Bitcoin has long been lauded for its simplicity—a characteristic some praise for robustness, and others criticize for lack of functionality. However, despite this simplicity, Bitcoin has consistently spurred innovative thinking, particularly in layer-2 development.

A year ago, it was the Ordinals protocol that made a lot of noise, offering non-fungible and later – fungible inscriptions on satoshis, the smallest unit of bitcoin. The Ordinals hype pushed Bitcoin transactions (and their fees) through the roof, hitting an all-time high of 30 BTC of daily fees.

However, since April 20, 2024, a new layer-2 dwarfs the Ordinals’ achievements. On the day of its launch, Runes, another protocol allowing the creation of tokens on Bitcoin, pushed daily fees to a jaw-dropping 1,289 BTC. The launch was accompanied by massive hype around the potential of more efficient Bitcoin-based memecoins, and even the possibility of tapping into the DeFi space.

So, what exactly is Runes, and how might it impact Bitcoin and the broader cryptocurrency landscape?

What is Runes and how it works

Like the Ordinals (the BRC-20 standard), Runes aims to enable the creation of fungible tokens on the Bitcoin blockchain. However, unlike its predecessor, Runes manages to do so without clogging the network (or more precisely, its UTXOs).

Indeed, Bitcoin blockchain has a particular bookkeeping method: each transaction spends all the coins that belong to the sender, sending the intended amount to a receiver’s address, and the rest (Unspent Transaction Output, or UTXO) to a new address also controlled by the sender.

The Runes protocol cleverly utilizes these transaction leftovers, identifying and repurposing the unused UTXOs. A unique digital item called Rune is assigned to a UTXO using a protocol message, stored in an OP_RETURN output. This helps solve the issue of network overload, so often associated with the Ordinals.

In other words, Runes offers a more streamlined approach to creating fungible tokens on Bitcoin. Also, unlike the Ordinals, Runes is compatible with the Lightning network, an important scalability solution for Bitcoin.

How to use Runes?

To use Runes, one must install a compatible wallet, such as XVerse or Magic Eden, and possess enough BTC to pay a transaction fee.

Runes can be created (“etched”), generated (“minted”), and transferred using runestones, which are messages stored in Bitcoin transaction outputs. Etching involves setting properties like name, divisibility, and symbol. Minting creates new tokens based on etched properties.

Runes performance

Understandably, Runes does not have a token, and the protocol’s success can be tracked either by assessing its impact on the Bitcoin blockchain or by the valuation of the Runes-based tokens.

On the Bitcoin side, we can see that after the initial surge, the number of Runes-related daily transactions has declined from over 1 million to 139k. Daily fees paid to Bitcoin miners decreased as well, from 1,289 BTC to below 8 BTC yesterday  (source: Dune).

As for Runes themselves, the tokens’ market cap is now slightly over 35,000 BTC, owned by almost 500,000 Runes holders (source: Rune Alpha). That’s nearly half of the active addresses on the network, showing real interest from Bitcoiners.

The most popular Runes include Dog•To•The•Moon, RSIC•Genesis•Rune , and Satoshi•Nakamoto. At their core, those are memecoins (or shitcoins), but one day some of them may evolve into proper community-driven projects with a purpose. Or not. After all, a token is merely a vehicle for the value its creators instil in it.

Runes’ impact on the larger crypto space

The introduction of Runes is part of a broader trend towards enabling more sophisticated functionalities on the Bitcoin blockchain. Previously, the scripting limitations of Bitcoin hindered the development of smart contracts and other advanced features, leading developers to flock to alternative platforms like Ethereum or Solana. However, with innovations like the Ordinals and now Runes, Bitcoin is gradually transforming into a more versatile platform. The Runes protocol is still in its early stages, but the talks of a possible DeFi ecosystem on Bitcoin are gaining traction.

This could potentially diminish the importance of other blockchains as they may need to advance their innovation and expand their use cases to remain competitive and relevant.

All in all, even if (or when) the Runes hype subsides, it could still stimulate a virtuous circle of innovation within the crypto space.