Renaissance of Bitcoin Scaling V — Runes Protocol

19 min readMay 3, 2024

Author: F.F from LBank Labs Research team

TL;DR

The Runes Protocol has emerged as a prominent topic within the Bitcoin ecosystem, garnering widespread attention in recent days. As the chaos surrounding the Bitcoin halving subsides and gas prices stabilize, it is essential to delve into the intricacies of the Rune protocol and its potential future trajectory.

In this article, we would analyze the fundamental aspects of the Rune protocol, we can envision a myriad of possibilities that may emerge in the future. From enhanced token utility to novel use cases, understanding the potential avenues for growth and innovation within the rune ecosystem is essential for informed decision-making and strategic planning.

In the realm of runes tokens, attention economy plays a pivotal role in determining market dynamics and investor sentiment. As most rune tokens are characterized as memecoins, the ability to capture community attention and engagement becomes a crucial factor in determining the success and market value of these tokens.

The interconnected nature of the runes ecosystem and its integration with the broader Ordinals network highlights the strength and maturity of the runes ecosystem. As Casey’s secondary upgrade to Ordinals, a seamless transition is facilitated, enabling the continuity of operations and innovation within the network. Additionally, the allure of the runes ecosystem has attracted new projects seeking to leverage the capabilities and opportunities offered by the protocol.

By analyzing the history, specifications, top runes tokens, and ecosystem dynamics of runes, we can gain a comprehensive understanding of the protocol’s evolution, market dynamics, and future potential within the decentralized finance landscape.

Runes

Exploring the technical specifications of the Runes Protocol unveils the underlying framework that governs the creation and utilization of runes tokens. Parameters such as token issuance, divisibility, premine allocation, and minting terms play a crucial role in shaping the functionality and utility of rune tokens within the network.

Runestone

Runestones are specialized messages termed within the Rune Protocol, designed to convey essential data related to the creation, minting, and transfer of runes tokens. Each transaction within the Runes Protocol can be associated with a maximum of one Runestone, following a specific format for data transmission to ensure seamless communication and interoperability between network participants.

The format of a Runestone message is defined by the structure of its script pubkey, starting with OP_RETURN, followed by OP_13, and subsequent data pushes that are concatenated and decoded into a series of 128-bit integers. These integers are then parsed into a distinct sequence, encapsulating the essential information required for the identification and processing of the Runestone within the protocol.

The Runestone struct encompasses key attributes and functionalities essential for the minting and management of runes tokens within the Runes Protocol. The core components of the Runestone structure include:

struct Runestone {
  edicts: Vec<Edict>,
  etching: Option<Etching>,
  mint: Option<RuneId>,
  pointer: Option<u32>,
}

The edicts field within the Runestone structure comprises a vector of Edict elements, encapsulating information related to specific actions or mandates within the protocol.

struct Edict {
  id: RuneId,
  amount: u128,
  output: u32,
}

id: RuneId: Refers to the unique identifier of the RuneId structure associated with an edict.
amount: u128: Represents the amount of runes tokens allocated within the edict.
output: u32: Indicates the output reference for the edict, facilitating transactional and operational activities related to rune tokens.

2. The etching field, an optional component of the Runestone, entails essential details regarding the properties and characteristics of the runes being etched, encompassing factors such as divisibility, premine allocation, symbol representation, and terms of minting. We could talk about it in the later section.

struct Etching {
  divisibility: Option<u8>,
  premine: Option<u128>,
  rune: Option<Rune>,
  spacers: Option<u32>,
  symbol: Option<char>,
  terms: Option<Terms>,
}

struct Terms {
  amount: Option<u128>,
  cap: Option<u128>,
  height: (Option<u64>, Option<u64>),
  offset: (Option<u64>, Option<u64>),
}

The mint field, also optional, contains the Rune ID of the rune to be minted in this transaction.
The pointer field, an optional u32 value, contains the index of the output to which runes unallocated by edicts should be transferred. If the Pointer field is absent, unallocated runes are transferred to the first non-OP_RETURN output.

Runes Token

Specifications

The specifications of runes tokens are fundamental in shaping their identity and functionality within the Ordinals ecosystem. A detailed breakdown of key parameters defines the structure of runes tokens, ensuring their distinctiveness and utility:

The name assigned to a runes token must adhere to a specific length range, spanning between one and twenty-eight characters. It is recommended that the name initially exceeds thirteen characters to deter front running. Over time, the name should gradually decrease by one character every four months to maintain diversity. While names may incorporate spacers, they should not dictate uniqueness to promote varied token naming conventions.

Each runes token possesses a unique Rune ID, derived from a combination of the originating block number and transaction index. This identifier distinguishes each token within the network, facilitating easy tracking and verification.

The divisibility of a runes token is denoted by a numerical value, indicating the level to which the token can be subdivided:

Divisibility of 0 signifies that the token cannot undergo further division.
Divisibility of 1 allows the token to be subdivided into smaller units.
Divisibility of 2 enables the token to be divided into increments of a hundred, enhancing flexibility in token transactions.

Symbolic representation plays a crucial role in identifying and distinguishing runes tokens within the ecosystem. Symbols serve as concise and recognizable markers for the tokens, facilitating seamless interaction and recognition among users.

The premine allocation of runes tokens signifies the initial supply held by the project. This preallocated amount forms the cornerstone of the token’s distribution and circulation within the network, dictating the initial availability and ownership structure.

Runes token minting operations are governed by specific terms that outline the conditions for creating new units of the token: Mint open and closed terms define the parameters for initiating and terminating the minting process based on predetermined conditions.

Caps impose limits on the total supply of tokens that can be minted, terminating minting once the cap is reached.
Minting transactions generate a fixed amount of new units for each mint, establishing consistency in token creation.
Start and end heights, along with start and end offsets, provide precise block height and timing parameters for executing mint transactions, ensuring accuracy and control over the minting duration and frequency.

Allocation Strategies

The allocation strategies for runes tokens play a crucial role in determining the distribution, supply limitations, and utility of the tokens within the Ordinals ecosystem. These strategies provide flexibility and customization options for token issuers, catering to diverse project requirements and objectives while ensuring the integrity and effectiveness of runes tokens.

100% Premine Allocation In this scenario, tokens are entirely premined and distributed through various mechanisms, such as airdrops or community initiatives. A notable example of this allocation strategy is the Runestone token, which has been introduced to the community through a premined distribution model.
100% Mint with Height Restriction Tokens allocated under this strategy are minted with specific restrictions based on block height. For instance, the token ‘UNCOMMON•GOODS’ follows a minting process that is restricted and controlled by predefined block height parameters, ensuring a structured and controlled minting mechanism for the token.
100% Mint with Cap Restriction In this allocation model, tokens are subject to a predefined cap on the total supply, enabling issuers to control and manage the maximum number of tokens that can be minted. This strategy ensures a regulated and limited supply of the token within the ecosystem.
100% Mint with Cap and Height Restriction Tokens allocated with both cap and height restrictions are subject to dual limitations on minting, ensuring a controlled and structured approach to token creation. By incorporating both cap limits and block height constraints, issuers can effectively manage the supply dynamics of the token.
Premine with Height Restriction This allocation strategy combines a premined allocation of tokens with specific block height restrictions, ensuring that the distribution and availability of tokens are tied to predefined block height milestones. This approach adds an element of time-bound scarcity to the token distribution process.
Premine with Cap Restriction Tokens allocated with a premine and a cap restriction on the total supply strike a balance between initial distribution and long-term supply management. By setting a maximum cap on the token’s supply and preallocating a portion of tokens, issuers can control the circulation and availability of the token.
Premine with Cap and Height Restriction Combining premining, cap limits, and block height restrictions, this allocation strategy offers a comprehensive approach to token distribution and supply management. By implementing multiple constraints, issuers can fine-tune the distribution process and ensure a controlled and sustainable growth trajectory for the token.

Attention Economy of Top Runes

Analyzing the top runes tokens in the market provides insights into the strategies and narratives that resonate with the community. Ticker symbols, branding, and unique value propositions all contribute to the ability of a runes token to capture the imagination of users and investors, driving market demand and adoption.

By evaluating the performance and market sentiment surrounding top runes tokens, we can identify the winners in the market based on their ability to engage and retain community interest. Understanding the factors that contribute to the success of certain runes tokens can provide valuable lessons for future token issuers and participants in the ecosystem.

Runestone & DOG·TO·THE·MOON

The top hottest runes is DOG·TO·THE·MOON which grasp the most attention, when we look from different metrics, it’s no doubt the top 1 runes. We just take the stats from OKX at the time the articles written, the holders of DOG·TO·THE·MOON is 72,583, the second place is 72,583. The trading volume 24h is around 76 BTC, the second place is only 8 BTC.

But when we look into DOG·TO·THE·MOON, we need looks Runestone and DOG·TO·THE·MOON together. Runestone is the Ordinals NFT, the same name of the Rune Protocol message. By the way, this NFT collection was launched even before Casey published the specification. DOG·TO·THE·MOON is the rune token 100% airdropped to the Runestone.

When we look back at the history of Runestone, we have to admit the founder, Leonidas, is a master of marketing.

On March 3rd, a historic event occurred in the world of cryptocurrencies as the largest Bitcoin block to date was mined, marking a significant milestone in blockchain technology. Leonidas inscribed the Runestone on Bitcoin. This remarkable achievement garnered widespread attention and sparked speculation about the implications for the future of digital currencies.

On March 8th, the Runestone, was auctioned off to raise funds for network fees associated with Runes memecoin airdrops. Finally, it was bid 8 BTC. This strategic move not only contributed to the sustainability of the project but also showcased innovative ways in which blockchain technology can be leveraged for fundraising and community engagement.

On April 7th, renowned digital artist Beeple’s engagement with the concept of the Runestone added a new dimension to its significance within crypto space. His creative interpretation and visual representation of the Runestone captured the imagination of audiences worldwide, further solidifying the symbolic nature of the artifact.

After influential community consensus was established, Runestone ascended to the top narrative of runes in the NFT space even before the halving event. In a strategic move, Leonidas announced plans to airdrop 3 Runes to Runestone NFT holders. The first of these highly anticipated runes airdrops is known as the DOG·TO·THE·MOON. The second airdrop, slated for later this year, sets the stage for further excitement. The series culminates with the third and final airdropped rune, linked to the ambitious goal of DOG·TO·THE·MOON becoming the premier memecoin worldwide.

When examining Runestone, it inherently embodies the anticipation surrounding all three runes airdrops. Prior to the DOG·TO·THE·MOON drop, Runestone stabilized between 0.07 to 0.08 BTC. However, post-airdrop snapshot, the price experienced a sudden decline to 0.03 BTC. Subsequently, the expected market price of DOG·TO·THE·MOON should fall within the range of 0.04 to 0.05 BTC. As of the time of writing this article, DOG·TO·THE·MOON is valued at around 0.066 BTC. This suggests that even after the airdrop, the combined market value of Runestone and Dog is nearing an all-time high, approaching 0.096 BTC.

Conversely, the price of ORDI has been continuously declining, indicating a shift in liquidity towards runes assets. While several centralized exchanges have listed DOG·TO·THE·MOON, there has been limited movement on major exchanges. Despite Leonidas’ efforts to promote the token on X and tag Binance, there has been no significant response. It is evident that liquidity plays a critical role in the success of memecoins, as large whales await opportunities to exit on top-tier exchanges.

Z•Z•Z•Z•Z•FEHU•Z•Z•Z•Z•Z

Z•Z•Z•Z•Z•FEHU•Z•Z•Z•Z•Z has garnered significant attention as it has managed to secure the first position in the halving block (840000:1). For the sake of simplicity, let’s use “FEHU” to represent it. 99% of the total supply (111,111,111) has been premined for the project, while only 1% remains for public minting. Currently, only the publicly minted shares are in circulation, with prices ranging around $25–30 USD per FEHU. The intricate premine ratio has positioned it as the top-ranked rune with the largest market capitalization, currently standing at nearly 3 billion.

Several teams eagerly vied for the coveted first position in the Runes Protocol, as Casey had exclusively codified UNCOMMON•GOODS, leaving the remaining slots accessible for the community. Despite being the frontrunner, the RuneStone project faltered in claiming the top spot, leading to an unexpected turn of events. The FEHU team, as revealed in their account statement on platform X, embarked on a meticulous journey to craft a “pro mode” version of the ord client from the ground up. Their relentless focus on optimizing transaction efficiency and introducing innovative features like mempool synchronization bore fruit. Remarkably, the FEHU team achieved this remarkable feat with a modest budget of 6.73 BTC, a striking departure from the renowned NFT project CyberKongz, which invested approximately 7.99 BTC but clinched second place. To cement their ownership of the project, the FEHU team left an enduring mark on blockchain. By inscribing a message using the address housing the 99% premine tokens, they embraced that act as irrefutable evidence of their project’s authenticity and proprietorship.

Back to the name FEHU, the Runes itself is a letter belonging to a set of related alphabets known as runic alphabets, which were originally used by the Germanic peoples. Fehu ᚠ (pronounced FAY-hoo) represents the first runes in the oldest runic alphabet. It symbolizes the tangible form of wealth that is earned through diligent effort. Fehu is often associated with concepts such as gold, luck, power, and abundance. Furthermore, it holds a deeper esoteric meaning, signifying new beginnings.

It’s meaning to etch the first runes as the first runes token in Runes Protocol. However, things have taken an unexpected turn. The $FEHU team aimed to provide a significant minting opportunity for the public, ensuring that users would not feel pressured or succumb to FOMO amidst the initial excitement surrounding runes tokens and high transaction fees. There are 1,111,111 public mints available for the community, representing just 1% of the total supply. Nonetheless, this remains the most extensive mint allocation among the first 10 rune tokens, as users can acquire only one token per mint.

Nevertheless, users still succumbed to FOMO and minted FEHU in the early days. For example, if a user minted on the first day after halving when the gas price was around 1000 sats/vb, each mint would cost roughly 100 USD. This led to the Fully Diluted Valuation (FDV) of FEHU approaching nearly 10 billion. Even in the subsequent days, when the gas price stabilized at approximately 200 sats/vb, the FDV of FEHU would reach around 2 billion.

For the future of FEHU, it highly depends the team how to handle the 99% premine ratio. They just move the 99% to a cold wallet and post a statement. Before that, they also claimed would airdrops to user missed the mints in the gas war in the last minute, but didn’t implement it so far. Assume they had plans for the allocation of this premine before. But the rush towards the first runes token, placing the $Fehu team in an awkward position. They would find it hard to liquidate the premine shares into the open market, no such big buy power can hold the sell pressure, the market price would most likely go down. If the team decides to airdrop the token to the Ordinals community like the whole Runestone, the consensus can’t be stronger than Runestone.

So far we can only come up one possible solution that won’t make FEHU fall along the way, which is to burn all premine share or send it to the Satoshi’s address, then FEHU would become a fair mint memecoin. That’s not FEHU team intend to be at first. That’s the reason why they just move the premine share but have no decide yet how to deal with them. They could keep the premine share in their cold wallet, but it’s still the biggest concern for FEHU. None would join the community when the team still controls the 99% share of the token, it would just preserve the status quo, and lose liquidity and attention as time goes by.

UNCOMMON•GOODS

The uniqueness of UNCOMMON•GOODS lies in the fact that it is the only runes hard-coded in the genesis block by Casey in the code below, making it the genesis rune literally. We can gather basic information from the fact that the first transaction involving runes would initiate UNCOMMON•GOODS. It is indivisible and each transaction can only mint 1 token. There is no hard cap limit, allowing everyone to mint UNCOMMON•GOODS between the fourth halving and fifth halving, which falls within the range of block height 840,000 to 1,050,000. This is a 0% premine, essentially making it a purely community-driven rune. The extended time range gives everyone ample opportunity to mint as much as they want, with the only cost being the gas fee incurred. This is why only a few users rushed to mint UNCOMMON•GOODS in the early days, and it initially did not receive much attention.

In the short term, we can anticipate that the secondary market price will be slightly higher than the minting price, similar to what we saw with XEN on Ethereum, which can be likened to a gas token. We simply took a snapshot of the status from the marketplace and mainnet statistics.

Minting one UNCOMMON•GOODS consumes 137.5vb. Assuming a gas price of 100sats/vb, that amounts to 0.0001375 BTC. If we consider a BTC price of 60,000U, the gas cost would be around 7.8U. After one week, the market stabilizes, and the gas price decreases to around 40sats/vb, resulting in a gas cost of approximately 3.12U. According to statistics from Magic Eden, the floor price of UNCOMMON•GOODS is approximately 3.53U.

However, if the Runes Protocol successfully navigates through this halving cycle and establishes itself as the primary asset issuance standard on Bitcoin, then UNCOMMON•GOODS could potentially evolve into the most equitable, 100% community-owned memecoin within the Runes Protocol ecosystem.

Even though UNCOMMON•GOODS does not have a hard cap, there is a limited block space between two halving events, totaling 210,000 blocks. Drawing insights from YCharts, the current level of Bitcoin Total Transactions stands at 994.51M for Block height 841,051, indicating an average of 1180 transactions per block. Although the block size has expanded over time, presently, each block typically accommodates around 3000 transactions.

Considering data from the recent halving, in the last 1,051 blocks, the community has collectively minted a total of 210,059 UNCOMMON•GOODS, equating to 200 UNCOMMON•GOODS minted per block. If this level of enthusiasm persists, the projected total supply of UNCOMMON•GOODS could reach approximately 42 million, a reasonable figure. Simple calculations based on the above statistics reveal that if we mint at 100 sats/vb, the Fully Diluted Value (FDV) of UNCOMMON•GOODS would be a modest 312M. Alternatively, minting at a lower price, for instance, 20 sats/vb, would result in an FDV of around 62.4M.

Hence, opting to mint UNCOMMON•GOODS at a lower gas price would be a prudent decision, especially if there is confidence in the long-term success of the Runes Protocol. In fact, many individuals have already minted UNCOMMON•GOODS at lower gas prices and have submitted them to the memepool, awaiting a decrease in gas prices for miners to include them in the block.

What Happens Next?

We would like to pose this question not only to ourselves but also to the broader ecosystem: What comes next? What impact could a new asset issuance standard have after a proliferation of assets? Ethereum’s narrative has shown us that the exchange market and DeFi platforms can absorb assets and provide liquidity, while a new paradigm in decentralized finance can attract more users. However, for the Bitcoin ecosystem, the challenge lies in the fact that Bitcoin itself is not Turing-complete. Therefore, if we cannot address the programmability issue, we may only be able to issue memes. The reality of runes is that many of them are still considered memes, and even though there may be a dedicated project team behind them, the reliance on centralized exchanges for liquidity is still prevalent.

Hence, our focus will be on uncovering potential future innovations for the Runes Protocol to address this challenge. Furthermore, we aim to explore possible solutions and if the Runes Protocol ecosystem fails to deliver further innovations, it may simply function as a token issuance protocol.

Light Pool from Casey

Casey recently proposed the concept of the Light Pool in his blog, expressing a desire for the community to materialize this idea.

The notion of Light Pools introduces a decentralized trading platform that utilizes off-chain mechanisms to facilitate the exchange of Bitcoin-native assets in a decentralized manner. Emphasizing efficient pricing and cost-effective trading, Light Pools provide users with a secure and seamless platform for asset swaps.

At the core of the Light Pools ecosystem are nodes operated by users interested in facilitating swaps of Bitcoin-native assets, such as rare sats, inscriptions, or runes. These nodes function as market makers, offering quotes for potential swaps. Quotes, embodied as signed messages, circulate among various Light Pool nodes in the network.

When market takers opt to accept a quote from a market maker, they use the information in the quote to generate a Partially Signed Bitcoin Transaction (PSBT), integrating their digital signatures. Subsequently, the PSBT is broadcast across the network, enabling the smooth execution of the agreed-upon swap.

While the idea is promising, its implementation requires a more intricate approach compared to Automated Market Makers (AMMs) due to the integration of a gossip network. The ecosystem adopts a structured quote message format outlining the terms and conditions of swaps. The creation and finalization of PSBTs play a pivotal role in the secure and transparent execution of asset swaps within the Light Pools framework. Community-driven decision-making within Light Pools typically takes time to reach a consensus.

Autonomous Innovation from Ecosystem

The symbiotic relationship between runes and Ordinals highlights the strategic significance of runes as a supplementary enhancement to the existing protocol. The integration of runes within the Ordinals ecosystem has facilitated seamless interoperability and collaboration among various projects and initiatives.

Instead of delving into each individual project within the ecosystem, we will highlight a few that have introduced novel features beyond their contributions during the Ordinals era.

Magic Eden

Magic Eden serves as the second-largest trading platform, following the OKX Web3 team. Despite not launching their trading platform immediately post-halving, unlike other platforms that even released testnet versions pre-halving to accommodate the influx, Magic Eden has positioned itself as one of the most valuable tools for traders. It may be the earliest platform to support the sweep function.

While other platforms have resorted to replicating the familiar interface of listing and buying pages akin to the previous Ordinals NFT trading, Magic Eden has revamped runes trading to resemble token trading. Their website suggests plans to introduce a swap feature in the near future.

DotSwap

DotSwap leverages multisig addresses to simulate automated market maker (AMM) swaps on Runes, utilizing the Multilayered Multisig Matrix (MMM) scheme. These multisig addresses are developed in collaboration with BitGo and Safeheron, enabling DotSwap to circumvent the programmability constraints on Bitcoin while delivering a comparable experience to traditional DeFi participants.

DotSwap’s asset pool functions through a multisig wallet structure, necessitating multiple signatures for fund transfers to enhance security and negate single points of failure. The security framework is fortified by the trusted partnership between DotSwap, BitGo, and Safeheron.

In addition, DotSwap has introduced a feature aimed at addressing the initial liquidity challenges within the Runes Protocol. Liquidity pools are established through a dual approach: BTC obtained from minters contributes to the liquidity on the BTC side of the BTC-Runes trading pair, while Runes are premined and reserved for the Runes side of the same trading pair. DotSwap’s provision of a launchpad and mining tools further streamlines the process for projects seeking to list their token on the Runes Protocol.

Lending

As far as we are aware, there are several lending protocols being developed on the Runes Protocol platform, such as Runessance, Runeflex, and Ordbit. However, these projects have not launched their products yet, so it remains to be seen what new experiences and innovative solutions they will offer, and whether they will successfully deliver their products to the market.

Mempool Sniper and RBF

During the gas war in the first week, users were engaged in a competitive bid to pay higher gas prices to ensure their transactions were swiftly processed, making accelerators a coveted resource for users. During this period, certain projects endeavored to provide high-quality user experiences, exemplified by Wizz, which offered user protection.

However, due to the Replace by Fee (RBF) improvement that allows senders to replace their unconfirmed transactions with versions featuring higher transaction fees, opportunistic individuals have been scouring the mempool to replace transactions and exploit arbitrage opportunities. This activity becomes particularly prevalent when market prices are on the rise, increasing the likelihood of unconfirmed transactions being hijacked. Some projects expedite this process by offering tools that enable users to efficiently monitor and interact with the mempool, such as goldmine.tools.

Summary

Although Rune Protocol was specifically designed for the issuance of fungible tokens, the user experience thus far has not significantly outperformed that of BRC20. Additionally, the opportunities and wealth effects accruing to the community have been relatively limited. In an objective assessment of Runes Protocol, it has not quite met the expectations set prior to its launch. It is widely known that Runes Protocol was Casey’s response to the BRC20 standard, as Domo had taken control of the outcome of Ordinals from him, amid the controversy sparked by the dust attack on Bitcoin. While Runes Protocol has indeed made some enhancements to the fungible token standard, the personal influence of Casey and Leo appears to overshadow the project, deviating from the geeky and community-driven ethos originally envisioned for Ordinals.

One could liken the early days of Runes Protocol to a highly publicized party that garnered a rush of participants, leading to a gas war on Bitcoin and making it less accessible for the average user. As the fervor subsided, enthusiasm dwindled. As discussed in the ecosystem section, it is essential to monitor the developments and innovations within the runes space moving forward.

Fortunately, Runes Protocol is constructed on UTXOs, offering the potential for scalability and further enhancements. Should improvements on the Bitcoin mainnet prove challenging, there is an opportunity to explore scaling solutions compatible with the UTXO model to introduce runes into Layer 2, fostering new liquidity and narratives.

Reference

Disclaimer: This article is provided for informational purposes only and should not be considered as financial advice. The cryptocurrency market is highly volatile and unpredictable. Always conduct thorough your own research and consult with a qualified financial professional before making any investment decisions.