In September 2023, Casey Rodarmor, the creator of the Ordinals protocol, proposed the Runes protocol as a more efficient method for creating fungible tokens on the Bitcoin network.

Ordinals was the first experiment to add digital assets on top of bitcoin by inscribing NFTs (digital artifacts) on individual satoshis. The BRC-20 concept extended the idea of Ordinals by inscribing the whole set of tokens. However, BRC-20 required an off-chain database to maintain the index of the tokens.

The Runes protocol is similar to BRC-20 but keeps all transactions on the Bitcoin blockchain without the need for an off-chain database or indexer.

The Runes protocol uses Bitcoin’s native UTXO (Unspent Transaction Output) space to maintain the ledger of its tokens.

Rune is issued through a special Bitcoin transaction, similar to how an ERC-20 token is deployed on Ethereum. The issuer (creator) generates a Bitcoin transaction that contains information such as The new Rune name, the maximum supply and other data.

The issue transaction embeds the Rune protocol data into a Bitcoin transaction using an OP_RETURN output, which allows extra data storage without bloating the UTXO set. Once the transaction is confirmed, the Rune officially exists on the Bitcoin network.

If the Rune is set to be mintable, users can create additional tokens following the rules defined in the original deployment transaction. Some Runes may have a fixed supply that is created at the time of deployment.

Rune is stored within a Bitcoin UTXO meaning to send a Rune a bitcoin transaction is required. The transaction spends the UTXO containing the Rune and creates a new UTXO for the recipient. The Rune amount transferred is specified in the output (sending) UTXOs.

Because Runes require proper Bitcoin UTXO transactions, their deployment and transacting involve higher fees. BRC-20 minting is cheap: Deploying and minting a BRC-20 token only requires small text-based inscriptions.

Also, Runes have no programmable logic beyond token issuances and transfers. However, DeFi functions on BRC-20 cannot be considered fully on-chain.

if this protocol had a small on-chain footprint and encouraged responsible UTXO management, it might serve as harm reduction compared to existing protocols. At least one of which, BRC-20, is already quite popular, and has the undesirable consequence of UTXO proliferation.
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