A look into Runes, a new Bitcoin token standard for issuing fungible tokens

The Runes protocol has gained a lot of interest in the Bitcoin community over the past few months.

Runes is a fungible token standard designed by Casey Rodarmor, the creator of Ordinals. The protocol is designed to be an alternative to BRC-20, an experiment token standard for fungible tokens on Bitcoin.

The BRC-20 standard is built on ordinals, which means it stores information in a Bitcoin transactions witness data, in a similar way, runes data is stored in a data storage function called OP_RETURN, Bob Bodily, the founder of Bioniq, told Blockworks.

“Runes is a very elegant byte-efficient protocol; everything is encoded down into integers that you can store in the operator,” Bodily said.

Unlike BRC-20 tokens, which often leave behind “junk” after transactions which can consequently clog the network, runes use Unspent Transaction Outputs (UTXOs), and messages sent using the rune protocol (called runestones) will be stored on Bitcoin transaction outputs.

With Runes, users can deploy (etch), mint, and launch tokens in the same way that they can with ERC-20 tokens.

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Rennick Palley, the founding Partner at Stratos, a VC firm focused on early-stage crypto projects, believes that Runes may have a bright future in enabling bitcoin miners to remain profitable.

“By adding a whole new layer of fungible tokens on Bitcoin, Runes is making the network busier and more versatile. This should mean more transactions and, by extension, more fees for miners. It‘s especially promising because it meshes well with Bitcoin’s existing UTXO model, which is a core part of how miners operate,” Palley said.

However, he notes that with Runes growing popularity, transaction fees may climb, making everyday Bitcoin transactions less appealing due to their cost.

“It should encourage more BTC to transact off the layer,” Palley remarked. “Overall, I see the rise of layer-2 solutions as a major positive. These technologies will be the key to enabling hyperbitcoinization. Bitcoin would always need layer-2 solutions to scale — ordinals, BRC20s and Runes have just accelerated the timeframe, which is great.”

Alexei Zamyatin, co-founder of BOB, a hybrid layer-2 powered by Bitcoin and Ethereum, shares this sentiment. He notes that although bitcoin miners are likely to remain profitable thanks to the Runes protocol, high fees remain a concern.

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“Ultimately, trading and other DeFi related activity will have to move to Bitcoin layer-2s/sidechains if [they] are to compete with the UX people are used to from Ethereum and Solana. Otherwise, the 10 min[ute] block times and high fees will result in a decrease of activity very quickly once first speculation is done,” Zamyatin said.

Zamyatin also noted that the growing interest in Bitcoin layer-2s can not be credited solely to Runes but remains a net positive for the Bitcoin ecosystem. Additionally, he notes that many projects are currently riding the “hype wave,” though these projects will likely disappear from the ecosystem in the long term.

“There are a number of strong technical and product teams that may be able to create a strong competition for ETH layer-2s. A lot of this still depends on technical innovation in the form of BitVM or a fork to Bitcoin, which I personally do not believe will happen soon, unfortunately,” he said.

Despite this, Zamyatin remains optimistic, noting that layer-2s and Bitcoin sidechains will likely bring more value to the Bitcoin blockchain.

“The Bitcoin learning curve is steep and we need to give people a simple way to start playing around with Bitcoin assets — instead of, as previously, tell[ing] them that anything else but Bitcoin is a scam,” he said. “This is certainly something that has changed since Ordinals: Bitcoin has become more welcoming of new developers and builders, with the toxic maximalist culture subsiding into irrelevance.”