How Runes Work: Bitcoin’s New Fungible Token Standard

Runes introduced a new fungible token standard to Bitcoin’s ecosystem.

Casey Roadrmor, a well-known Bitcoin developer and creator of the Ordinals Protocol, proposed the Runes protocol in September 2023.

Runes protocol launched on April 20 2024 on block 840,000, coinciding with the Bitcoin Halving. Every four years, Bitcoin's mining reward is split in half, limiting new supply.

Runes will make creating and managing fungible tokens easier and more efficient. So, let’s dive into this topic and learn how Runes works!

How Runes Work

Runes is the name of the protocol and the name for the fungible tokens issues on the Bitcoin network using the Runes protocol.

First, imagine a secure vault with separate safes where users store money. Bitcoin network is the vault, and little safes are UTXOs (Unspent Transaction Outputs). Inside the safes, you can now store tokens called Runes. Also, you can trade them like other crypto tokens. However, they aren’t built on other blockchains. Runes exist within the Bitcoin blockchain and leverage the same level of security and decentralization as Bitcoin.

Etching Runes

In essence, “etch” means “create”. By etching a Rune, you create a new type of token. You can define its name, symbol, and divisibility (the number of decimals it can have, with a maximum of 38).

Photo: Code for etching Runes, Source: ordinals.com

Minting Runes

After you etch a Rune, you can mint it to create more of it. Imagine it as printing new money.

Photo: Code for minting Runes, Source: ordinals.com

Transferring Runes

During Bitcoin transactions, you can send Runes to other users.

Photo: Code for transferring Runes, Source: ordinals.com

Technical Overview of Runes

But, let’s give you a more technical explanation! Two main terms are:

• Bitcoin’s UTXO transaction model

• The OP_RETURN opcode

A Runestone is a special message that instructs what to do with Runes. For example, whether to etch, mint, or move them. Runestone defines a Rune and is stored in a Bitcoin transaction.

Photo: Visual explanation of UTXOs, Source: geeksforgeeks.org

A quantity of BTC you haven’t spent yet is called UTXO. Each UTXO can hold any amount of Runes. UTXO is an output of a previous transaction, you can use it for new payments. The creation of junk UTXOs can clog the Bitcoin network. Fun fact: Runes protocol holds the balance record of a token within a UTXO, but doesn’t link it to a wallet address.

During a Bitcoin transaction, data is stored in the OP_RETURN message. This message defines a Rune and includes information on what to do with it. For example, how to etch, mint, or move a Rune.

OP_RETURN outputs are provably unsendable. Thus, they don’t congest the UTXO and impact network efficiency. Each Rune transaction can specify various operations across distinct Runes. Instructions in the OP_RETURN data define how the Rune protocol splits the UTXO into multiple new UTXOs.

But, what if a Rune transaction fails? After an invalid protocol message, the Runes are burned. This prevents the accidental creation of Runes.

Benefits of Runes

Fundamentally, Runes will simplify actions with fungible tokens. Users can create and manage new tokens on-chain without generating “junk” UTXOs. This will result in Bitcoin’s improved efficiency.

Furthermore, Runes will expand the utility of Bitcoin’s network and attract a wider audience. It will be easier to create meme coins and other community-driven projects. As new users join, Bitcoin’s revenue system will grow.

Runes should replace the less efficient, more complex, Ordinals-based BRC-20 token standard. Additionally, Runes strives to outperform other Bitcoin protocols for fungible tokens that rely on off-chain data (for example, RGB and Taproot Assets).

Photo: The Bitcoin Runes Ecosystem, Source: @CoinMarketCap on twitter.com

Final Thoughts

Even though the Bitcoin network wasn’t originally designed for this, it’s fun and refreshing to see it gain a new token-issuance mechanism. Many new communities are already building up and expecting their own launches. Certainly, it’s exciting to see the new usage and adoption of the Bitcoin network.

With this blog, we aim to educate you about the technical background of cryptocurrency. Here's a beginner's guide to fundamental Blockchain concepts. However, when you’re investing, always do your own research! 🙂