What is Monero?
How does it work? Is it completely anonymous? Why would I even need an anonymous coin?
Crypto Swami Whiteboard Tuesday where we take complex cryptocurrency topics, break them down and translate them into plain English. Before we begin, don’t forget to share on social media. Today’s topic is Monero coin, a private decentralized cryptocurrency. But what does “private” actually mean?
First, let’s clarify the difference between privacy and anonymity. Privacy means that you don’t want others to know what you’re doing. While anonymity means that you don’t mind that people know what you’re doing, you just don’t want them to know that you’re the one doing it.
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For example, privacy is when you lock the door to a bathroom because you want to keep what’s going on in there…. well.
.. private. Anonymity is when you post data that can’t be linked back to you on the web in order to bring something to the public’s attention. If you look at Bitcoin, it’s certainly not private.
The Bitcoin blockchain is completely public and all transactions can be viewed by anyone on the web. If you want to keep your privacy in Bitcoin, you’ll have to use transaction mixers, VPNs and a variety of other methods. Bitcoin is also not completely anonymous. On the one hand, the blockchain shows how many Bitcoins were sent from which address and when. On the other, without any additional information it’s impossible to connect a Bitcoin address to a real life identity (also known as an IRL).
So Bitcoin is pseudonymous. Enter Monero. Monero aims to be a private cryptocurrency that doesn’t expose who sends how much to whom. Transactions on Monero are untraceable and unlinkable, so you can’t tell where they originated from and you can’t connect any two transactions together. Now, you might be asking yourself who really needs a private coin?
Isn’t that stuff only for criminals? Well, while criminal activity can benefit a lot from a private cryptocurrency, there are more than enough legitimate reasons for privacy as well. For example, with the amount of data being displayed on blockchains like Bitcoin and Ethereum, it’s become easier these days to identify patterns, map real life identities, connect between addresses and uncover behavioural information about users.
So, if you don’t like companies analyzing your data in order to map out your behavioural or purchasing patterns, you may consider using a private cryptocurrency. Additionally, since all address balances are completely transparent, you may become subject to attacks if you hold large amounts of Bitcoin.
Another thing to consider is market prediction. If I know a certain address belongs to an bitcoin exchange, I can track it for incoming transactions. If I see a large amount coming in, then I can assume that a big sell order may be on its way and short the currency for profit. In a truly perfect market, such loopholes wouldn’t exist. And finally we come to the issue of fungibility.
Fungibility means that currency units should be completely interchangeable with one another. Simply put, if I have a $20 bill, it shouldn’t matter to you where it came from or when it was made. A $20 bill is just a $20 bill, and it’s equivalent to any other $20 bill you can find. However, in Bitcoin, for example, you can trace each coin back, even as far as to when it was first created as a mining reward which is known as the Coinbase transaction. So, if somewhere along the way this Bitcoin was used for illegal activity, you may find some law enforcement agency knocking on your door as part of some investigation they are running.
While this is all theory for now, it could happen since Bitcoins are 100% traceable. So you might have different prices for freshly minted Bitcoins as opposed to “used” Bitcoins. For Bitcoin to truly become a currency, it will have to deal with this fungibility issue. On the other hand, a private coin that can’t be traced has complete fungibility. As you can see, there are numerous use cases for using a privacy coin such as Monero.
Well, while other coins like Dash and Zcash offer the option for private transactions, in Monero all transactions are private without exception. Monero, meaning “coin” in esperanto, started out in 2014 as a fork of Bytecoin, the first private cryptocurrency to be created. The Monero protocol obfuscates the 3 parts of any cryptocurrency transaction – the sender, the receiver and the amount sent. Let’s see how this is done for each part.
To obfuscate the sender’s identity, Montero uses ring signatures. When a person signs a Monero transaction, their signature is combined with past signatures from the Monero blockchain.
These act as decoys and make it impossible for an outside observer to determine who actually sent the transaction. The amount being sent is obfuscated by ring confidential transaction, or ringCT for short. I won’t go into the technical aspect of how ringCT works, but suffice to say that instead of broadcasting the actual amount being sent, the user transmits only a small random looking piece of information.
This information is enough to verify that the amount being sent is legit while keeping the actual amount private. And finally, we want to obfuscate the receiver. This is done through the use of stealth addresses. A public Monero address is a 95 character string that starts with a 4. However, when I send funds to that address, the funds are actually sent to a different address.
So for example, if I’m the recipient, funds are sent to a one time stealth address that is derived from my public address. This creates a separation between my public address and the funds sent to me so no one is able to know my balance. Only the recipient’s private key “knows” they can spend funds from that 1 time stealth address and each time the Monero wallet launches it will scan the blockchain for addresses it can spend in order to know the actual balance. While all of the transaction data may be obfuscated, the sender’s IP address can still be tracked. That’s why there’s one additional feature on Monero’s roadmap: Kovri.
Kovri reroutes your transaction through multiple virtual nodes so that your IP address is also obfuscated.
What is Monero? Explained
Kovri is not yet integrated with Monero but is in active development. So there you have it, a completely private cryptocurrency that hides the sender’s address and IP, the amount being sent and the recipient’s address. Now let’s talk a bit about Monero’s currency XMR. Similar to Bitcoin, XMR is mined through computers that guess the solution to complex math problems, also known as Proof of Work.
However, the algorithm used to mine XMR, called CryptoNight, is completely different than the SHA-256 algorithm used to mine Bitcoin. CryptoNight is an ASIC resistant algorithm. This means that you won’t be able to mine more XMR if you have a more powerful computer. Even with a GPU, your mining advantage won’t be as substantial as it would be with other coins.
This makes XMR still open to mining with your personal computer, something that is completely out of the question with more popular coins like Bitcoin or Ethereum.
Since CryptoNight allows personal computers to mine Monero, it quickly became a very popular option for browser mining. Browser mining occurs when a site that you visit uses your computer’s CPU to mine in the background while you’re visiting the site. You can learn more about it in our Bitcoin mining tutorial. Also, unlike Bitcoin which is limited to 21M coins, there’s no limit to how many XMR can be produced. New XMR is issued each time a block is mined, every 2 minutes on average.
The actual reward varies and decreases over time. By May 31, 2022, 18.4 million XMR will be in circulation and the reward size will become fixed with 0.6 XMR being distributed with each new block. That’s it for today’s episode of Crypto Whiteboard Tuesday.
Hopefully by now you understand what Monero is – A private decentralized digital currency. I also hope you have a better grasp of why privacy is important not only for criminals.