Launched on the day of the Bitcoin halving, Runes are a form of data embedded directly into Bitcoin transactions. Unlike simple financial transfers, Runes encapsulate additional information within these transactions.
Bitcoin Runes operate by utilizing a method known as “transaction augmentation,” which allows users to embed arbitrary data into transaction outputs. Runes can store a variety of data types, from simple messages to more complex contract-like scripts.
This mechanism is distinctly different from other Bitcoin-based innovations such as Ordinals and BRC-20 tokens. Ordinals inscribe data into individual satoshis, turning each into a discrete and uniquely identifiable unit of data. It makes Ordinals ideal for representing digital artifacts like images or texts on the Bitcoin blockchain.
On the other hand, BRC-20 tokens are a token standard similar to Ethereum’s ERC-20, which is designed for issuing and managing tokens on Bitcoin’s sidechains — specifically the RSK Smart Contract Network.
The Runes protocol operates using a system known as Unspent Transaction Outputs (UTXOs). A UTXO represents a specific amount of Bitcoin that hasn’t been spent and can be used to fund new transactions. Runes are assigned to a UTXO via an OP_RETURN function, which allows data to be embedded in transactions without cluttering the network.
In a transaction, a Rune is linked to a UTXO through an OP_RETURN output that specifies the output location, a unique numerical ID for the Rune, and the amount of Rune being transacted. This setup also handles Rune characteristics such as divisibility and other metadata, all encoded within the same transaction. The transfer of Runes between parties uses Bitcoin’s secure framework to detail which Runes are moving from one UTXO to another.
The strategic launch of Runes on the day of the halving leveraged the attention the event got from the broader market. This timing was chosen to maximize visibility and impact, leveraging the increased attention during halving when miner rewards are reduced, and the future price of Bitcoin is hotly debated.
The immediate impact Runes had on the Bitcoin network was huge. Even though the market was expecting high fees and congestion around the halving, the impact Runes had seems to have been unexpected.
Although Runes were designed to minimize network clutter by using OP_RETURN outputs, which are provably unspendable and thus do not contribute directly to the growth of the UTXO set, they can…
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