Exploring the Rune Protocol: Beyond the Initial Hype

Author: IGNAS, DEFI RESEARCH

Translation: Baihua Blockchain

There are 3 days until the Bitcoin halving, and the Rune Protocol will launch at the same halving block time! I believe you have heard of the Rune Protocol, but I want to share my perspective on why I am bearish in the short term but bullish in the long term, how to prepare, and which protocols/tools to use to avoid missing opportunities.

1. Bearish on the Rune Protocol (Short Term)

I expect the market to remain hot before the Rune Protocol goes live. Assets like Runestone, RSIC, and PUPS have already surged significantly, and those holding these assets will receive Rune Token airdrops. The new Rune Tokens may perform strongly for a while.

However, the market will cool down just like the drop after the NFT reveal. Here are a few reasons:

Bitcoin transaction fees will become too expensive for traders with less capital, making it difficult to actively trade Runes (which in turn will drive the Bitcoin Layer 2 narrative).

Runes may not significantly improve the BRC20 trading experience, as the trading method for UTXO and BRC20 is similar to NFTs.

The early UniSat and Ordinal Wallet trading interfaces are the same as the BRC20 interface, which includes two aspects during trading: 1) the number of tokens traded in one transaction, and 2) the price per package.

The number of new Rune Tokens issued will be staggering: dozens or even hundreds of new tokens will be minted daily (under high Gas fees), which will dilute traders' attention and the capital inflow for each token.

From a utility perspective, Runes are meme coins like BRC20. At least initially, so the "novelty" will gradually fade. Especially if there are no Rune Tokens that can sustain an increase, speculators will incur losses.

Additionally, the Rune 0 (UNCOMMON • GOODS) set up by Casey Rodamor will be difficult to hype because it 1) can be minted for free for 4 years, and 2) only one can be minted per transaction.

2. Why I am Bullish on the Rune Protocol Long Term

If I'm not mistaken, shortly after the Rune Protocol goes live, the hype around Runes will cool down, and the best opportunities will arise after the sell-off.

The reasons are as follows:

Narrative speculation is segmented.

The first wave is triggered by excitement for something new. This usually stems from innovative technology or simple meme potential. Meme tokens are a bit like gambling: most of the meme tokens that surge rarely have a second wave.

However, narrative speculation based on technological innovation has a stronger chance of revival after the first wave of hype cools down.

Ordinal Inscriptions were launched in December 2022. But the first major wave of excitement occurred when BRC20 was launched in May 2023. The freely minted BRC20 grew rapidly, but with continuous development, the second and third waves arrived by the end of 2023.

Now we are in the fourth wave of pre-Rune speculation.

While many narratives fail to survive the first wave (see ERC404 trading), I believe Runes will have a fifth, sixth, or even more waves.

The reasons are as follows:

Multiple protocols are building infrastructure for Rune Tokens. However, developing new DEXs/markets takes time. For example, Saturn is building a familiar DEX for Runes, but it will take time to make the user experience smooth. I will share more protocols to watch below.

The Rune Protocol aims to consolidate the BTCFi industry around a unified development standard. Imagine Ethereum without a unified ERC20 standard—tokens cannot be exchanged between Aave and Uniswap. This is the current situation with Bitcoin. Before Runes, we had BRC20, C BRC-20, ARC-20, BRC-420, and so on, a complete mess.

I am also optimistic about the long-term development of Runes because it captures the three pillars of the thriving crypto ecosystem, which is my framework for this bull market.

In my view, the success of any crypto ecosystem is driven by three key elements: technological innovation, token minting opportunities, and engaging narratives. How do Runes fit these elements?

1) Technological Innovation: We were once told that NFTs and tokens were impossible on Bitcoin. However, in this cycle, Bitcoin NFTs have outperformed Ethereum NFTs. Moreover, as the first BRC-20 on Bitcoin, ORDI reached a trading volume of $1 billion on Binance.

The magic lies in turning interchangeable satoshis into non-interchangeable ones. When there is an inscription on top, one satoshi is no longer equal to another.

This is one of the most exciting zero-to-one innovations of this cycle. If you want to know how we got here, you can check out my previous blog post on BTCFi.

2) Token Issuance: This is one of the reasons we have cryptocurrency cycles. In every bull market, new tokens spring up like mushrooms and are assigned crazy valuations. Just like central banks can overprint fiat currency, we tend to issue too many tokens to align with the influx of capital and attention into the crypto space. Thus, the market collapses.

This cycle is no exception. Before this bull market began, I wrote more about how this happens.

However, token issuance has always been the domain of smart contract blockchains (like Ethereum/Solana) until the Ordinals theory inadvertently birthed BRC20.

I am concerned about BTCFi because it has unrestricted token issuance. BRC20 (and Runes) can be easily minted without any accumulation of actual value, as there are no smart contracts on Bitcoin.

However, the Ordinals community has managed to find a Schelling point that can be aggregated by assigning original value to early Ordinal NFTs and airdropping tokens to those NFT collectors.

Additionally, due to the lack of direct value accumulation, all BRC20 tokens are essentially meme coins. Only ORDI successfully attracted attention as the first BRC20 token, but now PUPS may have crossed the Yellow River to become a true meme coin on Bitcoin. The higher the price of PUPS, the higher the confidence of speculators.

Finally, the BTCFi ecosystem is continuously growing in local tokens, countering meme coins, and will theorize the rationale of having BRC20/Runes as value accumulation tokens. More on that later.

3) Engaging Narrative: The narrative is key to giving life to the technological aspects and token economic models, transforming them into something people can relate to, trust, and be a part of.

For example, Bitcoin Ordinals exist as immutable NFTs on the most secure and decentralized blockchain, which is a fascinating story. Moreover, meme coins on Bitcoin? Come on, that's way cooler than meme coins on Solana or Ethereum.

Crypto Twitter is catching up with the technological innovation of Ordinals/Runes, and the narrative is also hot.

This short-term bearish but long-term bullish scenario may be the best case, especially if you come late to the pre-Rune token participation. Once the hype cools down, you will have enough time to learn and prepare to be ready before the second wave of Rune excitement arrives.

The best time to learn was yesterday, and the second best time is today. So here is a brief introduction to Runes.

3. Things You Need to Know About the Rune Protocol

The Rune Protocol is developed by Casey Rodamor, the creator of the Ordinals theory, aimed at challenging BRC20. Casey does not like BRC20, so it can be expected that what Casey did for NFTs, he will do again for interchangeable tokens.

You know, BRC-20 tokens use JSON data (a text-based data format) inscribed on satoshis. They trade more like NFTs than interchangeable tokens. For example, you need to "inscribe" (by making an on-chain transaction on Bitcoin) these tokens before selling or transferring them.

Additionally, BRC-20 generates "garbage" or "residual" transactions, leading to network congestion.

In contrast, Runes adopt the UTXO model, which confuses everyone. Here is my explanation: Ethereum uses an account-based model, while Bitcoin uses UTXO (Unspent Transaction Output) to track user states and balances.

For example, if you have a UTXO worth 1 Bitcoin and want to send someone 0.3 Bitcoin, the transaction will use the entire 1 Bitcoin UTXO as input. The transaction will then create two outputs: one sending 0.3 Bitcoin to the recipient and another returning the remaining 0.7 Bitcoin (minus any transaction fees) as two new UTXOs back to your address.

Therefore, technically, when you say, "I have 1 Bitcoin," you should say, "I have some UTXOs that allow me to spend 1 Bitcoin."

In the above example, when you use the 1 Bitcoin UTXO as input, that UTXO is 'destroyed,' and two new UTXOs are minted: 0.3 UTXO for the recipient and 0.7 UTXO (minus fees) returned to you. As you can see, these UTXOs are like NFTs!

However, while each inscription (like BRC20) is unique, each Rune unit is the same. They are interchangeable tokens. You can transfer Runes like regular Bitcoin without having to inscribe BRC20 each time.

In the case of Runes, a UTXO can now store 1 Bitcoin, 100 Rune TokenA, and 50 Rune TokenB as Rune Stones.

Tip: Create multiple UTXOs by sending the amount of Bitcoin you are willing to invest in each Rune to a new wallet. This way, you can quickly invest in multiple tokens without waiting for the previous transaction to complete or using Luminex.

Runestones (not to be confused with Rune ordinals) are a way for the Rune Protocol message to be stored in Bitcoin transaction outputs when you send Unspent Transaction Outputs (UTXOs).

I share this because once Runes go live, you will soon start seeing terms like "Runestones," "inscriptions," and "decrees" being discussed on Twitter. People will try to trade Runes but will encounter problems, and then they will surely look for answers on Twitter.

Runestones - Rune Protocol messages - can include inscribing (deploying) a new Rune, minting existing Runes, and transferring Runes between different addresses.

Inscribing is the way Runes are first minted by "inscribers." Once inscribing is complete, the attributes cannot be changed.

4. Additional Background Knowledge About Runes

Finally, here are some other simple terms and facts about Runes that you should know:

Rune Name: Initially, only names with more than 13 characters were available; this limit decreases by one character every 4 months until all names are available after 4 years.

Rune Number: Indicates the creation order of the Rune, starting from "Rune 0," then "Rune 1," and so on.

The first Rune UNCOMMONGOODS - free to mint, with no supply limit, only 1 UG can be minted at a time. 1 UG is basically equal to the transaction fee of Bitcoin.

Rune ID: Generated based on the transaction block and position, for example, "500:20."

You can mint Runes by entering the Rune ID. For example, the RuniGun bot on Telegram will allow minting Runes via Rune ID. Therefore, if you know the ID, you don't have to rely on a third-party UI to mint. You can check out this bot here (disclaimer: I am not affiliated with it, just discovered it on X).

Rune Symbol: A non-unique currency symbol for a Rune $, ⧉ or 🧿, or a generic currency symbol ¤. More technical terms provided by Leonidas.

5. Projects, Protocols, and Tools to Watch

I initially planned to write an article on "How to Prepare for the Launch of the Rune Protocol." However, there are already several similar posts on X covering the same protocols.

1) Projects to Watch

The key thing to know is that the Rune game is underway, and several similar pre-running protocols have been launched, promising Rune Token airdrops after the Bitcoin halving block.

The hype began with the RSIC protocol (RSIC stands for Rune Specific Inscription Circuits, an NFT on Ordinals, with a total of 21,000 pieces, 10% reserved by the project team), which mysteriously airdropped RSIC NFTs to Ordinal OG/miner wallets.

At that time, I said, "The Bitcoin Finance (BTCFi) space is brewing a huge transformation," but I didn't actually know how it would develop. Now we know that RSIC initiated a competition to attract the attention of Rune speculators.

If you do not hold RSIC, I don't think now is the right time to enter: by holding RSIC, you can mine RSIC points to earn RSIC Rune Tokens as rewards. Theoretically, RSIC should trade at $0 at the halving block.

In response to the RSIC team (which kept 10% of RSIC for themselves and had opaque airdrop standards), Leonidas airdropped Runestone to 112.4k OG wallets. By holding Runestone, you will receive not just one, but three Rune meme coins.

Runestone currently has a market cap of $5.49 million, making it the second-largest (by market cap) project in the pre-Rune collection (after Rune Pups + PUPS).

As RSIC continues to depreciate as the halving approaches, the real valuation of RSIC is $588 million based on the price of $0.028 per 1 RSIC Rune on whalesmarket.

The total market cap of Rune Pups ($80 million) + PUPS meme coin ($421 million) is $501 million. Remember, holders of Rune Pups and PUPS Tokens will migrate to Runes at a 23% allocation ratio, with 77% allocated to PUPS.

There are generally good arbitrage opportunities among Rune Pups NFTs, PUPS on Unisat, and Pups bridged on Solana.

This is not financial advice, but would you be willing to invest at these valuation levels? If my short-term expectations are correct, their valuations should drop shortly after the launch.

In any case, this is a speculative decision you should make for yourself. There are several other Rune protocols with valuations below $100 million. You can check the full list on Magic Eden.

Nonetheless, I do not intend to sell; I entered this ecosystem early and am willing to hold. Additionally, these three major assets are becoming targets in the Rune ecosystem, hoping they can maintain value and receive more airdrops.

In the long term, new protocols will emerge to capitalize on the hype of the Rune Protocol. Here are some starting protocols and tools.

2) Notable Protocols

Luminex: Mint Runes and can split UTXOs to mint multiple Runes in the same wallet. Promoted by the Xverse wallet, so it may be good.

Sovryn: A Runes trading/lending platform with its own sidechain. Will launch at the halving. Sovryn will launch their DEX on Bob L2, which is the platform I recommend.

Rune Pro: Building a DEX and inscribing protocol. Not yet live. https://twitter.com/Rune_Pro

Rune Bitcoin: Provides inscribing and transferring services for Runes while also building a marketplace and a DEX.

Runessance: A lending protocol for Runes and Bitcoin.

Liquidium: Lending Ordinals and Runes. Or earn on Bitcoin. Points system enabled. Liquidium airdrop has reward points.

Saturn: An AMM/order book trading platform for Bitcoin assets. May not have enough liquidity during the Rune launch.

RuniGun: A Telegram bot for minting, creating, and managing Runes. Cannot export private keys, so use with caution.

But you might use Magic Eden and Unisat to trade Runes, as well as OKx Web3 wallet (if you are a mobile user). Personally, I would alternate between Unisat, Xverse, and OKx wallets.

3) Useful Tools

SatScreener: A real-time token aggregator for the Rune and Bitcoin ecosystem. Due to poor support from Coingecko/CMC for the Bitcoin ecosystem, Satscreener is the best choice to understand token information.

Runesmarketcap: Find Rune protocols by source, market cap, type, etc.

Runealpha: A Rune explorer with real-time data, covering all inscribing (minting) protocols, very practical.

Runes Terminal: Building scanners, minting tools, and launchpads. Has its own ordinals and will reward RUNI airdrops after the halving.

We are still in the early stages, so please add the best tools and protocols for other Runes in the comments!

Also, note that BTCFi is in its early stages. It's like rewinding time back to the 2019-20 Ethereum DeFi era, even before the birth of Uniswap. Opportunities will be abundant, so be sure to keep learning.