Bitcoin’s UTXO Model
The process of creating and using Bitcoin Runes is closely tied to how Bitcoin transactions are processed on the network. To understand Runes, it's essential to grasp the concept of Unspent Transaction Outputs (UTXOs).
A UTXO can be thought of as a banknote. When you make a payment on the network, you essentially send an entire UTXO to the recipient's address and receive a new UTXO in return, much like paying with a $20 banknote and receiving $10 in change.
Bitcoin's UTXO model means that instead of having a flat balance in your wallet, you have piles of sats (the smallest unit of Bitcoin) distributed across various UTXOs. Your wallet can spend one or more of these UTXOs, and you will receive a new UTXO as change.
The Bitcoin Runes protocol leverages this transaction process to create fungible tokens. Just as the process of creating a Bitcoin ordinal is called "inscribing," the process of creating a Bitcoin rune is called "etching."
This process involves creating a "genesis" UTXO that includes the details of the rune's name, symbol, decimals, and total supply. This information is assigned to a single UTXO. When sending out transactions, the protocol creates fractionalized, fungible pieces of the original UTXO, and these new pieces are called Runes.
By utilizing Bitcoin’s UTXO model and transaction process, the Runes protocol provides a native and efficient way to create and manage fungible tokens on the Bitcoin network, without the need for additional layers or protocols.
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