A Beginner's Guide to Monero (XMR)
Introduction
Transparency is inherent to public blockchains. Blockchains must be able to verify all transactions independently so that they can operate in a decentralized environment. If you take a look at Bitcoin or Ethereum, you will see how open and accessible their respective databases are. An infrastructure like this has some advantages, but it often brings several compromises in terms of privacy and anonymity.
Blockchain transactions and addresses can be linked together by observers in order to potentially deanonymize address owners. There are several applications for these pseudonymous cryptocurrencies. But privacy coins are likely to be more desirable for those looking for the most privacy in financial matters. As for private cryptocurrencies, perhaps none are as well known as Monero, which is one of the most well-known of them all.
What is Monero?
The name Monero (in Esperanto, it means "money") refers to the concept of unlinkability and untraceability that underpin it. This means that a connection between two Monero transactions is impossible, and a source or destination of funds cannot be identified.
This is the appeal of Monero. It still utilizes a blockchain to keep track of the movement of funds, but it utilizes some neat cryptography to make it difficult to identify the source, amount, and destination of every transaction. In order to illustrate this point, let us compare it with the Bitcoin ledger, which comes across as follows:
Let's talk about how this kind of obfuscation works.
A very brief history of Monero
Bytecoin, an encrypted cryptocurrency released in 2012, is a fork of Monero, a privacy-oriented cryptocurrency. In order to address some of the shortcomings of Bitcoin, Bytecoin came up with an open-source technology called CryptoNote, based on CryptoNote technology. Specifically, those shortcomings consist of two aspects: ASIC mining (the use of specialized mining equipment) and the lack of privacy in transactions. There are now many crypto-currencies based on CryptoNote, which are designed to be confidential.
Developers who were unhappy with the initial distribution of Bytecoin created a new project called Bitmonero in 2014 as a replacement for Bytecoin. After the change in name, the "Bit" was removed, and what we now know as Monero.
How does Monero work?
Among the innovations that make Monero transactions anonymous are "ring signatures" and "stealth addresses". This section of the guide will be devoted to a high-level overview of both concepts.
Ring signatures and Confidential Transactions
Ring signatures consist of digital signatures each corresponding to an individual in a specified group. Anyone can verify whether the signature originates from one of the group members by referring to the signature and checking the public keys of the members. But they don't know which one.
This concept is explained in a 2001 paper entitled How to Leak a Secret that used the example of a government cabinet to demonstrate how it works. Consider the possibility that one of the members of this government - Bob for example - has some evidence incriminating the Prime Minister. In this case, Bob would like to prove to a journalist that he is in fact a member of the cabinet, although he wants to remain anonymous.
Bob would not be able to do this when he were using a regular digital signature. By comparing the signature with Bob's public key, anyone could state with certainty that this signature could only have been produced by Bob's private key. For blowing the whistle on the activities of the Prime Minister, he could face serious consequences. If, on the other hand, all the other cabinet members' keys were to be used to create a ring signature scheme, it would be impossible to determine which one sent the message. However, you may argue that the information was leaked by a cabinet member, proving its authenticity.
You can use this technique to create transactions every time you create one, so that you can provide plausible deniability at every step of the way. When you construct it, your Monero wallet pulls the keys of other users from the blockchain and combines them to form a ring. A key can effectively act as a decoy, i.e., it can make anyone appear to have been able to sign your transaction at first glance. This means that an outsider can never figure out whether an output has been spent or not.
Green outputs indicate the ones you are actually spending, and red outputs indicate decoys you have gathered from the blockchain. According to an observer, it appears that you may spend any of the eight outputs.
There used to be a rule that said all of the outputs in the ring had to have the same size. In any other case, it would be extremely easy to figure out what was happening since you could see the amounts of all the transactions. In such cases, you might want to include only outputs of 2 XMR in your ring, or just 0.5 XMR if the ring is limited only to the outputs of 1 XMR.
It has changed as a result of RingCT (Ring Confidential Transactions) being upgraded. In it, Confidential Transactions were incorporated, a technique for obscuring transaction amounts. The integration of this protocol into the Monero protocol has significantly increased privacy since you are no longer required to use fixed denominations. As a result, you will be able to compile a ring with outputs of different sizes without disclosing any information to the outside world that can deanonymize you.
Stealth addresses
The ring signatures hide the origins of the funds, but with regular public addresses, you will still be able to see the destinations of the funds. If your identity is associated with one of your blockchain addresses, it could be problematic.
Consider the case where your e-commerce store uses the same address for every order. Anybody who has made a purchase from you can see the balance that you have and tell others that it's your business's address. In this case, you may become a target.
Using a stealth address hides the destination of funds. In order to achieve this, they request that the sender generate a one-time address based on a public address that has been set up exclusively for the transaction. The public address would look like this:
The address listed in the Monero block explorer is not attached to any transactions, so you will not be able to enumerate any transactions tied to it. This is because when a sender is trying to send you funds, he/she will create a stealth address by converting the above address into a mathematical expression of sorts. Whenever someone sends XMR, that XMR goes to a brand new address on the blockchain. There will be a different address created for each one in the future, and these addresses cannot be linked together.
In addition, you have access to two pieces of information that can be used by you: the private view key as well as the private spend key. The name of this key indicates that it will allow you to look at all the transactions associated with an address. It is possible to pass this along to others (your accountant, for instance) who can check the funds that have been received by you. Spend keys are what you would normally think of as private keys. These keys are used to spend your coins.
There is a privacy by default policy for Monero, which indicates you are not able to opt out of the use of a stealth address by default. Despite the fact that the public ledger of the organization is automatically obscured, you can still choose to make your transactions visible to those you choose.
Monero vs. Bitcoin – what's the difference?
There are some similarities between Monero and Bitcoin as cryptocurrencies. Despite this, Monero and Bitcoin present unique features.
Fungibility
Fungibility is a major source of disagreement among users of Bitcoin. Interchangeability is the ability that a good can be used in combination with another good of a similar nature. The gold, for instance, is considered fungible since you can swap an ounce of your gold for someone else's, and it will still function as it did before. In the same way, cash can also be exchanged - you can alter ten dollar bills for another ten dollar bill. Conversely, a unique, one-of-a-kind piece of art such as the Mona Lisa is not fungible since there isn't any other one like it.
When it comes to digital currencies, it can be a bit more difficult to determine fungibility. The units in Bitcoin are fungible on a protocol level, since the software does not distinguish between them. However, things get more complicated at the political and social levels. There are some who contend that Bitcoin is non-fungible due to its unique properties, while others contend that it doesn't matter.
The blockchain of Bitcoin is transparent. Due to this fact, it is possible to track transaction details such as amounts and destinations. At the grocery store, you receive a five-dollar bill as change. There was a possibility that this bill could have been used in a criminal transaction ten transactions ago. Nowadays, it would not affect the bill's usability in any way. Bitcoin has had incidents in the past when coins have been confiscated or refused on the basis of their "tainted" history. The use of chain surveillance, however, can affect the usability of coins as currency even if users are unaware of past transactions.
It is thought by some professionals that these practices could weaken the parts of public ledger cryptocurrencies that make them attractive to users. Coins that have been freshly mined (and, hence, do not have any history behind them) can be more valuable than those that have been around for a longer period of time. According to those opposed to coin profiling, such analysis relies on unreliable and subjective techniques.
As a result, coin mixing and CoinJoining, which obfuscate the source of funds, are becoming increasingly accessible to end users. Monero avoids these shortcomings from the beginning. Observers are unable to determine the source or destination of funds, therefore these coins are more like cash than non-privacy coins.
However, the added privacy provided by Monero does come at a price. Due to the larger size of the transactions, there are several important hurdles to overcome before the system is capable of scaling to accommodate the masses. However, its strong fungibility has gained it some recognition, surpassing Bitcoin as the preferred currency of cybercriminals involved in cryptojacking, ransomware, and dark web transactions.
Blocks and mining
The Monero blockchain is maintained by Proof-of-Work, as is the case with Bitcoin. In addition, it is designed to be ASIC-resistant, as is the case with all CryptoNote-based protocols. In this way, we intend to prevent mining pools from dominating the cryptocurrency market by running high-performance, specialized hardware.
By favoring CPU mining and decreasing GPU effectiveness, Monero's Proof-of-Work algorithm (recently changed from CryptoNight to RandomX) aims to make the system more fair. According to our logic, this will lead to better distribution of mining power, since consumer-grade PCs will remain competitive in the near future. Even so, mining pools still have the majority of the hashing power.
Monero does not have a limit on block size, as opposed to Bitcoin, which is limited to 4 million units of block weight. Instead, the blocks have a dynamic size, meaning that they can be expanded to accommodate increases in demand. As a result, if demand declines, the size of the permitted blocks can be resized. Accordingly, the size is determined by looking at the median size of the previous 100 blocks (which are mined on average every two minutes). A miner may produce blocks that exceed the limit, but he or she will receive a lower reward if they do.
Hard forks
At the governance level, Monero and Bitcoin have another interesting difference. Even simple upgrades are not implemented quickly in Bitcoin due to its aversion to forks. And there's a good reason for it. It's important for Bitcoin developers to be cautious sometimes so the system stays secure, stable, and decentralized.
A fork is simply a protocol upgrade mechanism. They are often required to correct critical errors or to add new features. Although Bitcoin users generally avoid them due to their potential for causing division and threatening decentralization. Hard forks in Bitcoin generally occur when a group wishes to create a new cryptocurrency from an existing cryptocurrency. In addition to this, they are generally used to fix urgent vulnerabilities.
The Monero roadmap however, includes frequent hard forks. Consequently, security upgrades can be rolled out quickly and the software can adapt to changes. Despite "mandatory" protocol updates being perceived as a weakness, Monero hard forks don't really carry the same negative connotations as they do in other cryptocurrency markets. However, this is not to say that they are foolproof - frequent hard forks can lead to unnoticed vulnerabilities, as well as force users who do not upgrade off the network.