Bitcoin is the first cryptocurrency to arrive in the financial market, and as a result, has served as a blueprint for all those who followed in its aftermath. Over the years, it has remained relatively reserved in terms of development, operating largely as a trading coin instead of finding new use cases across decentralized finance and applications like many of its peers have done. However, over the past year, it has consistently broadened its horizons. Initially, it was the Ordinals, assets similar to non-fungible tokens, that came to the Bitcoin market. While some investors were hyped, others remained skeptical, believing that the technology could only cause unwanted disruptions across the marketplace.

Later, the exchange-traded funds arrived on the blockchain, taking the prices to new all-time highs well ahead of the next halving. Right now, the marketplace is dealing with a new addition, the Bitcoin Runes. But what are they exactly, and are they any different from the BRC-20 tokens that allow the transfer and creation of NFTs?

What are the Runes?

The somewhat esoteric name of these tokens comes from the etching, their preferred term of deployment. They use the UTXO model to provide users with more efficient tokenization solutions, allowing investors to mint directly on top of Bitcoin. The tokens they create are typically meme coins, but the process has nonetheless attracted a lot of attention because it is primarily considered to be more efficient than the BRC-20 standard, which is associated with the world of the Ordinals.

The chief purpose of the Runes is to simplify the creation process involved in the development of fungible tokens, as well as mitigate challenges such as the UTXO bloat. This happens when the address used for data doesn’t correspond to private keys, meaning that the UTXO can never be spent. Essentially, it is a fake payment. The transactions are, therefore, removed from the set, something that causes the database to continue increasing indefinitely.

With the Runes, every transaction begins with identifying the unspent transaction output. These figures can be employed as new input in a new transaction. This is, in a sense, similar to gathering spare change, but the process occurs solely in the digital sphere.

How do they work?

Apart from the UTXO, the Runes also use the OP_RETURN opcode to make the creation of the tokens a much more straightforward process. Runes operate as unique digital assets and are assigned to the protocol on the basis of specific details like a Rune ID, output amount, and index. It leverages Bitcoin’s abilities for on-chain storage, an approach that reduces the incidence of unspent sums. This is important because the UTXOs are known for their ability to cause network congestion. Within the crypto environment, this means higher prices, less dependable transactions, and slower processes overall.

This is an undesirable outcome within the world of cryptocurrencies, which is normally so fast-paced. All the Rune balances are tracked as part of the balances dealing with the unspent output instead of being linked directly to wallet addresses. The transfer details are also specified as part of the OP_RETURN. The creation of Runes occurs only with the help of runestones, messages stored in the Bitcoin blockchain transactions that contain instructions on what to do with the Runes, including their minting, movements, and creation process. Runes can be either etched or minted, with the former focusing on properties such as divisibility, the symbols used, and the name, while the latter generates new tokens depending on their etched properties. Transferring them involves the same features as the ID, amount, and output number during their operations.

BRC-20

Part of understanding how the Runes function and what they entail lies in examining the functionality of ordinals and BRC-20 tokens first and foremost. The ordinals arrived on the BTC blockchain in late January 2023, and despite the similarities they share with the Ethereum-based NFTs, they are believed to be far safer and more reliable because they are located directly on the mainnet. Their introduction marked the beginning of a new era in the history of Bitcoin and its network, signifying the conquering of a new and significant milestone in tokenization.

Ordinals allow users to inscribe any kind of data directly onto the blockchain, including images, videos, and text. Many members of the Bitcoin community were excited and enthusiastic about the Ordinals, while others were more skeptical. After all, Bitcoin is known as being relatively standard compared to its peers, and this type of upgrade is not commonplace for the ecosystem, hence why many were unsure how to approach the advent of these new tokens and use cases. The BRC-20 standard and protocol came soon after the Ordinals in March 2023.

The assets started as purely experimental and enabled the transfer and minting of fungible tokens on the BTC blockchain. The name stands for Bitcoin Request for Comment, and it follows similar parameters to the ERC-20 present on Ethereum. In the span of just three months, BRC-20 climbed exponentially, getting to $1 billion in market capitalization. They were also responsible for significant network congestion due to the production of UTXOs.

The difference

With that in mind, it can seem that the BRC-20 and the Runes are pretty much the same thing, with the chief difference being that the former is a year older than the latter. But there’s way more to it than that. Rune is generally less complex and provides users with a more cost-effective and user-friendly alternative. The BRC-20 is far more complex, requiring three transactions per transfer, compared to Rune, which needs a standard one transaction for one standard. This also results in BRC-20’s higher blockchain footprint.

BRC-20 uses Ordinal inscriptions for data storage, not the OP_RETURN, and relies on witness areas across the transaction blocks instead of on-chain data storage. Runes are based on UTXO architecture, while BRC-20 focuses on account-based architecture. Both use deploy, mint, and transfer as their main functions, but there’s an additional difference in their approach toward indexing tools, as BRC-20 requires some more complex features, while Rune can afford to keep things simpler.

Although the Bitcoin market has been relatively conservative until now, it seems that the blockchain is set to expand this year. 2024 is the year when the marketplace becomes more mature, so it's natural that things will change and evolve. Investors must do their research to keep up with the trends and ensure they’re making the best of them.