Runes: The Next Big Step in Bitcoin's Evolution?

When Casey Rodamor introduced the Ordinal Theory in early 2023, we, like many other Bitcoin enthusiasts, perceived a before and after in the original blockchain.

While there are detractors of amplifying Bitcoin's utility beyond a secure, decentralised and fully functional network as a payment method, a store of value, in other words as the Internet of Money, there is no hiding the potential that Rodamor's proposal brought to the entire Bitcoin ecosystem.

Now, as part of these paradigm shifts and as we approach competition times and more complicated access to rewards to subsidise all the logistics needed to keep the network safe (I mean mining), Runes emerge as an alternative that can unlock the full potential of decentralised finance around Bitcoin.

In short, Runes are Bitcoin's new fungible token standard that comes to try to capture the historically Ethereum-dominated market and other L1 networks such as Solana and BNB Chain. Beyond that, I could argue that Runes is the next significant opportunity in the next Bitcoin bull cycle.

RUNES: Tokens fungibles unrelated to Ordinals or Inscriptions

“Runes allow Bitcoin transactions to etch, mint, and transfer Bitcoin-native digital commodities” - Ordinal Theory Handbook.

One of the key differences between the Runes protocol and its predecessor, BRC-20, is that it is issued directly on the Bitcoin network and not on a meta-protocol on top of Bitcoin.

To understand the above, we must remember that the BRC-20 fungible tokens deployed as a meta-protocol on top of Ordinals, a meta-protocol on top of Bitcoin known as Ordinal Theory.

Therefore, the new fungible token standard ON Bitcoin and not ON TOP of meta-protocol makes Runes simpler, lighter and natively integrated into Bitcoin in its UTXO transactions, which translates into fewer inherent complexities when creating and managing fungible tokens on Bitcoin, which is very different from what we have been experiencing with BRC-20s on the network.

Key aspects of the Runes

• Block 840,000 is where the Runes protocol was first activated.
• Casey Rodarmor created Runes – the guy who developed Ordinals, a protocol that lets you create NFTs on Bitcoin.
• Runes was created by Casey Rodarmor – the same guy who developed Ordinals, a protocol that lets you create NFTs on Bitcoin.
• Runes natively uses the UTXO properties of the network and is not related to any external element in the chain, as its predecessor BRC-20 (Ordinal Theory) does.
• In line with the above, the Runes are more efficient and expected to have fewer complexities than the BRC-20, which could translate into lower transaction fees.
• Given the UTXO model adopted, Runes has a minimal on-chain footprint on the Bitcoin chain.
• Runes does not mean to change anything within the Bitcoin protocol or Bitcoin's consensus mechanism. Everything required to rebuild Runes exists within the Bitcoin blockchain without third-party components.
• The distribution of Runes can be diverse: pre-mints, open-mints or delayed mints as set by the issuer.
• Runes presents a potential new revenue stream for miners, generating additional transaction fees.

Why Runes

One of the big questions in the community when Rodamor announced Runes was: Why Runes?

Well, the answer to this question has a particular nuance that Rodamor himself put down very well on the Hell Money Podcast:

“Runes are a form of degenerate gambling… Runes are not the future of finance… Runes are a fungible token protocol, so that people can meme…”

From a degen point of view, it is imperative to acknowledge that the Runes are merely a tool to capture the attention of the Bitcoin ecosystem. In retrospect, it is crucial to understand the pre-Runes market to understand the motives behind Rodamor's proposal: memecoins.

Quite different from previous cycles, the power of memecoins has flourished beyond crypto borders thanks to their amusing way of capturing the attention of even those outside the ecosystem.

To give everything context,  the market cap of memecoins on the various blockchain networks exceeds $50B, with PEPE and WIF skyrocketing in the last year. Since December 2023, the trading volume of memecoins has been trending higher and skyrocketing in the first half of 2024 as the narrative of a new Bitcoin bull cycle consolidates, as the chart below shows.

Ethereum and Solana have long been capturing the memecoin season's attention. This power encourages the native network use on which these fun coins can change lives in an instant.

Because of this 'pull' power that memecoins represent for L1s, Runes is an attempt to innovate on the initial design of the BRC-20 token to create a standard fungible token that is also accessible to more people using the Bitcoin network.

Runes are a new protocol on Bitcoin that will attempt to bring memecoins to the OG blockchain. Previous efforts to shoehorn in memecoins most recently include the well-liked but chunky BRC-20s.

Memecoins on Bitcoin will almost certainly bring opportunities and fun, so Runes is not only a degenerate attempt to divert market attention to Bitcoin but also to satisfy the growing demand for Bitcoin-native fungibility in a simpler and more native way.

How Runes Work

As noted, Runes does not require off-chain data or a native token to operate, given that the native UTXO model in Bitcoin transactions is its base protocol. Specifically, the data for Runes gets stored inside the OP_RETURN field of a Bitcoin transaction.

Bitcoin's UTXO models mean that when a user has a Bitcoin balance in their wallet, the software counts a stack of sats across various UTXOs (unspent transaction output).

A fine example of the UTXO model is the change you receive when you purchase in a shop with cash using a banknote of a higher denomination than the bill total.

Returning to Runes, it is imperative to understand new concepts introduced in this protocol that represent the creation and operation process.

* Etching: Refers to the process of creating the Runes. During this process, token properties such as name, symbol, divisibility, terms, cap and amount, among other properties, are established.

At this point, it is important to highlight two fundamental properties of market opportunities: Name and terms.

In the first case, it is worth noting that Runes have unique names created by combining any uppercase letters from A to Z. In addition, Runes names during the first four months after their launch can only contain between 13 and 26 characters in length.

The previous resulted in a crucial variation every four months until the next halving, where users could create Runes one character shorter, meaning that by August 2024, all of the 12-character Rune names will unlock. Then, in December 2024, all of the 11-character Runes will unlock, and so on, allowing for continued euphemism around the Runes until the next Bitcoin Halving in 2028*. Smells like a money opportunity here.*

On the other hand, the 'terms' property allows a Rune to have an open mint, delayed mint, or limited mint within a set of conditions pre-set in the code as a specific interval of blocks.

This property opens the door for innovations with Runes, such as airdrops, lottery, and gambling properties, unlocking functionality within the Bitcoin ecosystem never seen before. Will it be the next big industry airdrop in Bitcoin?

With each Rune etching unique and specific properties such as name, divisibility, and tokens, these fungible tokens are ready to be transferred and exchanged in the protocol via Bitcoin transactions.

The significant thing to note is that once Runes properties get set, they remain unchanged forever.

* Minting: After establishing the properties and defined terms during etching, minting is the next natural step in the creating Runes process.

In this part, you generate the pre-defined amount of Runes according to the set terms. In short, it is the process of claiming a new Rune, similar to how you mint an NFT.

* Transferring: Runestones facilitate Runes transactions, messages stored in Bitcoin transaction outputs. Runes tokens are transferred from transaction inputs to outputs using edict messages.

These edits and scripts define the creation of new runes, minting additional units of existing runes, or transferring runes between transactions.

A key point to note here is that specific instructions are given throughout the runestones to indicate which input Runes get transferred to which outputs (pointer). If you transfer several UTXOs with different numbers of different Runes without using such specifications, all of those Runes will go to the first non-OP_RETURN output of that transaction.

The previous is crucial when a project requires, for example, token distribution (Airdrops, IDOs, private sales, etc.)

Key point: Runestones may be malformed by empty fields, invalid variants, or by including non-pushdata opcodes in the runestone OP_RETURN. In this case, the runestones are termed cenotaphs.

The cenotaphs are burned, which invites us to be attentive when deploying the Runes, verifying that the 'code' is correct to prevent the loss of the funds available for token deployment.

The Potential of Runes

As the 840,000th block on the Bitcoin network strategically coincided with the latest halving activation, the FOMO around Runes became very present in the community.

As a result, market-wide effects were not long in coming. On the one hand, transaction fees and transaction counts increased as the halving date approached. Meanwhile, sectors such as NFTs began to feel the effects of a revival that saw metrics rise, especially in Inscriptions, Ordinals, and some traditional blue chips from other chains.

To get an idea of the effect Runes had, look at the chart of Bitcoin fees before, during and after the launch of Runes on April 20th. This day alone, transaction fees accounted for 74% of the total block reward, allowing miners to earn a considerable  amount of BTC before halving to subsidise the sudden drop in inflation due to the event.

According to Dune Analytics data, since launch Runes has generated around 2,541 BTC in fees, approximately ~US$162M, representing almost 30% of all Bitcoin Network fees since April 20th.

On the other hand, data from Unisat indicates that demand for network blockspace and, subsequently, network fees has been driven primarily by Runes in the first week of the launch, demonstrating a positive sentiment around the Bitcoin ecosystem very similar to that experienced during Q1-2023 with Ordinals, Inscriptions and BRC-20s.

It is worth noting that the launch of Runes also involved the following network milestones:

• The achievement of over 4.8M Runes-related transactions on the Bitcoin Network, ~45% of all Bitcoin's transactions since April 20th.

• The introduction of Runes meant a historic increase in Bitcoin mining difficulty, which rose 2% to reach a record 88.1 trillion, the first time such an increase has occurred immediately following a halving, demonstrating the hype surrounding Runes.

• Daily active NFT traders reached a historical high on Bitcoin on April 18th at 25.6k in anticipation of the Rune launch.

• In the first week of April, Magic Eden generated +$1.84M in revenue via Ordinals trades, more than what OpenSea and Tensor made across the Ethereum, Solana, and Polygon NFT ecosystems combined in that same span.  In the first month after the halving, the figure has increased to +$5.1m in revenue, with Runes leading the way.

• The overall NFT market rose 27.45% in the week leading up to the launch of Runes, thanks to increased sales volume of BRC20, boosting overall industry sales to $307 million in that period.

In addition to the impressive metrics delivered by Runes inside and outside Bitcoin, it is worth mentioning that the protocol has the potential to decrease valuable aspects, such as the storage requirements to run a full Bitcoin node that increased with the rise of the BRC-20.

On the other hand, its simplicity in creating and managing the issuance of assets directly on the Bitcoin network facilitates the issuance of various fungible tokens, expanding Bitcoin's utility and attracting a broader user base due to its native compatibility with any solution available on the network such as wallets, LNs, L2s, and Bridges without the need for additional encryption.

How to invest in Runes?

If you are interested in participating in this nascent Runes market, some options support the protocol. Be sure you have some BTC in your wallet and do your due diligence to take advantage of market opportunities.

Some of the options you can use are:

• Xverse: Bitcoin wallet that has supported Runes since before its launch on the 840,000 block of the Bitcoin network.
• Magic Eden is the most popular site for buying and trading Ordinals. It also includes support for Runes.
• RSIC: One of the forerunners of the Runer Miner Mania with a freely airdropped of Runes to early ordinal collectors
• Ord.io: One DEX to trade with Odinals and mint Runes
• OkX Wallet: Introduces support for Runes through its non-custodial wallet natively
• Runemine: A wallet to mint, transfer and manage Runes in Bitcoin
• Unisat: The ultimate wallet and marketplace for Ordinals is also available for Runes.
• Runes DEX: Launch Runes, Trade memes and experience effortless trading in the runes world

The list above can also include several protocols and services that offer Ordinals support and have now adopted Runes to capture their respective market share.

Although some DeFi protocols can use Runes for practices such as lending and yield farming, some critics point out not to lose sight of the initial purpose behind these fungible tokens: a degen way to get labeled as memecoins.

However, many supporters believe this cycle is atypical and that memecoins can prove their permanence over time, as Doge, Shiba, and recently, PePe have done.

Whatever the case, remember to do your due diligence before entering this exciting market.

Runes, is this the future of Bitcoin?

To assert or deny that Runes will have a significant effect on the Bitcoin story seems to me too early to say. However, looking at the market's behavior before, during, and after its launch, there is no doubt that Runes is trying to win a space where its closest challenger (BRC-20) is already two billion reasons ahead.

Despite the above, Runes seems to promise to close the gap not only with BRC-20 but with other dominant networks in the fungible token spectrum, such as Ethereum or Solana, as pointed out by Franklin Templeton Digital Assets, the giant fund with more than $1.5T asset manager.

According to the investment firm's report, Runes Will Help Bitcoin DeFi ‘Close the Gap’ on Ethereum and Solana in the fungible token market cap by introducing a more efficient token standard for Bitcoin.

And frankly, I agree with the argument made about the role of the BRC-20 standard in the proliferation of fungible tokens on Bitcoin, given that it highlights the issue of UTXO bloat and increased fees.

Noting the above, I know that Runes can be a near-term catalyst for the Bitcoin ecosystem- just like how Ordinals caused a Bitcoin NFT rush and grew to a $2B market in under a year.

Considering that the marketcap for ERC-20 tokens on Ethereum is close to $100B, it is not unreasonable to acknowledge the potential for Runes to close the gap with its immediate rivals as more developers continue to explore its capabilities.

By developing more integrations with the Runes protocol and L2 solutions in Bitcoin, it is possible to envision a future of BTCfi with Runes as a protagonist beyond Rodemor's specific goal of evoking memecoins season on the OG blockchain.

On the other hand, the halving of rewards to bitcoin miners from 6.25 $BTC to 3.125 $BTC means a significant cut that will influence the sustainability of miners in times when it is possible to disrupt the subsidy in case there is no increase in the price of bitcoin as demand for ETF approval grows.

The alleviation of his reduction in revenue is possible if Runes increases interest and investor appetite in the ecosystem, as demonstrated in the days leading up to the protocol launch. Miners would be the first beneficiaries of the widespread adoption of Runes.

Remembering the launch of the Ordinal Theory and then the community rollout of BRC-20, there is no doubt that Runes has the technical advantages and the ideal framework in the main ecosystem network to mark its successful timeline as its predecessors did.

What I'm observing

If you are a lover of Bitcoin and memecoins, Runes might be the perfect combination for you right now.

Also, if you remember Ordi's April 2023 price of $0.4 and compare it to today's price (x10) after one year, you might find the same reasons I have for getting into early-stage market experimentation, with all that it means.

In that sense, I share with you some of the options I have in sight. Of course, this is not financial or investment advice. DYOR!

• Memecoins: $DOG, $PUPS & $RSIC. They are currently leading the way in the Runes memecoins.
• Launch/mintpads: Magic Runes, Runes Terminal, NFTs2Me
• Tools/ Infrastructure: Rune Bridge, Genii Data, Rif Wallet
• DAO: Runes DAO
• DeFi: Runes DEX, Runessance.
• NFTs/ Pre-Rune token: Runestone, RSIC,  Rune Totems & Rune Guardians.