Monero is a protocol and a secure, private-by-default, and untraceable cryptocurrency that records transactions on a public ledger. It is a privacy coin that uses cryptography to obfuscate the origin, amounts, and destination of transactions. The peers transacting know the details and can verify their transactions, while other blockchain observers only see the transaction existence and no details.
Monero’s value proposition is fungibility, which is accomplished with ring signatures, confidential transactions, and stealth addresses. Its default privacy design prevents coins from being tainted by what they have been used for in the past. Therefore, XMR coins cannot be blacklisted by merchants or exchanges because of their previous use.
Monero was introduced on 18 April 2014 as a Bytecoin fork using CryptoNote reference code. The core team operates under the privacy principle used in the chain’s fundamental purpose, and only three out of the seven core members have revealed their identity. The Monero project has a strong community, and Monero’s Research Lab attracts many cryptocurrency experts.
What Is XMR?
XMR is electronic cash with enhanced privacy. The word ‘monero’ in Esperanto means ‘coin’, and XMR is a unit on the Monero blockchain.
Currently, there are 17,584,812 XMR in circulation and no maximum supply. There is no hard cap, but once 18.4 million XMR are mined, a continuous issuance of 0.6 XMR in a block will maintain miners’ incentive to confirm transactions.
Storing XMR is similar to banking any other cryptocurrency. The safest wallet is a hardware wallet, and both Ledger and Trezor support Monero. Other most popular wallets are the desktop wallets GUI Wallet and CLI Wallet. CLI Wallet is appropriate for the tech-savvy and is fully customizable, presenting total control over the Monero node and funds. GUI Wallet has a friendly interface for all types of users, and it supports quick and easy handling of the currency. Use Cake Wallet, Monerujo, MyMonero, or Edge to store the cryptocurrency on a mobile device.
The Monero community has taken many precautions, and the Tokens.net team advises verifying the hashes of all wallet downloads from their website. To continue reading about wallets, check out our blog post How to Choose the Best Monero Wallet.
The Monero protocol is designed so that transactions are private and coins untraceable by default. The amount and addresses involved in the transaction are obfuscated, which is achieved through the ring signatures and stealth addresses described in detail in the protocols and architecture.
Every transaction on the Monero chain consists of a sender, a receiver, and an amount transacted. What is different with Monero is that the user has not only one pair of keys but also an extra key called a view key. The keys are a part of the stealth addressing. Every user has a public address for receiving payments, a private view key, and a private spend key. The private keys are intended for viewing incoming transactions and sending XMR out. The view key can also be used as a watch-only wallet.
Let’s look at a transaction example. Bob wants to send Alice some XMR. Alice gives Bob an address for him to send the XMR to. Bob uses his XMR wallet and sends the XMR to Alice. While Bob sends funds to Alice, her wallet address never appears on the blockchain. Instead, Bob generates a one-time output, also called a note address, which is the address that appears on the blockchain. Alice receives the funds with her address hidden in the note address. She uses her view key to check her transaction. No other blockchain observer can connect Bob’s transaction to Alice.
Monero is private and anonymous thanks to sender and recipient ambiguity and information privacy. Plausible deniability is a phrase that formally describes Monero’s privacy design. No one can pinpoint who the public keys belong to.
How Monero Works: Protocols and Architecture
Monero’s main focus is on privacy. Accordingly, its architecture is different from Bitcoin’s. Unlike Bitcoin, XMR is not a pseudonym but an anonymous cryptocurrency. It is a privacy coin.
Formerly called BitMonero, today the protocol is now known as Monero, and its main feature is the CryptoNote algorithm. The CryptoNote hashing algorithm was first used by Bytecoin, but this coin had some questionable pre-mine. Therefore, a user called thankful_for_today decided to fork Bytecoin, seeing potential in the value of the hashing algorithm. He published a post on the Bitcointalk forum, and a community-driven team of developers formed to continue developing Monero.
Monero has a peer-to-peer network with a structure that hides transaction details. The details are only known to the two peers transacting. To ensure privacy, the technological solutions unique to Monero are Ring signatures, Ring Confidential Transactions (ringCT), stealth addresses, and Dandelion++.
Dandelion++ is a part of the technical structure that undetectably broadcasts transactions to a node to resist large-scale rule-breaking deanonymization. The reason for its use lies in cryptocurrency analysis such as Chainalysis, actively following transactions with IP address linking. With Monero using Dandelion++, this issue becomes obsolete.
Ring signatures are the base of Monero’s fungibility, and they prevent tracking histories. Ring signatures are a type of digital signature applied in users’ Monero wallets to achieve sender ambiguity. When sending XMR, a new one-time address is generated and signed with the one-time address previously received. This is done by using the other one-time addresses from the blockchain without others knowing, thus forming a ring. A ring signature is a way to show knowledge of the private key corresponding to one of the outputs’ public keys used by the user. The sender uses his private wallet address and generates a private key for the output with his private sender key. A ring signature makes it computationally infeasible to determine which of the keys was used to produce the signature. What it does show is the sender’s control over the one-time address used (but not the sender’s wallet address) and that funds were not double spent. The unique feature implemented in 2017 is ringCT, an improved version of ring signatures and an extension of the CryptoNote algorithm, which hides the transaction amounts.
Another main characteristic of private transactions is stealth addressing, which allows only the sender and receiver of the transaction to determine where the amount of XMR was sent. Stealth addresses use multiple keys: spend and view, private and public. The sender of the XMR creates a random one-time address from his public key for the transaction on behalf of the recipient. The receiver uses his private view key to check the blockchain for his transaction.
Attaining private transactions on the Monero chain can cause transactional inefficiency. The mechanisms used to enforce privacy make the chain heavy. To optimize the transaction sizes, Monero underwent an upgrade to bulletproof signatures. A bulletproof signature differs from ringCT in that it relies on short proofs and minimizes transaction sizes without compromising anonymity.
Blocks on the Monero chain are created approximately every two minutes and are not subject to scalability issues because the chain uses dynamic block size. There is no maximum block size, and aggregated transactions can be validated in a block up to twice the median block size of the last 1,000 blocks. Miners can validate larger blocks in exchange for a block reward penalty.
Mining Monero can be compared to mining other cryptocurrencies when it comes to miners’ work. Miners are nodes that validate transactions on the network and include them in blocks. Monero uses a Proof-of-Work (PoW) mechanism to issue new coins, incentivizing miners to secure the network and validate transactions. It’s similar to Bitcoin but with a different hashing algorithm.
Since its beginning, Monero has used the CryptoNight hashing function from the CryptoNote PoW algorithm. By using PoW to mine Monero, XMR miners still have to solve the puzzle at the heart of the currency.
To make the mining process more egalitarian, the Monero PoW process uses the ASIC-resistant and CPU-friendly consensus mechanism RandomX. RandomX is a PoW algorithm designed to be ASIC resistant. It uses random code execution and memory-hard techniques to make mining decentralized and egalitarian.
More information regarding mining Monero is available in a special blog post.
Like Bitcoin, Monero was once labelled bad because it was used to buy illegal goods. The interest in buying illegal goods with Monero originates from the fact that Monero gives its users the highest level of privacy by default, promoting transactional anonymity. Some also call it the digital version of cash. XMR transactions are private and untraceable, preserving the right to privacy for all.
Monero focuses on improving existing cryptocurrency design to give users plausible deniability by obscuring the sender, recipient, and amount of every transaction. Transactions cannot be linked to any individual user or real-world identity. Monero is creating a private, censorship-resistant monetary system.