Bitcoin Runes Explainer
I will occasionally have knowledgeable folks in the Bitcoin DeFi space write guest posts on the topic.
This post was written by CB Spears regarding Runes, a new metaprotocol developed by Casey Rodarmor the creator of Ordinals.
Runes are more interesting than you realize
You may have heard about Casey Rodarmor’s “Runes”, the hot new fungible token standard that he’s implementing in the same client he used to launch Bitcoin Ordinals. It’s Casey’s idea that is in direct response to the clear market demand for fungible tokens on Bitcoin, but improves and solves some of the issues many Bitcoiners (including Casey) have with the existing standards such as BRC-20. Casey launches his Runes token standard on the halving in April – at blockheight 840,000. It could be a giant boost in fees to Bitcoin miners at the very moment they need it the most!
Most Runes speculators are primarily concerned with farming aidrops for the anticipated launch and have little to no understanding about how the protocol works.
However, for those who understand a little bit about them, come down the Runes Rabbithole with me.
Beginner: Runes work within Bitcoin’s UTXO model
Most Runes degens know this basic differentiation between Runes and BRC-20s. “They are better for Bitcoin than BRC-20s” is generally true in that it’s good practice not to proliferate the UTXO set on Bitcoin (more UTXOs can make it harder/more expensive to run a node). Inscriptions have doubled the size of the UTXO set in just the past year and the majority of those are forever useless- they are “dead” BRC-20 mint & transfer inscriptions
Runes operations (the mint, transfer equivalents) do not create a leftover useless UTXO. This is a very simple strict improvement over BRC-20. I’ve learned the hard way that the market doesn’t particularly care about technical improvements so I’m glad that the market is hyped about Runes even if it’s for speculative reasons and hopefully it results in a general improvement on the network!
Medium: Runes light wallets through SPV-proofs – does Runes improve the indexing problem?
BRC-20 is an account-based model, meaning your balance is tied to your Bitcoin address. In Runes, your balance is tied to your UTXO set. This means that instead of having to validate the entire state of all BRC-20s in order to get your individual balance, you only need to validate just the UTXO that you own and it’s ancestors (previous UTXOs it “descends” from). This means that you could theoretically have very light Runes clients, even combining this with “utreexo” which is an interesting technique for a Bitcoin Core light client that could be run on a mobile device.
This has pretty big implications for the state of indexing Runes, although I haven’t fully thought down this path. Basically, I believe it would allow a lot of users to self-verify their Runes transactions, meaning that the problem of “decentralized indexer” that has plagued the BRC-20 ecosystem has dramatically improved. The proof of Runes state is more easily verifiable for the end-user, perhaps even on their own lightweight device.
Medium: Runes are probably compatible with Layer 2s/Bitcoin scaling
Because Runes is UTXO-model-based, this actually sets it up incredibly well for interoperability with many Bitcoin “Layer 2s” like Lightning or Statechains like MercuryLayer. Theoretically, a scaling solution that uses Bitcoin’s UTXO model would be natively compatible with Runes.
We know that Bitcoin fees are going much higher. In such a scenario, it can get really expensive really quickly to quickly transact directly on Bitcoin’s L1. Imagine that it becomes economically irrational to mint or transfer smaller BRC-20 amount on L1, then the volume for this fungible token trading would want to move elsewhere. Scaling solutions natively compatible with Bitcoin’s UTXO model would have a significant design advantage over the existing scaling models for BRC-20 such as the Black / White module system proposed by Unisat.
Deep: Runes pay your Bitcoin transaction fees
Rijndael proposed a wild idea in the latest Gwart Show episode where you could theoretically get someone to pay your Bitcoin transaction fees in return for getting your Runes. Rijndael theorized the idea that if you had a transaction with 2 outputs where 1 is the Bitcoin payment and the other output contains a Rune but the Rune output is “anyone can spend”, then someone could child-pays-for-parent the entire transaction in order to “get” the Rune. In such a scenario, you could make the transaction with low or “no” fees, and someone else pays for your transaction in order to take the Rune. This essentially makes the Runes pay for your Bitcoin transaction.
This idea would likely be classified under “MEV” which is a hot rising topic in Bitcoin-land. It could have some very interesting effects on Bitcoin’s incentive structure.
Crazy idea: Covenants + Runes
There are various Covenants proposals gaining steam, such as OP_CAT or OP_CHECKTEMPLATEVERIFY (“CTV”). These proposals can allow users to “share” UTXOs. Runes being UTXO-compatible could take advantage of some of these proposals. Let’s imagine just 1 of these concepts integrated with the Runes standard.
Introducing the “Gumball Machine” for Runes:
This is just a back-of-the-napkin idea. With covenants like CTV, a user could pre-fund a transaction for a Runes transfer which lets anyone “buy” Runes from the covenant. 2 inputs where the first input is the covenant, 2nd input is the user’s payment, and we remove the signature requirement for the transaction so anyone can spend it. Then the 2 outputs are: 1rst output is the Runes transfer OP_RETURN which sends some Runes to the “payer” (the 2nd input) and the remainder of the Runes to the second output. The 2nd output is a recursive covenant to the original transaction covenant (I may be using incorrect terminology). In this way users can spit out Runes entirely on-chain kinda like a gumball machine. There’s way more ideas down this rabbithole but I will write about those down the road ;)
If you think the “Runes Gumball Machine” idea is cool then you should look into Covenants in general. I particularly recommend OP_CHECKTEMPLATEVERIFY, but maybe get started visiting the “BIP Land” page from the Taproot Wizards Quantum Cats collection!
Conclusion
In the words of Casey Rodarmor: “The world of fungible tokens is a near and totally irredeemable pit of deceit and avarice.” Most of you readers will wish you had just bought Bitcoin instead.
Trade accordingly.
CB Spears