In December of 2022, the Ordinals protocol was introduced to the Bitcoin network, and this expanded use cases for Bitcoin beyond the usual payment and store-of-value mechanisms. In gist, these fungible tokens are essentially similar to NFTs (non-fungible tokens) inscribed into satoshis (the lowest fractional unit of BTC), and these Ordinals have opened up a new world of possibilities for the legacy blockchain.

While Ordinals opened up such opportunities, they faced limitations in scalability and efficiency, which necessitated further innovation, particularly in the form of the Runes protocol. According to Casey Rodarmor, the creator of both Ordinals and Runes protocols, this technology has the potential to reach a $1 billion market cap within 2024, due to the potential use cases.

The Runes token protocol went live when the latest Bitcoin halving event occurred on April 20, 2024. Ordinals itself was said to usher in the “second phase of Bitcoin,” with Cointelegraph reporting that more than $3 billion has already been moved via Ordinals since 2023, involving nearly 600,000 unique wallets and 2.5 million on-chain transactions. “The Ordinals protocol ignited a new flame in Bitcoin, and the Runes protocol represents the next phase,” wrote Lugui Tillier, Chief Commercial Officer of Lumx Studios.

This optimism reflects the growing anticipation in the Bitcoin community to streamline the process of issuing fungible tokens and therefore pave the way for using the Bitcoin network for a wider range of use cases. In this article, we will explore how the concept of Runes provides a more optimal solution to the viability of Bitcoin for Real World Assets (RWAs) and the use cases thereof.

How Runes build on Ordinals and expand the possibilities of Bitcoin

As a blockchain, Bitcoin was traditionally only as an asset–it entailed a ledger of payments or exchange of value. Earlier attempts to attach data to Bitcoin were popularized by Ordinals and the BRC-20 standard.

Ordinals somehow innovated on this and could be used to attach images, videos, and other data to satoshis in the Bitcoin network, similar to how the Ethereum network supported such tokens. In early 2024, Runes was established as a new protocol on Bitcoin designed to issue fungible tokens (FTs). Unlike Ordinals, which primarily focused on issuing unique NFTs, Runes offers a standardized and efficient way to create interchangeable tokens (hence they are fungible and not non-fungible).

One of the main advantages of Runes is its use of Unspent Transaction Output (UTXO) based design. This means that each Rune token is directly linked to its own UTXO on the Bitcoin blockchain. This approach provides several advantages over previous protocols envisioned to add-on functions to Bitcoin, particularly BRC-20.

For one, Runes transactions are smaller and less complex, leading to better efficiency. This reduces the strain on the Bitcoin network and thus potentially lower fees. UTXO also provides for more efficient handling of large transactions and tokens, resulting in a more scalable architecture. Meanwhile, UTXO-based systems are inherently secure. Transactions cannot be duplicated, and it is easy to track sequences and dependencies of these transactions.

How Runes open doors for Real-World Assets on Bitcoin

Runes provide a way to represent RWAs such as stocks, real estate, or commodities on the Bitcoin network, and it offers benefits like increased liquidity, fractional ownership, and the potential for innovative financial applications. Here are some use cases that can address some of the opportunities in today’s financial and other ecosystems.

Access to a global asset market. Tokenizing traditional assets like stocks, bonds, and even other financial instruments like derivatives, can improve access to these assets on a global scale, especially given the borderless nature of Bitcoin. In addition, since these are traditionally exclusive investment instruments, tokenization enables fractional ownership of these assets into smaller units.

It’s the same case with real property, wherein investors can own a portion of the property and can even gain rental income or revenue shares, which can be secured under Bitcoin’s blockchain consensus.

New financial instruments. Tokenized RWAs can include traded commodities. This can also open up opportunities for new financial instruments, as tokenized RWAs can be used as collateral for financing. An example of this is Runnessance, which allows users to borrow BTC using their UTXO tokens as collateral, potentially addressing liquidity needs within the Bitcoin ecosystem.

Virtual worlds and Web3 gaming. The bitmap standard represents digital real estate within the Bitcoin blockchain, which can be used to build a fully immersive 3D interactive social platform. Bitmaps can be integrated into any project, protocol, or service on the Bitcoin blockchain. An example is Bitmap Valley, which essentially brings bitmaps to life by utilizing digital parcels into a fractional virtual real estate “living” on the Bitcoin blockchain.

“We are bringing the first gaming experiences with an emphasis on onboarding and in-game economies born from Bitcoin,” says IMSO Chris, Founder of IMSO & Bitmap Valley, whose game engine allows developers to create composable code that can interact with any of the known programming languages for any blockchain. “We have created many ‘firsts’ in this space in regard to gaming, Bitmaps, BRC-20s, and now Runes.”

With bitmaps, virtual worlds are “etched” onto Bitcoin blocks, creating a new twist on how metaverses are built, experienced, and modded by the community.

Extending Bitcoin’s utility

As many of these projects have launched alongside this year’s four-year Bitcoin halving event, these are pioneers in utilizing Bitcoin for ambitious projects that can potentially change how we interact with the mysterious Satoshi Nakamoto’s Bitcoin network.

The integration of Runes with RWAs is in its nascent stages, which means there will be technical and regulatory concerns to look into. Despite the challenges, these solutions are currently being explored for their potential to enhance accessibility, liquidity, and to create innovative financial instruments, offering new utilities to the Bitcoin community.

Just as how Bitcoin, blockchains, and crypto changed finance in the recent years, Runes and fungible tokens will indeed usher in a new phase of Bitcoin.

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