Defining Monero
So you want to know about Monero? We’re going to have to flashback to Bitcoin first.
On the Bitcoin network, every transaction is technically anonymous: wallet addresses (which replace real names) and the amount of BTC moved are permanently visible to any observer on the network. This is called pseudo-anonymity and presents a privacy issue where, with enough metadata, senders and receivers can be identified.
Founded in 2014, Monero is the largest privacy coin in the world. A privacy coin essentially addresses Bitcoin’s privacy limitations. While most cryptocurrencies showcase built-in privacy features as an option, Monero has an extreme dedication to privacy: not only are user identities and transaction amounts encrypted and anonymized, but its software is designed to update at a regular interval* to incorporate new privacy upgrades.
*Interval: Used to be a 6-month period, now adjusted to 9-12 months as the community feels that the Monero Network is mature enough.
A Brief History
Monero started as a theoretical alternative to Bitcoin in 2013, called CryptoNote. Although the concept soon materialized into Bytecoin, the project collapsed under allegations that its core developers had tampered with its token supply by pre-mining more than 80% of it.
Then, in April 2014 ‘Bitmonero’ was launched. After a series of controversies and arguments among its team, however, a new whitepaper was released and it was rebranded as the ‘Monero’ that we know today.
The rocky track record of privacy coins until then made it easy for people to write off Monero (XMR). However, with Ricardo Spagni (see: fluffypony) as its lead maintainer for many years, Monero continued to innovate on the privacy front. Even with Fluffypony out of the picture, Monero still baffles would-be codebreakers.
The market has taken note of Monero’s power. These days, not only is it the largest privacy coin-type cryptocurrency in the world, but it has also solidified its position among the top 30 cryptos in the world by market cap.
How It Works
The Monero team has pioneered several innovative privacy features that successfully mask transaction data such as the source, quantity, and destination of each transaction. It has a privacy by default policy, meaning that nobody can opt out of using the privacy technology in a transaction.
Ring Signatures
Ring signatures mask the sender’s identity.
Instead of having only the sender sign off on the transaction, the Monero network uses a ‘ring’ of signatures. Before recording an individual transaction on the blockchain, 10 decoy digital signatures are added to the ring of signees. The 10 decoys are real addresses on the network.
As a result, it looks like any one of the 11 people could have signed for the transaction. The number of decoy signees per transaction has fluctuated over the years but has held steady at 10 since 2019.
Ring Confidential Transactions (RingCT)
RingCTs mask the number of tokens being transacted.
Before the implementation of RingCT, Ring Signatures required that the actual transaction and all dummy transactions have the same transaction amounts. This was to prevent people from discerning which of the signers was the actual signer. Unfortunately, it also resulted in slower transactions and observers could tell that a particular transaction moved a specified number of tokens.
The Monero team introduced RingCT in January 2017 as part of the regular security upgrade, which then became mandatory from that September. It achieved this by encrypting the amount of Monero at the miner level. All newly minted Monero tokens get encrypted into RingCT dominations at the first transaction after mining.
Think of RingCT as placing tokens in a sealed box. Only senders and recipients know how many tokens they are sending or receiving, but everyone else is just passing off sealed boxes.
Stealth Addresses
Stealth addresses mask the recipient’s identity.
Every Monero transaction generates a one-time single-use address, known as a stealth address, that serves as the destination of each transaction. Each stealth address has its own unique public key, and only those with the proper credentials can view and/ or spend the XMR tokens in that stealth address.
You can think of stealth addresses as disposable Postal Office Boxes.
Dual Key Pair Configuration
Every Monero user has two sets of key pairs that enable RingCT and stealth addresses: a public view key & public spend key, and a private view key & private spend key.
Let's follow this up with how a transaction proceeds. Assume here that Anna is sending Ben some Monero on its network.
- Anna creates a stealth address using her public view key and public spend key.
- Anna then signs the transaction with her private spend key, authorizing the use of her funds. The funds get sent to the stealth address.
- Ben can now access the transaction details by combining his private view key with the stealth address’s public key. This allows him to check the balances.
- For Ben to spend the XMR in this stealth address, he needs to generate a one-time private spend key for that transaction by combining his private view key and private spend key with the stealth address’s public key.
This might seem complicated, but the concept is actually quite simple. Each user has four keys which they must use to enable a transaction. This too is an innovative feature found in Monero.
Bitcoin Comparison
Its unique privacy-centric architecture is not the only thing that distinguishes Monero from other blockchains. Monero’s consensus algorithm and mining community diverge from Bitcoin in some ways as well. Most importantly though, Monero developers eagerly tinker with and upgrade the network when they can.
Consensus Algorithm & Mining Schemes
Like Bitcoin, Monero uses the Proof-of-Work (PoW) consensus algorithm to process transactions and add blocks to its blockchain. However, it has a very different mining scheme: it is built to be ASIC-resistant, meaning the hardware requirements for miners are lighter than the ASIC-friendly Bitcoin mining setup.
Application-Specific Integrated Circuits (ASICs) are specially designed chips customized for a particular use-case, such as cryptocurrency mining. Networks like Bitcoin are dominated by high-performance ASIC miners in the form of expensive graphics cards (GPU).
Every computer has a highly functional CPU. Monero’s algorithm favors CPU mining over GPUs, making mining via consumer-grade PCs perfectly feasible for mining Monero. The reliance on relatively cheap CPU over GPU makes Monero mining ASIC-resistant.
Cheaper mining encourages more mining, and subsequently increases distribution. Despite this arrangement, the majority of the Monero network hashing power is dominated by a few mining pools.
Hard Forks And Development Efforts
Unlike Bitcoin, Monero embraces changes, upgrades, and hard forks, as you can see in the roadmap. Hard forks are scheduled to happen regularly in every 9 to 12 months in order to implement any changes and security upgrades. Some argue that the frequency of Monero Hard Forks still poses a threat to the network security, but the Monero founders and maintainers believe that the benefits outweigh the risks.
True Fungibility
Because the Bitcoin network is so transparent, it is easy for regulators and network participants to identify which Bitcoin tokens have come from a malicious actor.
Unfortunately, this means that if someone pays you in Bitcoin that has been linked to a hacker or money launderer, your Bitcoin could be slated for seizure by authorities.
Monero, with its suite of cutting-edge privacy features allow for true fungibility - no single XMR token can be tracked from one wallet to another. A disturbing consequence of this privacy is the impetus for malicious actors to use Monero over Bitcoin.
As a matter of fact, many ransomware payouts and dark web transactions are known to happen through the Monero network. A number of prominent cryptocurrency exchanges have chosen to delist Monero as a result.
Future Of Monero
Monero aims to be the quietest mouse in the hole when it comes to privacy. The development team has not only made transactions more private, but has deployed many other features that are intended to secure the network throughout its value chain.
This includes network integrations with the Tor browser, an open-source anonymous web browser that enables private communications over the internet. Monero wants to make sure that every part of a user’s network experience is as encrypted as possible.