In-depth Analysis of Runes Protocol: Underlying Mechanism Design and Limitations

In the past year, the most remarkable development in the Web3 space has been the vigorous rise of the Inscriptions ecosystem. The source of this wave can be traced back to the Ordinals protocol, which gives each satoshi on the Bitcoin network a unique serial number.

The core developers of the Runes protocol submitted the basic version of the code back in September last year, but the mainnet version has not been officially released. This led some projects like RunesAlpha to fork the code early and independently issue the protocol. Despite some controversies, these projects achieved a market value growth of hundreds of millions of dollars in just a few months, showcasing the immense potential of the Runes protocol.

The official version of the Runes protocol is expected to launch on the Bitcoin mainnet around April 20, 2024. This means that project parties wanting to issue Runes assets, as well as wallets and trading platforms wishing to support Runes, will face one of the most challenging tasks in the blockchain industry: how to directly adapt to the mainnet without a testnet.

This article will systematically outline the evolution of the underlying fields of the Runes project, helping readers fundamentally understand the differences between Runes and other FT protocols (such as BRC20, ARC20), and rationally assess their advantages and disadvantages.

Bitcoin On-Chain Data Recording Methods

There are mainly two methods for attaching off-chain data to the blockchain in the Bitcoin network: engraving and etching.

Etching Technology Principles

Runes uses etching technology, which is an intuitive way of recording on-chain information. It achieves this by writing data into the OP_RETURN field of Bitcoin UTXO (Unspent Transaction Output). This feature has been supported since the 0.9 version of the Bitcoin Core client in 2014, creating a verifiable but non-consumable output type that allows data to be stored directly on the blockchain.

In the Bitcoin block explorer, transactions with OP_RETURN information can be easily seen. This information is usually in hexadecimal encoding and may appear in JSON format when decoded, containing relevant information about the deployment, minting, and issuance of Runes assets.

engraving technology principles

Ordinals/BRC20 and other protocols utilize engraving technology to embed metadata into the witness data of transactions. This process leverages Segregated Witness and the "Pay-to-Taproot" mechanism, completed through a two-phase submission and reveal process (i.e., two transactions).

P2TR is a type of transaction output introduced by Bitcoin's Taproot upgrade in 2021, which enhances the privacy of transaction conditions. The inscription process requires first generating a UTXO (submitting a transaction) that pays to a P2TR address generated by a specific script, and then providing the actual script in the witness script when spending this UTXO, thereby uploading the inscription data onto the chain (revealing the transaction).

Comparison of the two solutions ###

Etching advantages:

• The logic is simple and intuitive
• Low transaction costs
• Does not occupy the full node memory pool

Etching disadvantages:

• Limited to 80-byte length restriction
• Requires highly compressed data encoding

Advantages of Engraving:

• Almost no restrictions on data size
• Has a certain level of privacy protection ability
• Supports various advanced features (such as time locks, proof of work)

Drawbacks of engraving:

• Requires two on-chain transactions, overall cost is relatively high.
• The transaction submission duration is long, putting a lot of pressure on the full node memory pool.

Deep Analysis of Runes Protocol Design

The Runes protocol has evolved from the initial version 0.11 to the current version 0.18, undergoing significant changes. By comparing the field designs of these two versions, we can gain a deeper understanding of the core value proposition of Runes.

Runes version 0.11 analysis

The early version of the Runes protocol mainly consists of three parts: edicts (asset transfer information), etching (asset deployment information), and burn (destruction).

When the OP_RETURN field of a transaction is decoded and contains correctly formatted edicts information, the off-chain parser will calculate the transfer status of the user's assets, with the output specifying the transfer target.

The etching section defines the main information for asset deployment. Compared to ERC721, Runes adds limit and term fields to restrict the minting quantity and the time interval for minting. This reflects the fundamental difference between the inscription and rune projects and the asset issuance of Ethereum smart contracts: due to the lack of on-chain smart contract verification, protocols like Runes uniformly define the methods for asset issuance and user participation in minting, emphasizing the concept of fair launch and reducing the likelihood of project parties interfering in the market.

Runes 0.18 version analysis

The latest version of the Runes protocol introduces several important changes:

1. The edicts field has added a pointer parameter to modify the default transfer direction of assets, optimizing the encoding efficiency when multiple Runes assets are transferred out simultaneously.

2. Added a Mint field to limit each transaction to minting only one asset, balancing the participation opportunities for technical and ordinary users.

3. The etching (asset deployment) section has undergone significant reform:

   • Change in asset ID generation method, optimization of encoding space utilization
   • Introduce the terms field, allowing the issuer to specify the starting block height for minting, improving the fairness of user participation.
   • Implement name length release rules to control the allocation of scarce resources.
   • Adopt a two-step deployment process similar to engraving (commit and reveal) to enhance privacy protection.
   • Added turbo field to reserve space for future protocol expansion.

Runes New Protocol Assessment

The latest design of the Runes protocol demonstrates a profound understanding of market demands and is expected to improve the issue of inferior assets rampant in the inscription ecosystem. As part of the Ordinals protocol, Runes can leverage the existing user base and supplement the shortcomings of Ordinals in market operations as an FT protocol.

However, the Runes protocol also faces some challenges:

1. Market Timing: Tight development timelines may affect the early development of the ecosystem.

2. Complexity of Rules: Complex issuance management protocols and long names may increase the risk of user misoperation.

3. Future compatibility: Compared to other protocols (such as Atomical) that explore the direction of smart contracts, Runes is currently still primarily focused on the asset issuance level.

Nevertheless, the design of the Runes protocol to record on-chain data through the OP_RETURN method provides great flexibility for asset management, with the potential to achieve security performance comparable to Bitcoin. As the ecosystem matures, Runes is expected to open up new application scenarios on the Bitcoin network.