New innovations have appeared in the Bitcoin space. This has to do with new features on the Bitcoin protocol software. Two of the recent ones are Runes and Ordinals.
Runes and Ordinals are protocols that allow for embedding additional data onto the Bitcoin blockchain, but they differ in functionalities. Runes are ideal for fungible tokens like memecoins, while Ordinals are ideal for non-fungible tokens or NFTs.
Figure A. Brief summary of the difference between Runes and Ordinals
What Are Runes?
Runes focus on fungible tokens, similar to the ERC-20 standard on the Ethereum blockchain.The token records are embedded directly into Bitcoin's Unspent Transaction Outputs (UTXOs). This approach aims to be more efficient and compatible with Bitcoin's existing infrastructure.
Runes are designed for creating tradable tokens that are interchangeable, so one token can be used for any other token. This is like how any dollar bill can be used to make a payment, without being specific.
Runes modifies the script section of a UTXO to embed data related to the token. This data might specify token ownership, amount, and potentially transfer rules.
Figure B. These are tokens created using the Runes protocol (Source: Coinranking)
What Are Ordinals?
Ordinals focus on the development of non-fungible tokens (NFTs). The data is stored within the witness part of a transaction. This data acts like inscriptions attached to individual satoshis (smallest unit of Bitcoin), creating unique digital artifacts directly on the blockchain.
Developers can create unique and irreplaceable digital assets using ordinals. This is why they are called Bitcoin NFTs. It lets you attach unique data (like images) to specific portions of Bitcoin, creating one-of-a-kind digital items.
Although Ordinals are used for NFTs, it also forms the basis for a fungible token standard on Bitcoin called BRC-20. The difference with Runes fungible tokens is that it uses inscriptions in satoshis rather than saving the data about the token in the UTXO.
Figure C. Examples of Bitcoin NFTs created using Ordinals. (Source: Ordinals.com)
The Pros And Cons
Both of these protocols bring new uses for the Bitcoin blockchain. For the longest time, Bitcoin did not have an application ecosystem like other cryptocurrency (e.g. Ethereum).
The new use cases can bring important things to Bitcoin. It creates new communities of developers who build applications around tokens that use the Bitcoin blockchain. This in turn can bring more liquidity from the sale of tokens and use of the ecosystem.
The takeaway here is that these are new and unproven technologies. Thus they carry risks for anyone who is willing or has invested in products created from these protocols.
There is criticism that these protocols create more spam and congestion on the already limited Bitcoin blockchain. There is also the challenge of handling more storage space for the additional data that is added.
Ordinals have a vulnerability issue, and this has been included in reports like that from the NIST as a cybersecurity risk. Some Bitcoin core developers, like Luke Dashjr, also argue that Runes exploits a design flaw in Bitcoin by modifying UTXOs as explained in CVE-2023-50428.
Another takeaway here is that these protocols, since they create more transactions, can affect the Bitcoin network's performance. When the Runes protocol was launched, it had congested the Bitcoin network which also increased fees.
Final Thoughts
The new protocols, whether accepted or not, introduce new narratives to the application of Bitcoin. While this might be anticipated by developers and VC investors, Bitcoin maximalists are not entirely thrilled about them.
The question is whether these new applications, which can certainly generate more liquidity and adoption of Bitcoin, are sustainable into the future. That is not really known until the protocol breaks.
Some developers have pointed out the risks from these new protocols. This can come from centralization, fees and security.
If many miners or nodes struggle to handle the additional data from Runes and Ordinals, it could lead to a more centralized network with the entry of more capable miners. This potentially compromises the concept of decentralization.
Both Runes and Ordinals add data to the Bitcoin blockchain, potentially increasing transaction size and network congestion. This could also lead to higher fees and affect Bitcoin's ability to scale.
The Bitcoin development community will need to continuously assess and improve the security of Runes and Ordinals. This is needed in order to ensure they don't introduce vulnerabilities to the core protocol software that is running on nodes.
Both opportunities and challenges are presented for the long-term future. Their success relies on addressing scalability and security concerns, while also gaining acceptance from the Bitcoin community.
As these protocols mature and the ecosystem around them evolves, we'll have a clearer picture of their lasting influence on Bitcoin. Hopefully it can be realized to add more value to Bitcoin as an asset.
Disclaimer: This is not financial advice regarding cryptocurrency. Please do your own research always for education and further understanding.
