Cycle Capital: DOG leads the return of Rune popularity. When will the track explode?

Author: Alfred @GametoRich , Cycle Capital

1. What is a Rune

Starting in early 2023, the BRC-20 standard based on the Ordinals protocol set off a wave of construction and speculation around BTC assets, and promoted the hot attention and capital influx of ecological infrastructure such as BTC's second layer and Defi, which played a positive role in the long-term development of the BTC ecosystem. However, the hype of BRC-20 also brought about Bitcoin's network congestion and redundant data. In response to this, Casey Rodarmor, the creator of the Ordinals protocol, proposed the Runes protocol in a blog in September 2023, which will build a replaceable token protocol based on BTC UTXO, which is the "Rune Protocol".

The Runes protocol was officially launched on April 20 this year when Bitcoin was halved. When it was first launched, due to the enthusiasm for the first batch of rune casting, the Gas fee of the BTC network was pushed to more than 1,000 sats, which was unprecedentedly popular. But soon the market's attention shifted from runes to other tracks. In the past month, DOG has risen from the bottom sideways price to a new high, driving a wave of rune targets and new attention.

1. How runes work

The Runes protocol uses Bitcoin's native UTXO model to issue and track tokens, which is more native and decentralized. In addition, the rune balance is held directly by UTXO, and one UTXO can hold any number of runes. No "junk" UTXO is created, and the mechanism is more efficient and reduces the space occupied on the chain.

Specifically, Runes' data is stored in the OP_RETURN field, which is an operation code from a Bitcoin transaction ("opcode") and allows 80 bytes of data to be stored in a transaction output. Transactions use the OP_RETURN marker in the protocol message, followed by a data push with a capital R. Issuance or transfer transactions are specified and assigned to UTXO in subsequent data pushes. Invalid protocol messages will cause runes to be burned.

The following figure intuitively explains how the Runes protocol performs issuance and transfer transactions:

2. Comparison between Runes and BRC-20

Compared with BRC-20, the Runes protocol has several important features

(1) Runes is specially designed as a replaceable token based on the native BTC architecture. It does not rely on off-chain data and only needs to be minted once, which is simpler and more efficient. BRC-20 is based on the Ordinals protocol, which is more suitable for building non-fungible tokens. It relies on off-chain indexes and needs to be minted twice, which is more complicated overall.

(2) Runes data is stored in the 80-byte OP_RETURN field, while BRC-20 uses witness data, which can occupy up to 4MB. In comparison, tokens built on Runes are more compatible, occupy less space, and reduce blockchain expansion.

(3) The Runes protocol is based on the UTXO model, which can be integrated with the native BTC architecture and inherit security. It will have stronger scalability in the future and can be perfectly compatible with the development of BTC ecology such as Lightning Network and BTC L2.

3. The meaning of runes

(1) It further created a way of issuing BTC assets that can break the circle. Since BRC-20 introduced the inscription asset, this new asset form has brought more attention and funds into the BTC ecosystem. The meme craze on SOL and Base chains in 2023 has confirmed that memes cannot be ignored in the introduction of funds to the chain they are on. The Runes protocol will create a dedicated, fungible, and more suitable token standard for speculative activities for BTC in the future.

(2) The asset issuance method is simpler, more efficient, and more compatible than before. The Runes protocol is based on Bitcoin's native UTXO architecture, does not need to rely on third parties and off-chain data, occupies less space, reduces network congestion, and will be seamlessly compatible with various upgrades and ecological solutions of the BTC network (such as L2, bridging, etc.) in the future.

(3) The popularity of this asset can further solve Bitcoin's security budget problem. Rune transactions can contribute more transaction fees to the network, especially after the halving, when miners have a new source of income after the block output is reduced, which has a positive effect on maintaining the security and sustainability of the network.

II. Track Data Overview

From the BTC network data, in terms of transaction volume and transaction share, Rune currently accounts for about 20% of the total network. When the Rune protocol was first launched, transactions were very fomo, accounting for as much as 81.3%, and then quickly entered a cooling-off period. Currently, Rune accounts for about 10-40% of the network. Combining the data, we can observe how hot the current Rune market is. Comparing Runes with BRC-20, Runes have become the most actively traded L1 asset outside of non-BTC transactions. The ratio between the two is about 4:1. The highest share of Runes occurred when the halving was launched, about 99%, and the lowest was about 55%. The current popularity of Rune transactions has surpassed that of BRC-20 tokens.

From the perspective of fee contribution, the current native Bitcoin transaction fee accounts for 70–80%, Runes account for 10–20%, Ordinals and BRC-20 account for about 10% in total, and Runes account for up to 70% on the halving day. Currently, the hype of Runes has broadened the income sources of BTC network miners and has the highest proportion among new assets.

If Runes and BRC20 are currently regarded as memes, compared with the market value of meme coins on other chains, the market value of memes on the Bitcoin chain accounts for the lowest proportion, less than 0.1% of the chain. In horizontal comparison, the meme leader of ETH and SOL chains accounts for more than 3% of the market value of the chain. As BTC is the chain with the highest consensus, market value, and mainstream funds, the market value share of meme coins has the impetus to further expand. In vertical comparison, Rune has exceeded BRC-20 in terms of transaction volume and contribution fees, but Rune's Dragon One is still behind BRC-20's Dragon One. If it can land on the first-tier CEX, it has the potential to surpass ORDI.

III. Rune Evaluation System and DOG Analysis

This article believes that the evaluation of Rune's popular projects can be analyzed from three stages and nine dimensions. In the early stage, focus on distribution methods, degree of dispersion, founders and storytelling; in the mid-term, focus on: continuity of dissemination and price continuity; in the mature stage, focus on: trading volume, market value, chip structure, and price stability.

Combining the above logic, this article believes that the current rune track is the first dragon DOG:

1. Distribution method: The distribution design is progressive and bears all on-chain costs, which is a big pattern.

It was issued in stages before the launch of the Rune Protocol. The Rune Stone NFT (Runestone) was launched first for hype, and the first rune was airdropped to the Rune Stone holder after the Rune Protocol was launched on the halving day. At the same time, whether it is the airdrop of the Rune Stone or the airdrop of the first rune, it is all free for the airdropped people, and the community raises funds, and the project party bears the on-chain costs of the issuance.

2. Degree of dispersion: The early common interests are high-quality and large in number, which has achieved a rapid cold start and a large number of core users.

The Rune Stone was airdropped to 11w+ users who actively participated in the BTC inscription ecosystem in the past. The rule is to have at least 3 inscriptions in the 826,000th block (excluding inscriptions starting with "text/plain" or "application/json", including curse inscriptions that can be searched by ordinals). The first Rune DOG was airdropped to 7w+ firm Rune Stone holders.

3. Founder and story:

The founder Leonidas is an OG in the BTC community and a co-founder of the cutting-edge Ordinals browser Ord.io. He has a close relationship with Casey, the founder of Oidinals, and they interact frequently. The name of the Rune Stone links the Runes protocol launched on the halving day and the Runestone encoding instructions in the protocol, which is very topical and orthodox. In terms of the design of the Rune Stone, Leo found a sculpture artist to customize the creation, which is artistic. The name of the first airdropped Rune is DOG, which is the most spreadable meme image in the crypto world, and is issued in the form of a new token on the most consensus Bitcoin network.

4. Communication continuity: strong and continuous attention attraction

As the OG of the BTC community, founder Leo has relatively strong communication power and resources, especially in the European and American communities, with frequent publicity. The number of Twitter posts can reach up to about 100 per day, and most of them have detailed data and inflammatory content, which continuously captures the attention of the market.

5. Price continuity: Rune Stone and Rune relay hype

Rune Stone NFT was preheated before the launch of the Runes protocol. The price of NFT rose steadily in March-April, with the highest one reaching 0.1166BTC. After the first Rune DOG airdrop, the price of Rune Stone fell, and Rune DOG took over the hype. After a month of market pricing and consolidation, the price began to rise from around 0.0025 to a maximum of 0.0097 in mid-May, and currently fell back to 0.0078. There will be two more rune stone airdrops later this year (when it becomes the first meme coin with DOG), and the price of rune stones may be raised again depending on the price of DOG.

6. Trading volume: The trading volume leads other runes by a cliff, and the liquidity is the best

The overall liquidity of the rune sector is poor, and DOG has been the first target in terms of trading volume on the overall timeline since its launch. The current trading volume is mainly concentrated in Gate, accounting for more than 80%, followed by Bitget, Okx wallet, and Magic Eden. The current daily trading volume exceeds 70 million US dollars, while Runes x, which ranks second in trading volume, is about 2 million US dollars. DOG leads all rune targets by a cliff, and has reached the trading volume of mainstream tokens.

7. Market value: Market value ranks first in general

After excluding the ZZZ rune with very low trading volume and high unit price, DOG's market value has basically maintained the first place in the entire period after its issuance.

8. Chip structure: the holders are large, but the chips are not concentrated enough

The on-chain holders of DOG remain stable at 7w+, ranking third in Rune. Because the main liquidity is on CEX, the actual holders should still be the first, with a large number of holders and a strong consensus. However, the largest holding ratio of the on-chain address is about 1.69%, and it has been continuously decreasing in recent days. There are only 5 addresses with more than 1%, and the fifth-ranked address is rapidly increasing its holdings. However, the overall chip concentration is not enough, which may be the reason why Longyi cannot be listed on the first-tier CEX despite its clear status at present.

9. Price stability: The price is stable and upward

The rise of DOG price since the bottom of 0.002 is stable and strong. After stable consolidation at 0.004 and 0.007, it can be further pulled up, and the buying power in terms of volume and price is still strong when the overall market pulls back.

Based on the evaluation system proposed in this article, we can dynamically analyze the top projects in the rune track and screen new targets. Due to space reasons, this article will not discuss this in detail.

IV. Summary

1. Rune is a protocol designed specifically for fungible tokens. Technically, it is simpler, more efficient, and more compatible than BRC-20. It has surpassed BRC-20 tokens in terms of transaction share and transaction fee contribution, becoming a new asset form that must be valued.

2. The current main function of Rune is to serve as a meme coin to enhance the attention and fund capture of the Bitcoin network. It has the significance of sustainable development, but from the data, it has not yet ushered in a full-scale outbreak and has further price discovery potential.

3. This article proposes a three-stage, nine-dimensional evaluation system for Rune projects. At present, DOG is in the leading position in the track compared to other targets, but the chip structure at this time is relatively scattered, and it may take a certain amount of time to accumulate before landing on first-tier exchanges.