Author: Alfred @GametoRich, Cycle Capital
I. What are Runes
Starting in early 2023, the BRC-20 standard based on the Ordinals protocol sparked a wave of speculation and construction around BTC assets, leading to increased attention and funds pouring into BTC Layer 2, DeFi, and other ecosystem infrastructure, playing a positive role in the long-term development of the BTC ecosystem. However, the speculation around BRC-20 also led to network congestion and redundant data for Bitcoin. In response to this, Casey Rodarmor, the creator of the Ordinals protocol, proposed the Runes protocol in a blog post in September 2023. The Runes protocol aims to build an alternative token protocol based on BTC UTXO, known as the “Runes protocol.”
The Runes protocol was officially launched on April 20th, coinciding with the Bitcoin halving. Initially, the high demand for the first batch of Runes minting pushed BTC network gas fees to over 1000 sats, creating unprecedented excitement. However, the market’s focus quickly shifted from Runes to other trends. Over the past month, DOG has surged from its bottom price to new highs, driving a wave of interest and a price increase in Runes assets.
1. How Runes operate
The Runes protocol issues and tracks tokens using Bitcoin’s native UTXO model, making it more native and decentralized. Additionally, Rune balances are held directly by UTXOs, with each UTXO able to hold any amount of Runes. There are no “junk” UTXOs created, making this mechanism more efficient and reducing on-chain space usage.
Specifically, Runes data is stored in the OP_RETURN field, which is an operation code (“opcode”) from Bitcoin transactions that allows storing 80 bytes of data in transaction outputs. Transactions use the OP_RETURN marker in the protocol message, followed by a data push with the uppercase letter R. Issuance or transfer transactions specify and allocate Runes in subsequent data pushes. Invalid protocol messages result in the burning of Runes.
The diagram below illustrates how the Runes protocol conducts issuance and transfer transactions:
Source: Crypto.com Research, GitHub, Casey Rodarmor Blog
2. Comparison between Runes and BRC-20
Compared to BRC-20, the Runes protocol has several important features:
(1) Runes are specifically designed as fungible tokens, based on BTC’s native architecture, independent of off-chain data, and only requiring one minting, making it simpler and more efficient. In contrast, BRC-20 is based on the Ordinals protocol, more suitable for building non-fungible tokens, relying on off-chain indexes, and requiring two mintings, making it overall more complex.
(2) Runes data is stored in the 80-byte OP_RETURN field, while BRC-20 uses witness data, which can occupy up to 4MB. Runes-based tokens are more compatible and occupy less space, reducing blockchain bloat.
(3) The Runes protocol is based on the UTXO model, allowing seamless integration with BTC’s native architecture and inheriting security. It has stronger scalability potential in the future, making it perfectly compatible with the development roadmap of the Lightning Network, BTC Layer 2, and other BTC ecosystem solutions.
Source: Binance Research, Ordinals/BRC-20 documentation
3. The significance of Runes
(1) Runes further create a way to issue BTC assets that can break through barriers. Since the introduction of BRC-20 and the inscription assets, this new form of asset has attracted more attention and funds into the BTC ecosystem. The meme frenzy on SOL and Base chains in 2023 confirmed the importance of meme assets in attracting funds to the chain. The Runes protocol creates a dedicated, fungible token standard for BTC, more suitable for speculative activities.
(2) This asset issuance method is simpler, more efficient, and more compatible than before. Runes protocol issuance is based on Bitcoin’s native UTXO architecture, without relying on third parties or off-chain data, occupying less space, reducing network congestion, and seamlessly integrating with various BTC network upgrades and ecosystem solutions in the future (such as L2, bridging, etc.).
(3) The popularity of this asset can further address Bitcoin’s security budget issues. Runes transactions can contribute more transaction fees to the network, especially after the halving when miners’ block rewards decrease, providing a new source of income to maintain network security and sustainability.
II. Race Data Overview
From the data of the BTC network, in terms of transaction volume and transaction share, Runes currently account for around 20% of the total network volume. When the Runes protocol was first launched, transactions were very fomo, reaching a peak share of 81.3%, before quickly entering a period of calm. Currently, Runes account for approximately 10-40% of the network, allowing observation of the current heat of the Runes market.
Compared to BRC-20, Runes has become the most active L1 asset for non-BTC transactions, with a ratio of about 4:1 between the two. Runes saw its highest share at the time of the halving launch, around 99%, and its lowest at around 55%. The current trading heat of Runes has surpassed BRC-20 tokens.
In terms of fee contributions, native Bitcoin transaction fees account for 70-80%, while Runes account for 10-20%. Ordinals and BRC-20 combined account for around 10%, with Runes reaching its highest share of 70% on the day of the halving. The speculation around Runes has expanded the revenue sources for BTC network miners and has the highest share among new assets.
Source: Dune@cryptokoryo
If we consider Runes and BRC-20 as memes, compared to the market value of meme coins on other chains, the market value of meme coins on the Bitcoin chain is the lowest, less than 0.1% of the chain’s value. Horizontally, the leading meme coins on ETH and SOL chains constitute more than 3% of their respective chain values, indicating further expansion potential for meme coin market value on the Bitcoin chain, which has the highest consensus, market value, and mainstream capital attention. Vertically, while Runes overall has surpassed BRC-20 in terms of transaction volume and fee contribution, the dominance of Runes compared to BRC-20 is still lagging. However, if Runes can land on a top-tier CEX, it has the potential to surpass ORDIs.
Source: Cycle Research
III. Runes Evaluation System and DOG Analysis
This article proposes a three-stage, nine-dimensional analysis framework for evaluating popular projects like Runes. In the early stage, attention is focused on distribution methods, decentralization, founders, and storytelling. In the mid-term, emphasis is placed on communication continuity and price sustainability. In the mature stage, attention shifts to trading volume, market value, chip structure, and price stability.
Based on the above logic, the article believes that the current leader in the Runes race is DOG:
1. Distribution method: The distribution design progresses layer by layer and covers all on-chain costs, showing a grand strategy.
Before the launch of the Runes protocol, distribution was done in stages, starting with the minting of Runestone NFTs for speculation. After the launch of the Runes protocol on halving day, the first Runes were airdropped to Runestone holders. Both the Runestone and the first Runes airdrop were entirely free for recipients, funded by the community with the project bearing the on-chain issuance costs.
2. Decentralization: Early adopters with common interests in large numbers, achieving rapid cold startup and widespread dissemination among core users.
Over 110,000 users actively participating in the BTC inscription ecosystem received a Runestone NFT airdrop, with the rule being that users must have at least 3 inscriptions by block 826,000. The first DOG Runes were airdropped to over 70,000 loyal Runestone holders.
3. Founders and narrative:
Founder Leonidas is an OG in the BTC community and a co-founder of the Ord.io browser, closely related to Ordinals founder Casey, with frequent interactions. The name of the Runestone links the Runes protocol launched on halving day and the Runestone encoding instructions in the protocol, generating significant interest and authenticity. The design of the Runestone involved a sculptor for custom artwork, adding an artistic touch. The first airdropped Runes were named DOG, the most viral meme image in the crypto world, issued as a new token form on the most consensual Bitcoin network.
4. Communication continuity: Strong and sustained attention-grabbing
As a BTC community OG, founder Leo has a strong influence and resources, especially in the European and American communities, with frequent promotions. The number of tweets can reach approximately 100 per day, with detailed data and engaging content, continuously capturing market attention.
5. Price sustainability: Runestone and DOG relay speculation
Runestone NFTs were heated up before the Runes protocol launch, with NFT prices steadily rising in March and April, reaching as high as 0.1166 BTC for a single piece. After the first DOG Runes airdrop, Runestone prices dropped, but DOG picked up the momentum, with prices stabilizing and consolidating in the market for a month before starting to rise from around 0.0025 in mid-May to a peak of 0.0097, currently retracing to 0.0078. There are two more airdrops for Runestone (later this year and when DOG becomes the first meme coin), which may drive Runestone prices back up based on DOG’s price.
Runestone price, Source: Okx.com
DOG price, Source: Magic Eden
6. Trading volume: DOG leads all other Runes by a significant margin, with the best liquidity
While the overall liquidity in the Runes sector is low, DOG has consistently been the most traded asset since its launch. Currently, over 80% of trading volume is concentrated on Gate, followed by Bitget, Okx Wallet, and Magic Eden, with daily trading volume exceeding 70 million USD, compared to around 2 million USD for the second-ranked Runes x. DOG leads all Runes assets by a significant margin and has reached the trading volume of mainstream tokens.
Source: Okx.com
7. Market value: Overall, DOG ranks first in market value
Excluding the ZZZ Runes with low trading volume and high unit price, DOG’s market value has maintained its position as the top-ranked asset since its launch.
Source: Okx.com
8. Chip structure: Large number of holders, but chips not concentrated enough
DOG’s on-chain holders have remained stable at over 70,000, ranking third among Runes assets. Since most liquidity is on CEX, actual holders are likely still in the first position, indicating a large number of holders and strong consensus. However, the largest holder accounts for only around 1.69% of total tokens, and in recent days, there has been continuous selling off, with only five addresses holding over 1%. The fifth-largest address is rapidly accumulating, but the overall lack of chip concentration may hinder DOG from landing on a top-tier CEX, despite its clear dominance.
Source: Okx.com
9. Price stability: Price stability on the rise
After stabilizing around 0.002 at the bottom, DOG’s price has been steadily and strongly rising. After consolidating at 0.004 and 0.007 levels, further upward movement is expected, with strong buying power even during overall market corrections.
Source: Coingecko
Based on the evaluation system proposed in this article, dynamic analysis of the top projects in the Runes race and the selection of new minted assets can be conducted. Due to constraints, this article does not delve into further discussions.
IV. Conclusion
1. Runes is a protocol specifically designed for fungible tokens, with technical features that are simpler, more efficient, and more compatible than BRC-20. In terms of transaction share and fee contribution, Runes has surpassed BRC-20 tokens, becoming a new asset form that must be taken seriously.
2. Currently, Runes primarily serve as meme coins to enhance attention and fund capture for the Bitcoin network, with significant potential for further price discovery based on data analysis.
3. This article proposes a three-stage, nine-dimensional evaluation system for Runes projects. Currently, DOG is in the leading position among other assets, but its chip structure is relatively decentralized at this stage, requiring some time to accumulate before landing on a top-tier exchange.