decentralization and security.

This is vitally important for Bitcoin, as the Runes Protocol is capable of driving innovation and utility within the Bitcoin ecosystem. By enabling the creation of fungible tokens, Runes could facilitate greater adoption of Bitcoin in various sectors, including decentralized finance (DeFi), voting systems, and representation of real or virtual assets. And, although the Runes Protocol is a relatively new proposition, its adoption and development could significantly influence how Bitcoin is perceived and used in the future.

How does this protocol work?

The Runes Protocol has been developed specifically for the Bitcoin network, facilitating the creation and management of a variety of digital tokens. This protocol operates through Bitcoin's UTXO system, initiating each transaction by collecting previously unused Bitcoin fragments (such as change) to generate new transactions. By tracing each Bitcoin from its origin, the uniqueness of each coin is ensured, preventing fraudulent duplication. This provides security to users about the authenticity and ownership of the Bitcoins they own or receive.

Unlike other protocols that might rely on information stored off-chain or special tokens, Runes takes advantage of Bitcoin's inherent capabilities for on-chain data storage. This results in fewer generation of unnecessary UTXOs, which can overwhelm the network and make transactions slower, more expensive, and less reliable.

In particular, Runes Protocol data is stored in the OP_RETURN section of a transaction. This is comparable to writing down a secret message in your Bitcoin transaction. OP_RETURN acts as that magic tool that allows you to leave a mark without altering existing Bitcoins. In this way, transactions remain efficient and organized, without imposing additional loads on the network, which could compromise the user experience.

On the other hand, using this option allows the Runes Protocol to issue a total of 340282366920938463463374607431768211455 tokens (340 sextillion tokens). An amount that can be issued for each UTXO within Bitcoin. This means that there is the ability to generate tokens within the Runes Protocol at a level that we could practically say is infinite.

Thus, depending on the information placed in the OP_RETURN, it is possible to create different tokens or Runestones that are desired, each one with its unique properties and thus beginning the history of a new token within the Bitcoin blockchain. Of course, everything that has a beginning also has an end, and the Runestones come to an end in what are known as cenotaphs. These are nothing more than coins that have an invalid OP_RETURN charge, which means that said Runestones have been destroyed and can no longer be used

Importance and impact on the Bitcoin ecosystem

Runes promises to bring a series of benefits to the Bitcoin ecosystem, among which we highlight:

• Greater utility for Bitcoin and its blockchain. The Runes Protocol will allow the issuance of various types of fungible tokens, such as security tokens, utility tokens, stablecoins and governance tokens, directly on the Bitcoin blockchain. In this way, the number of tokens that live within Bitcoin can be diversified, leading to the generation of decentralized applications around this blockchain.
• It will encourage innovation. It will encourage innovation among developers, offering new ways to interact with the Bitcoin blockchain.
• Better efficiency compared to Ordinals and BRC-20. The Runes Protocol will improve efficiency in the management of UTXOs, reducing network congestion, compared to the issuance of Ordinals and BRC-20. However, the issuance of new tokens on the blockchain network will have a strong impact on the overall congestion of the network and its fees, as we saw on the day of Runes activation, when fees cost over $4000 USD. .
• Unlike the BRC-20 protocol, which is complex and does not rely on UTXOs, generating a large number of unwanted UTXOs, Runes integrates more naturally and efficiently with the Bitcoin network, focusing on responsible management of UTXOs and minimizing their impact on the network.

The future of Protocol Runes

Although the Runes Protocol has only just been launched on the Bitcoin network, there are already projects such as, Magic Eden Runes, Runealpha, PipeBTC y RSIC that are being developed based on this protocol, demonstrating the interest and potential it has within the developer community.

Thanks to this, the Runes protocol is expected to evolve to include functionalities such as direct trading between users, minimizing dependence on centralized exchanges. Furthermore, once approved the Bitcoin Improvement Proposal (BIP) to bring the OP_CODE back to life, OP_CAT, bridges could be built with networks of Layer 2, further expanding Runes' capabilities and applications in the Bitcoin ecosystem.

In conclusion, the Runes protocol represents a significant step forward in the quest to expand Bitcoin's functionality beyond simply being a store of value or medium of exchange. With its focus on efficiency, innovation, and expanding the utility of Bitcoin, Runes has the potential to open new avenues for the development of decentralized applications and financial services on the world's most secure and stable blockchain.