On January 20, 2023, the Ordinals Protocol was created on Bitcoin. This breakthrough allowed for the embedding of any type of file into the smallest unit of Bitcoin, a Satoshi, thereby tracking its movement across the Bitcoin network. The result was an on-chain tracking of file ownership, effectively birthing a new kind of Non-Fungible Token (NFT) native to the Bitcoin blockchain.
The idea of leveraging Bitcoin's block space for use cases other than traditional financial transactions is not a new one. In 2010, initial ideas for a DNS system founded on Bitcoin materialized in Namecoin in 2013. During this evolutionary phase, "Colored Coins" became the nomenclature for protocols enabling the marking, or "coloring," of unspent transaction outputs (UTXOs) for deployment in off-chain protocols. The initial period allowed virtually unlimited data storage in a transaction as long as it adhered to the scripting system semantics and miners received appropriate fees. This functionality was capitalized upon in early systems like Counterparty, which made its debut in 2014 and initially minted tokens using a script originally intended for multisig transactions.
The unrestricted storage potential, however, was soon identified as a threat to Bitcoin's long-term scalability. This was primarily because all Bitcoin nodes needed to actively monitor all UTXOs for transaction validation. Outputs containing extraneous data were deemed unspendable and were merely storage burdens for nodes unconcerned with the specific data or protocol. Essentially, they became non-productive elements.
The v0.9.0 release of Bitcoin Core in March 2014 introduced OP_RETURN as a standard to tackle this issue. OP_RETURN allowed senders to mark an output as unspendable, signaling nodes to disregard these outputs, thus not inflating the UTXO set. A subsequent modification capped the size of data in an OP_RETURN output to 40 bytes and later to 80 bytes. OP_RETURN quickly became a popular means to add arbitrary data to the Bitcoin blockchain. Counterparty transitioned to using OP_RETURN, facilitating the creation of the first blockchain-based NFTs. Even today, it's simple for anyone to record data, such as a short message in the Bitcoin blockchain using OP_RETURN.
Inscriptions: A New Age of Digital Artifacts
Inscriptions offer a novel way of recording arbitrary data—or "digital artifacts" as the ordinals documentation refers to them—on the Bitcoin blockchain. An inscription represents a Bitcoin-native digital artifact, also known as an NFT, and it doesn't necessitate a sidechain or separate token. These inscribed satoshis can be transferred using Bitcoin transactions, sent to Bitcoin addresses, and held in Bitcoin UTXOs.
Conversely, Inscriptions are an innovative form of NFT. They embed the raw file data directly into the Bitcoin blockchain rather than referencing an external source. They can be text, video, images, etc., although text-based Inscriptions are the large majority (image below). This peculiarity of incorporating the raw data within the blockchain rather than pointing to an external file sets Inscriptions apart, imparting them a unique status in the realm of digital assets.
In contrast to the early Colored Coin protocols and OP_RETURN, which inserted data into outputs, inscriptions incorporate their data into the transaction's witness data. The segregated witness ("segwit") upgrade activated in 2017 and Taproot in 2021 facilitated a system like inscriptions by easing some of the size restrictions imposed on witness data. These upgrades also offered a discount for data housed in a separate data structure reserved for the witness, effectively increasing the block size to a potential 4MB.
The inscription protocol utilizes an "envelope" to store data—essentially a Bitcoin script crafted in a way that prevents execution. A digital artifact is thus established by encoding the artifact's data—say, a jpeg's bytes—within such an envelope. The inscription occurs on the first satoshi of the first output of the transaction where the envelope is unveiled, which only happens upon spending.
The introduction of BRC20 tokens and ordinals into the Bitcoin network has sparked a spirited dialogue within the cryptocurrency community, highlighting a range of concerns and opportunities these innovations bring to the fore. Critics have voiced apprehensions regarding the potential for blockchain bloat, increased transaction fees, and overall network congestion, which could detract from Bitcoin's primary function as a decentralized digital currency. These discussions underscore the balancing act between embracing new functionalities and preserving the efficiency and mission of the Bitcoin network.
Introducing Runes: A Response to BRC20 Tokens
In an effort to address these challenges, Casey Rodarmor, notable for his creation of ordinals, has introduced Runes—a protocol aimed at providing a more efficient alternative to BRC20 tokens. Runes is designed to minimize the blockchain's footprint and manage Unspent Transaction Outputs (UTXOs) in a manner that mitigates the inefficiencies associated with the BRC20 standard. This initiative represents a critical step towards reconciling the innovative potential of tokenization on Bitcoin with the imperative to maintain network performance and integrity.
Understanding Runes and Its Ecosystem
The concept of Runes, especially within the broader context of the Bitcoin ecosystem, presents a complex landscape for users familiar with Ethereum, EVM chains, and Solana. The intricate nature of participating in the Bitcoin ecosystem, coupled with the deeper level of understanding required, might seem daunting. However, the introduction of Runes signifies a pivotal moment in making Bitcoin's tokenization more accessible and efficient, promising to enhance user experience and broaden Bitcoin's utility beyond its conventional confines.
The Potential and Promise of Runes
Runes stands out not only for its technical merits but also for the strategic timing of its launch, coinciding with the Bitcoin halving event. This timing is significant, as it aligns with a period of heightened interest and activity within the Bitcoin community, offering early investors the opportunity to capitalize on the protocol's potential. With the existing market for Ethereum tokens excluding ETH valued at approximately $100 billion, and ordinals at around $2 billion, the introduction of Runes taps into a considerable market with vast untapped potential.
Key Features and Advantages of Runes
- Efficient UTXO-Based Model: Runes employs Bitcoin's UTXO model for enhanced token management, aiming to reduce network congestion and promote responsible UTXO handling.
- Streamlined Token Creation: By simplifying the token creation process, Runes aims to overcome the complexities associated with the BRC20 standard, facilitating easier asset issuance on the Bitcoin blockchain.
- Improved Usability: Runes eliminates the need for off-chain data or native tokens, thereby improving accessibility for developers and users alike.
- Enhanced Utility: The protocol enables the issuance of a variety of fungible tokens, expanding Bitcoin's applicability and attracting a wider audience.
- Increased Scalability: Compatibility with the Lightning Network promises near-instant transactions at lower costs, bolstering scalability and fostering mainstream adoption.
- Revenue Opportunities for Miners: Runes introduces new transaction fee revenues, offering a vital income stream for miners in the face of decreasing block rewards.
- Innovative Applications: The RSIC Metaprotocol, among other innovations, is exploring the integration of Bitcoin Ordinals with yield farming, incentivizing token holders and driving adoption.
