Key takeaways
- Bitcoin Runes are a new protocol introduced in 2024 as a more efficient successor to Bitcoin Ordinals, aimed at enabling NFTs on the Bitcoin blockchain.
- Runes offer greater flexibility than Ordinals by encoding metadata directly into Bitcoin transactions, overcoming limitations like the 80-byte restriction of the “OP_RETURN” field.
- The initial excitement around Bitcoin Runes quickly waned, with a 99% decrease in daily etchings within a month of its launch, suggesting that hype did not translate into sustained usage.
- Runes are particularly suited for creating and managing NFTs, providing a more tailored and scalable solution compared to Ordinals, which have broader but less specialized use cases.
- Despite the hype, the necessity of Bitcoin NFTs remains questionable, with alternative blockchains like Ethereum and Tezos offering more advanced features and potentially better platforms for non-fungible tokens.
One of the age-old problems with Bitcoin is that it doesn’t natively support non-fungible tokens (NFTs). This led to Bitcoin Ordinals appearing in January 2023, serving as a method for inscribing unique data onto individual satoshis, thereby enabling NFTs on the Bitcoin blockchain.
By early 2023, thousands of users and creators had been actively participating in the Ordinals ecosystem, creating and trading Bitcoin-native digital assets.
Notably, there were several high-profile sales reaching hundreds of thousands of dollars.
Naturally, the founder of the Ordinals protocol, Casey Rodarmor, decided that Bitcoin NFTs were a dream worth pursuing, with promises of continued community hype and profit.
As such, it didn’t take long for “Runes” to be announced, not even six months after the launch of Ordinals, claiming to be a “more efficient” successor to the protocol.
Runes were fully launched on April 24, 2024, right after the Bitcoin halving. But in less than a month since its debut on the Bitcoin blockchain, the Bitcoin Runes protocol has experienced a dramatic 99% decrease in daily etchings.
The initial surge might have been driven by hype, and the rapid decline suggests that the initial excitement did not translate into sustained usage.
Nevertheless, needed or not, the technology behind Bitcoin Runes is pretty fascinating, and that’s what we’ll be looking at today.
Did you know? Runes can be integrated into existing Bitcoin wallets with minimal changes, allowing for broader adoption without the need for new infrastructure.
Why are Runes needed?
An incarnation of the Runes protocol is necessary for Bitcoin’s continued relevance. But the Bitcoin network has certain limitations:
- Lack of smart contracts: Unlike Ethereum, Bitcoin does not natively support complex smart contracts, which limits its use cases beyond simple transactions.
- Non-fungibility: Bitcoin was designed for fungible tokens, meaning each Bitcoin (BTC) is identical to another. This makes it challenging to create and manage NFTs, which require unique identifiers.
- Scalability issues: The Bitcoin network can become congested, leading to slower transaction times and higher fees, which can be problematic for applications requiring quick and cheap transactions.
Indeed, while Ordinals aimed to address these limitations, Runes seeks to provide a more efficient and comprehensive successor.
What are Bitcoin Runes?
Bitcoin Runes operates by embedding extra data into BTC transactions. This additional data contains information that uniquely identifies each token or digital asset, making them distinct from regular Bitcoin transactions.
This mechanism allows for the creation of NFTs and other unique digital assets on the Bitcoin blockchain, often regarded as securer and more decentralized than other blockchains that natively support NFTs, such as Ethereum.
Suppose an artist, Alice, wants to create a unique digital artwork and issue it as a Bitcoin Rune. She follows these steps:
- Encoding the artwork: Alice’s digital artwork is encoded into a format that can be embedded into a Bitcoin transaction. This process involves creating a metadata file that includes the artwork’s details, such as its name, description and a link to the digital file.
- Creating the transaction: Alice initiates a Bitcoin transaction where a small amount of BTC is transferred. Alongside this transfer, the metadata for the artwork is embedded into the transaction using a specific encoding scheme.
- Broadcasting the transaction: The transaction is broadcast to the Bitcoin network and confirmed in a block, permanently recording the unique artwork on the Bitcoin blockchain. The resulting Bitcoin Rune represents ownership of the digital artwork.
Naturally, the inclusion of artwork in the metadata of a transaction means that those specific satoshis can be sold at a much higher price, allowing the artist to profit.
By embedding the unique digital artwork into the Bitcoin transaction, these satoshis become part of an NFT or a unique digital asset, increasing their value beyond the standard market price of Bitcoin.
Did you know? Runes are designed to be lightweight, using minimal additional data in Bitcoin transactions, which helps preserve Bitcoin’s efficiency and block space.
Runes vs. Ordinals
Each year, Apple brings out a new phone, or the Call of Duty franchise releases a new game, and we can’t help but feel conned into buying a new version of something that didn’t really need to be improved upon so soon.
It’d be easy to make such a comparison with Ordinals versus Runes, but the truth is a little more complex.
Firstly, there’s a difference in the encoding method. Runes are recorded in the metadata of a transaction, offering far more flexibility than Ordinals, which are confined by the 80-byte limit of the OP_RETURN field.
For example, an artist creating a detailed digital artwork can use Runes to encode comprehensive metadata, including the artwork’s title, description, creator information and high-resolution image links. In contrast, using Ordinals, the artist would be restricted to encoding very basic information such as a brief title or short description, significantly limiting the level of detail that can be included.
Next, while Ordinals have a wider range of use cases, the functionality of Runes is more tailored to creating and managing NFTs and other unique digital assets. Runes are optimized for non-fungibility, providing features and capabilities that make it easier to mint, transfer and trade unique tokens.
While Ordinals can be used to manage unique items, their primary strength lies in their versatility. Ordinals can track various types of data and support multiple use cases beyond NFTs.
Scalability is another area where Bitcoin Runes distinguish themselves from Ordinals. Since the OP_RETURN field has limited capacity, larger or more complex data sets require multiple transactions, which can strain the network and lead to higher fees.
Bitcoin Runes, in contrast, can handle a higher volume of transactions without causing significant network congestion or increasing transaction fees excessively.
Indeed, there was space for improvement when it came to Bitcoin NFTs, and for all his sins, Rodarmor certainly knew this.
How to buy Bitcoin Runes
Unless you’re an artist, developer or perhaps representing a Web3 gaming community, you’re mostly likely going to be trading Runes as a cryptocurrency enthusiast or investor.
Whereas the artist would need to mint or “etch” a Bitcoin Rune through a protocol like Counterparty or Stacks, trading the runes themselves is a little easier and resembles the purchase of any other token with a few basic differences.
- Step 1: Set up a Bitcoin wallet. Select a Bitcoin wallet that supports Runes, such as MetaMask or Ledger. Install the wallet, create a strong password, and back up your recovery phrase.
- Step 2: Find a marketplace. Look for marketplaces that list Bitcoin Runes, such as OpenSea or OKX. Sign up and verify your account on the chosen marketplace.
- Step 3: Purchase Bitcoin. If you need Bitcoin, buy it on an exchange like Coinbase or Kraken. Transfer your Bitcoin to your wallet.
- Step 4: Buy the Runes. Find the Runes you want on the marketplace. Use your Bitcoin to buy the Runes, following the platform’s instructions.
Did you know? When visiting a Rune or Ordinal marketplace, you might notice hundreds of identical-looking Runes. This happens because Runes and Ordinals are often bundled into collections or presented like tokens to make trading easier. But each Rune and Ordinal is technically non-fungible, meaning every single one is unique, even if they seem the same.
The future of non-fungibility on Bitcoin
NFTs certainly have their use cases. For example, they can be used to represent ownership of real-world assets, offering collateralization and therefore price stability.
This enables “receipts of ownership” to be stored on the blockchain, benefiting from its security and immutability.
Another example is digital art, where NFTs allow artists to create unique, verifiable digital pieces that can be bought, sold and traded while ensuring the artist retains provenance and royalties.
However, whether NFTs on Bitcoin are needed is an entirely different question.
Proponents argue that Bitcoin’s unparalleled security and immutability make it an ideal blockchain for NFTs, ensuring the highest level of protection for digital assets, but this argument is likely to weaken as time goes on.
Chains such as Tezos have a self-amending protocol, allowing them to upgrade without hard forks, which can reduce security risks associated with network splits.
Cardano’s Ouroboros consensus mechanism, Tezos’ self-amending protocol and Algorand’s pure-proof-of-stake are examples of how security on the “altcoin” market is quickly catching up to that of Bitcoin.
Moreover, security seems to be the only valid reason why Bitcoin NFTs would be preferred over the same NFTs on, say, Ethereum.
It’s likely that the Bitcoin NFTs saga was bred out of two reasons:
- To keep Bitcoin relevant as a chain in light of diminishing Bitcoin payments.
- To make a profit from short-term hype.
In fact, while many would copy and paste the age-old security argument, it’s very likely that there are those with hundreds or even thousands of BTC in their wallets, and the sustainability of their profits relies on increased use cases for Bitcoin.
So, the overarching reason would be money.
This is not to say, however, that protocols taking advantage of Native SegWit and Taproot updates aren’t interesting, and this has led us to the educational discussion today.
Alas, the lemon cannot be infinitely squeezed, and whales will inevitably withdraw in favor of more suitable chains for global crypto adoption.
Written by Bradley Peak