Something is holding Runes back

May 31, 2024

Maybe you missed it when we called it last week, but Runes are really coming back. The Runes protocol has added half a billion in market cap since we wrote about it last week and many coins are nearing or surpassing their previous all-time-highs.

But there may be a structural problem for Runes being adopted: it’s hard to get the right liquidity for on-chain exchanges.

Runes hard to list because they are hard to “split”

It’s not that there’s no buying/selling, it’s that the buying & selling has to happen in the “right” sizes.

What does this mean? Runes liquidity has picked up significantly in the past few days, currently doing ~$15 million volume in the past 24 hours. There appears to be decent demand for various Runes tickers. However, due to the way the Runes protocol is designed, it is rarely possible to buy the exact amount of a Runes ticker that you want. Runes currently have to be sold in “lots”, in preset amounts. You can’t just buy 10 → 10,000 of a ticker, you can only choose from the available lot sizes that are listed.

For example, if you only want to buy 1000 $DOG Runes at $0.008 cents each you will be hard pressed to find that exact amount of Runes listed on any of the major exchanges. Rather if you go look now, you will likely only see amounts of $DOG in the several hundred thousand $DOG lot size, which is anywhere from $2,000 USD → $10,000 USD depending on the listing price.

Listings on MagicEden for $DOG — notice the large lot sizes/amounts

This means that users are hamstrung by having to pony up comparatively large amounts of money to buy Runes off the floor.

Why is this? This actually has it’s roots in the Runes protocol design itself. While Runes fits very nicely on top of Bitcoin’s UTXO model, each UTXO only communicates a single amount of Runes. If you have an output with 1000 Runes on it, in order to sell/send 500 Runes you need to split that amount when you list it on an exchange. Sellers need to create another transaction in order to split/list different amounts of a Rune, so exchanges just list that static amount of 500, not smaller amounts of 400/300/200.

This creates a very difficult user experience that often results in high cost of entry or difficulty in buying/selling Runes at the current market rate. This has almost certainly played a role in the Runes market initial crash post-launch, as most users began listing their entire stacks of Runes in massive lot sizes — the market couldn’t absorb giant lots of $5,000 a piece. E.g. it’s much easier to find 100 buyers at $50e than 10 buyers at $500e. The result is that many simply just listed their Runes at the lowest price available and still had no buyers. Again, this wasn’t necessarily because there weren’t buyers at that price, but likely that there weren’t buyers at that price and in that large of a lot size.

TL;DR: if you want on-chain and “trustless” exchange of Runes, you’re probably going to have liquidity hurdles.

There are solutions to the liquidity problems: other layers or centralized exchanges. Centralized, off-chain exchanges would not have the same lot size liquidity issue as on-chain ones. Exchanges would simply only care about depositors exit transactions and not require transactions for each exchange on the CEX. Also, there are some ways to lift Runes onto other layers such as Lightning, which could allow an interesting comparatively trustless exchange but without an on-chain transaction each trade.

The absolute best deep technical breakdown of this challenge is this twitter thread by Mutable Trees (we did an interview with him last week!). Mutable Trees goes into further detail about how marketplaces are combining sold Runes, possibly exacerbating the problem.

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