Bitcoin’s New Asset Class (Without the VC-Tax)

Bitcoin Runes are Bitcoin's new fungible token standard that's highly relevant for builders, brands & corporates. Here's all you need to know.

May 01, 2024

Hey, it’s Marc.✌️

Bitcoin is experiencing a renaissance.1

Last year, the Ordinals (BRC-20) protocol brought NFTs to Bitcoin with over 66M inscriptions to date and a $2.65B market cap. Recently, Layer2 protocols, such as Lightning or Stacks, picked up as well.

Now, Bitcoin Runes introduces a new fungible token standard on Bitcoin, enabling a host of new innovations such as DeFi, Tokenization, Stablecoins, and more.

They also create new asset class accessible to anyone (without the VC-tax).

This is massive. And it opens new opportunities for builders, brands and corporates.

Here’s all you need to know.

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A Quick Overview

Bitcoin Runes launched on April 19th on Bitcoin, they are a new protocol that enables fungible tokens on Bitcoin.

Runes were created by Casey Rodarmor, the creator of the Ordinals protocol.

Why it’s important: Runes create a new asset class on the world’s most secure blockchain. Unlike Ordinals, also called BRC-20 token's or Bitcoin’s non-fungible tokens (NFTs), Runes are fungible (similar to Ethereum’s ERC-20 standard).

NFTBoi, a thought leader in the NFT, Ordinals and Runes space, said to me:

Runes adds to the functionality of L1 bitcoin in a way BRC-20 couldn’t because it lacked the UTXO model.

What he means by that is that Ordinals inscribe data directly into individual satoshis (the smallest units of Bitcoin), potentially leading to larger transaction sizes and strain on the network over time.

Runes, however, use the existing UTXO structure of Bitcoin to represent tokens, minimizing the footprint on the blockchain. This provides more flexibility as tokens can hold additional logic and rules for transfers (via edicts).

(You can deep dive here or read the Ordinal Theory Handbook)

Why it’s important: Using UTXO, Runes become much more scalable, efficient and customizable than any other asset creation protocol on Bitcoin, such as Taproot Assets or RGB.

Zooming in:

Taproot Assets: While less complex, shares similarities in leveraging Bitcoin upgrades for efficiency. Runes offers more flexibility for custom asset logic.
RGB: Runes provides a less complex yet more "trustless" model, relying more heavily on Bitcoin's security than user-side validation.

Combined with the security and provenance of Bitcoin, Runes become powerful.

So what? While Ordinals where a major development for Bitcoin, Runes are even bigger.

They essentially enabling the creation of programmable assets on the Bitcoin blockchain, allowing smart contract-like functionality, tokenization, and broad range of new applications.

Why Runes Matter

Not convinced yet? Think again.

Runes matter for two things:

New financial layer of innovation
New, high-provenance asset class owned by the people, not VCs

Let’s unpack that.

1. Financial Layer of Innovation

Runes spur a new wave of innovations on Bitcoin, such as:

Smart contracts
Asset tokenization
Stablecoins
Memecoins

NFTBoi states:

“I believe this is a new asset class that will ultimately be worth multiples of the current market cap and become a long term sustainable ecosystem as additional infrastructure is built out and more education happens.”

This is thanks to powerful new functionalities:

Simplified Smart Contracts: While Bitcoin's scripting language traditionally limited complex smart contracts, Runes offer a streamlined way to incorporate basic logic and conditions for their tokens. This won't replace the intricate smart contracts found on platforms like Ethereum, but it does enable:
- Conditional Transfers: Rules like, "Token X can only be sent to address Y after a specific date."
- Basic Multi-Signature: Requiring multiple parties to agree before a token is transferred, increasing security.
- Timelocks: Setting restrictions like, "This token cannot be moved for a certain period."
Asset Tokenization: Runes make it possible to represent assets on Bitcoin:
- Fractional Ownership: Easily split ownership of real-world assets (art, real estate) into many Rune tokens, lowering the barrier to entry for investors.
- Loyalty and Reward Systems: Implement points programs where Rune tokens represent rewards that can be redeemed or traded.
A Wider Range of Applications
- Decentralized Exchanges (DEXs): Facilitate basic trading of Rune tokens without trusting a third-party exchange.
- Stablecoins: Potentially create more secure and decentralized stablecoins pegged to other currencies, backed by various assets held on Bitcoin.
- Community Currencies, aka Memecoins: Local groups could establish their own currencies with rules for usage and incentives built-in using Runes.

This is massive.

New, High-Provenance Asset Class, Owned by the People, Not VCs

Similar to the Memecoin mania that has rocket the crypto space in the last months, Memecoins are now coming to Bitcoin – thanks to Runes.

And Memecoins aren’t just a fad, they yield tremendous financial and cultural power.

Maja Vujinovic, digital asset pioneer and over 12 years in the space, saw this coming many months ago. And she's on point:

"Memecoins should not be seen at their face value. They are a larger signal of a new type of organized groups collaborating in investment and profit sharing that is going to transform capital allocation, business and society at large.

Meanwhile, Memecoins have become an important driver of protocol adoption across the space, particularly among L1 chains.

Isabel Foxen Duke, General Partner at Unbroken Chain, the first Ordinals liquid trading fund, said:

“Retail investors like Runes — and meme coins in general — because they create opportunities to speculate without a built-in VC tax. Retail is sick of buying bags of cryptocurrencies on the basis of largely false technical or utility narratives. They’d much rather just gamble on fun, transparent, free-mints that put all investors on a level playing field.”

Runes bring power back to the people, in line with Bitcoin’s original ethos.

So what?

Every builder and corporate should start considering Bitcoin as a serious contender to other L1 smart contract chains, whether it’s for asset tokenization, stablecoins, memecoins or even NFTs.

Projects are racing to be amongst the first to launch their own Rune token using gamification models and promising airdrops.

Rune ecosystem (source)

We've seen trading coins and NFT be a significant boost to L1/L2 activity on other chains, and ultimately improve the health of those projects (i.e. Solana). […] Teams are working quickly to ship an entire ecosystem around Runes, and the main question is probably where runes trading will occur (CEXs, L2s, L1 on Bitcoin, or on other L1s as almost an L2/execution later like maybe SOL).
– NFTBoi

Many expect an upcoming “Bitcoin Summer” with ordinals, runes, and Bitcoin layer 2 protocols taking off.

We’re just getting started.

Talk soon,
– Marc

2 UTXOs (Unspent Transaction Outputs): Bitcoin functions by keeping track of UTXOs, which are essentially chunks of Bitcoin like unspent coins. Runes leverage this existing UTXO structure to embed token functionality.

OP_RETURN: Traditionally used to store a small amount of arbitrary data in Bitcoin transactions, Runes cleverly utilize OP_RETURN to hold more substantial information, enabling their existence.

Taproot: This recent upgrade to Bitcoin has enhanced its scripting capabilities and made it easier to work with more complex data, further facilitating the implementation of Runes.

3 TLDR; Runes utilize Bitcoin’s Unspent Transaction Output (UTXO) model and OP_RETURN data embedding to program token transfers and basic logic. The protocol is self contained and has no dependencies on ordinals or inscriptions.

Delphi Digital

Creating Runes works as follows:

Etching: The creation of a new Rune token type begins with an "etching" transaction. Information including the token name, symbol, supply, and potentially basic rules are added to this transaction's OP_RETURN output. This establishes the foundation for the Rune token.
Edicts: Specific rules for the transfer and potential manipulation of a Rune token are defined as "edicts". These edicts are included in subsequent transactions involving the Runes. Consider them the building blocks for potential smart-contract functionality.
Rune Transfer: When a Rune is transferred, it's done by taking a UTXO and creating a new transaction that spends the old UTXO. The new UTXO contains the Rune along with the relevant edicts, allowing it to be moved along the Bitcoin blockchain.