Monero (XMR) is a hard fork of Bytecoin, which was the first protocol that executed on the privacy principles laid out in the CryptoNote whitepaper. Nicolas van Saberhagen, (the author of the CryptoNote whitepaper who is no longer involved with the Monero protocol), pointed out that privacy and anonymity are the most important aspects of electronic cash. Untraceability and unlinkability are fundamental principles of the network.
With a list of over 240 contributors over the life of the project and 30 core developers, Monero recently underwent aBulletproof protocol audit by Kudelski. Bulletproofs is a zero-knowledge proof related improvement protocol, which allows for cheaper, smaller, and faster transactions, according to Ethereum World News. Monero will continue to schedule two more audits before the scheduled upgrade for bulletproofs in September/October.
There’s a huge debate on the ethical motives behind the inherent utility of Monero. One camp argues that a completely anonymous cryptocurrency engenders criminal activity, but the Monero team argues that it empowers the individual to complete ownership of one’s data. In today’s digital economy, tech giants own huge repositories of data that contain sensitive information of users’ search queries, purchases, and communications and other sensitive information. By granting users complete anonymity over their sending and receiving of Monero tokens, the protocol grants users the option to sell that data to advertising entities, and be compensated accordingly. As of now, the large majority of users do not own any of their data, nor are they granted an accessible vehicle for that data.
Another important aspect of Monero as a cryptocurrency is its fungibility. According to Blockgeeks, Monero’s private transactions eliminate traceability of funds from user to user — therefore, without the transactional history of a Monero token, users cannot be held liable for whatever types of transactions occurred with the token in the past. The fungibility of Monero distinguishes it from Bitcoin, where addresses with coins associated with questionable activity can be blacklisted and refused by other users.
Monero operates off of the CryptoNote proof-of-work algorithm, similar to Bitcoin but also with heavy modifications to enable privacy of transactions. The proof-of-work algorithm under CryptoNote is a voting system where users vote for the right order of transactions, and to approve new features within the protocol. The details of how the consensus algorithm works will be described below.
For most conventional cryptocurrency protocols, a user is granted one public key (to receive funds) and one private key (to confirm the sending of funds). Monero has different sets of keys. The first set is called view keys. Each user is granted a public view key (to generate a one-time stealth public address where funds will be sent to the receiver). The private view keys is used by the receiver the scan the blockchain to find the funds sent. The second set of keys are called spend keys. The public spend key helps the sender take part in ring transactions and also verify the signature of the key image. The private spend key helps creating a key image that enables them to send transactions.
An important distinction to make is how both the public view key and public spend key make up a 95-character string in which funds can be sent. Under the CryptoNote consensus algorithm, the automatic creation of multiple unique one-time keys prevents outside parties from being able to check all the incoming transactions. Going back to how the public view key and public spend key make up a 95-character string to which funds can be sent, the receiver computes the private part and can only release the funds after the transaction is committed.
What enables Monero transactions to occur anonymously is how inputs and outputs are processed. The most up-to-date process of how transactions remain untraceable and unlinkable is three-tiered.
Ring Signatures — With Monero, however, the final output (or receiving of funds for Mary), is actually the end product of a multi-step input-output function. On the input side of the transaction, the users’ identities are protected using ring signatures. A ring signature is a type of digital signature where the signatures of a group of people are fused together to create a distinctive signature that authorizes transactions. This is analogous to the signing of a joint banking account, with the actual signer remaining unknown. Essentially, by mixing the spender’s input with a group of others, outside parties will find it exponentially difficult to establish a link between transactions.
Ring CT —The Monero protocol further ensures privacy with Ring Confidential Transactions (Ring CT). This technology masks the exact amount being transacted from user to user. The protocol does so by first determining the ring size of a transaction (depending on how much Monero is being sent to someone else). From that, the protocol determines how many decoy inputs to create for the transaction. All of these inputs (real and decoy included) are then mashed together into a single input. Another important aspect of Ring CT to consider is that users are required to send their entire wallet amount to someone when making a transaction of any denomination. The difference of the intended amount sent and the entirety of the wallet is then sent back to the original sender as “change.” In a nutshell, Ring CT provides greater privacy since the actual amount of the transaction is not revealed.
Stealth Address — Stealth addresses prevent outside observers from identifying recipients of funds on the blockchain. Going back to how each user has a set of 2 public keys, the Monero network computes a one-time public address (different from a key), called a “stealth address.” Upon sending funds to another user, the recipient uses his private spend key to scan the entire blockchain for his transaction. When coming across the transaction, he can calculate a private key that corresponds to the one-time public key and retrieve the Monero.
Kovri is a decentralized anonymity technology based on I2P’s open specifications. It uses encryption and routing techniques to create an overlay network which enables users to hide their IP address (and therefore geographical location). Essentially, when messages are being transmitted from node to node, they’re encrypted with a key and lock. Each time a message is transmitted, a new key and lock are assigned to that specific piece of information. Peers on the network cannot read the contents of each message. Monero intends to create an API so that other cryptocurrency protocols can utilize the technology to hide IP addresses and encrypt messages on a peer-to-peer network.
Monero has no pre-set size limit per block (like Bitcoin’s 1 MB block size limit). The median size of the last 100 blocks is taken (M100) as a reference to the sequential sizes of blocks as the blockchain develops. To prevent malicious miners from clogging up the system with disproportionately large block sizes, block rewards will be reduced in quadratic dependency depending on how much the new block size exceeds M100.
The hashing algorithm called CryptoNight operates to create a fairer and more decentralized currency system. A huge debate over the decentralization of Bitcoin is how mining pools purchase large swaths of ASICS to monopolize the mining process (and therefore the rewards for verifying transactions). Cryptonight requires 2MB of fast memory, which requires a lot more silicon than SHA256 circuitry. Cryptonight was also built to be CPU and GPU friendly, so that some of the work done by Cryptonight can operate on hardware widely available on modern consumer machines.
There lies the issue of potential double spending if input addresses are muddled together with decoys (through ring signatures). Key images were created to prevent double spending. Essentially, a key image is the value of a cryptographic one-way function of the secret key. No one can recover the public key from the key image and identify signer, but it also prohibits the sender/signer to sign off on multiple transactions for an allocated set of funds. In the CryptoNote protocol, key images used more than once are rejected by the blockchain as double-spends. When a new transaction is received, the miner just needs to verify that the key image has not existed in the past.
Unlike some of the other platform blockchains (like EOS or Cardano), there is no formal entity behind Monero for commercial business applications, additional funding, or research and development. In fact, the large majority of team members remain anonymous, using online pseudonyms. The anonymity of team members very much falls in line with the privacy-ethos of Monero token. However, there is a Monero Research Lab that actively develops new features to add on to the protocol to improve cryptocurrency privacy and security.
With well over 200 contributors, the majority of the team remains anonymous. However, Riccardo Spagni is credited as the public face of the Monero team. He is the lead maintainer of the Monero project. He spent years in software development prior to tinkering with Bitcoin in early 2011.
As mentioned previously, some advocates of Monero argue that privacy of transactions empowers individuals to have greater control over their data. Large tech companies have a considerable degree of influence over the buying habits of its users by selling all of their purchase history to advertisers, resulting in targeted advertising. Monero has plenty of applications for users who do not want financial institutions, data mining companies, or technological intermediary to aggregate data on them without being financially compensated.
On the flipside, Monero is also notorious for being one of two cryptocurrencies (the other being Bitcoin) to execute purchases on the darknet market, AlphaBay (which closed in July 2017 by law enforcement). But to Monero’s merit, its privacy was so strong that law enforcement couldn’t figure out how much Monero the AlphaBay owner had.
At press time, Monero (XMR) is currently trading at $138.97 USD on CoinMarketCap. There is a circulating supply of 16,237,265 XMR with a total market cap of $2,256,476,533 USD — it is ranked 13th on CoinMarketCap. There will only ever be 18.4 million XMR, which should be mined at the end of May 2022. Afterwards, tail emission will kick in at 0.6 XMR per 2-minutes block, with no fixed limit.
Despite the most high-profile use cases of Monero being used for illicit activity, it’s hard to deny the practical applications of the token for every day users looking to engage in normal commercial transactions. Perhaps once governments around the world provide more legislative guidance to instill confidence in users, Monero can become a powerful tool to empower users in owning their own data when it comes to transactions.
Disclaimer: We are in no way associated with the Monero team. This is not meant to be financial advice, and is a reflection of our understanding of the project. Here is a link to the CryptoNote whitepaper.