Cryptocurrency is an ever-expanding field. With Bitcoin leveling the playing field for the development of other systems, it should not come as a shock that platforms like Monero are not only considered to be on par with Bitcoin but in some ways may be surpassing it. As per usual, that opinion is subjective. However, one cannot deny that newer cryptocurrencies are capturing the attention and the intrigue of many who partake in this digital method of transaction.
Some of these cryptocurrencies that anyone – or at least anyone familiar with this medium – can name off the top of their heads include Ethereum, Litecoin, Zcash, and even Bitcoin Cash (an independent branch of Bitcoin itself). One particular system that is making its way up the ranks and is offering unique and beneficial assets to its users is ‘Monero.’
People may not have a familiarity with Monero, as it was only brought into fruition about five years ago. But it’s similar to other cryptocurrencies in some ways and different in other ways. In fact, what makes it so special is not just how it improves pre-existing elements, but rather the exceptional privacy benefits it brings to its users.
What is Monero?
Monero is an open source cryptocurrency whose focal point centers primarily on privacy fungibility. Additionally, it offers high-level anonymity for its users and their transactions. These features are something that they pride themselves on and are well known for when compared to other cryptocurrencies.
The Monero network functions on a peer-to-peer system, much like Bitcoin. However, unlike Bitcoin, it performs as private digital cash while providing protection from any form of data tainting through the participation of past transactions.
It follows three core values: 1) Security, 2) Privacy, and 3) Decentralization. On its website, Monero boasts that its electronic cash is “safe from ‘capital controls’ – these are measures that restrict the flow of traditional currencies, sometimes to an extreme degree, in countries experiencing economic instability.”
It was launched in April of 2014 to work as a ‘fork’ of Bytecoin. Also known as a ‘hard fork’, a fork is when cryptocurrency is split into two to create a separate version. This is made possible due to open source formats that are inherent with most cryptocurrency designs. Primarily, a fork addresses flaws found in the parent currency. Inevitably, the goal is to construct better alternatives to the original currency.
What is Bytecoin?
Bytecoin is a decentralized cryptocurrency programmed with an open source code that allows others to participate. It mixes the outputs of similar values that are in one transaction. As a result, this renders the source of the money near-impossible to trace. The addresses are guarded and the users are able to generate multiple addresses from a single set of keys that are unlinkable.
This function is possible with the use of Ring signatures, a feature that conceals and muddles the funds’ sources. The recipient’s funds are mixed in with other Monero transactions and are then moved across lists of others. Moreover, it decodes the actual amount involved.
Monero’s Egalitarian Mining Process
The Monero mining process bases itself on an “egalitarian” concept. Essentially, this means all people who are participating are equals and thus deserve equal opportunities. The users are rewarded for their contributions and actions by joining mining pools (a system where individual miners work together to develop the formation of a block and split the reward amongst them), or they are given the choice to mine independently. This procedure can be done on a standard computer. Further, it does not need any specific hardware like ASICs (Application-Specific Integrated Circuit).
Monero designed its transactions to be untraceable and impossible to link. Digital cash that is sent to the recipient is rerouted through a randomized address that was created specifically for that transaction. Unlike blockchain, the Monero ledger does not record the actual addresses of either the sender or the recipient. This system of operation ensures anonymous usage and confidentiality.
The currency symbol for Monero is XMR.
The “keys” to Monero
All Monero users are given a ‘view key’, which is used to access an account. Users are given the option to hand their view key to other selected parties to view account holdings, while also setting limitations and not permitting these parties to be able to actually spend any of the funds that are held in the account. They are granted access to either past and current transactions or just specific transactions in the account.
Certain parties who could definitely benefit from this particular set-up are:
- Auditors who the user gives access to their account to so that they can audit the holdings in the account and its overall worth.
- Parents and/or guardians who wish to use the keys to monitor transactions on their child’s account.
Along with the view key, users are also given a ‘spend key.’ It authorizes a specific entity that the user may share the key with to spend and/or transfer funds from the user’s account.
Both keys are 64 characters long and consist of letters and numbers.
How it works
“Bob decides to spend an output, which was sent to the one-time public key. He needs Extra (1), TxOutNumber (2), and his Account private key (3) to recover his one-time private key (4). When sending a transaction to Carol, Bob generates its Extra value by random (5). He uses Extra (6), TxOutNumber (7) and Carol’s Account public key (8) to get her Output public key (9).
In the input, Bob hides the link to his output among the foreign keys (10). To prevent double-spending he also packs the Key image, derived from his One-time private key (11). Finally, Bob signs the transaction, using his One-time private key (12), all the public keys (13) and Key Image (14). He appends the resulting Ring Signature to the end of the transaction (15).”
Monero vs. Bitcoin
As previously stated, based on the in-depth definition and explanation of the operation’s process, Monero has certain elements within its system that differentiates itself from other cryptocurrencies. For the purpose of illustrating these differing points, it would be informative – albeit predictable – to compare it to that of Bitcoin because Bitcoin in and of itself is the foundation of Monero, and to an extent, almost every other cryptocurrency that exists. Furthermore, as Monero is a younger system, it would benefit it considerably to highlight what sets it apart from Bitcoin and also what it improves on in comparison.
Bitcoin functions on a protocol that shields the identity of the participant using a pseudonym address, which is generated at random with a combination of letters and numbers (not unlike the generation of a ‘view’ and ‘spend’ key number). While this is a long-standing practice that has proven to be beneficial for many, it is not without its drawbacks. This method leads to limited privacy due to the Bitcoin addresses and transactions being registered into a blockchain, and this results in them being open to the public. Several transactions carried out over time by a participant can be traced back to the same address, therefore it allows other parties (government, friends, family, etc.) to be made aware and alerted of the participant’s actions.
By this point, it has become apparent that what Monero has over Bitcoin is its anonymous network that promises a stronger sense of security, as their operation runs on misdirection and the assured protection of one’s address. Bitcoin undoubtedly runs an operation that is secure, but it is secure in its own way; a way that, when compared to Monero, has its fair share of flaws that can only be made obvious after some analyzing.
What Monero has and enforces that Bitcoin does not is fungibility. This means that two units of currency can be substituted and there is little to no difference between the two. Assets are exchangeable and this simplifies the exchange and trading process by providing equal value.
Investopedia writer, Shobit Seth, wrote an interesting analogy that explains this fundamental difference between Bitcoin and Monero by using dollar bills and pieces of gold to illustrate fungibility:
“While two $1 bills are equal in value, they are not fungible, as each carries a unique serial number. In contrast, two pieces of 1 oz. of gold of the same grade are fungible, as both have the same value, and don’t carry any distinguishing features. Using this analogy, a Bitcoin is the $1 bill, while a Monero is the gold piece.”
As it has been previously mentioned several times, Monero’s transaction history is difficult to trace. Bitcoin’s transaction history, however, is on a blockchain, meaning they can track down units that have been associated with and used for nefarious purposes such as fraud or theft. As enticing as this may sound, this has a significant downside. That being the unknowing recipient of these units could run the risk of having their account shut down due to simply being in possession of ‘rotten’ units. In this sense, this purging service can be viewed by some as a double-edged sword.
An additional comparison that can be made between Monero and Bitcoin is the latter’s lack of flexibility when it comes to implementing new features into its system. Doing so would require an update of the whole network, which is a link back to a debate surrounding the block size limit. This was a controversy about the size limit in a Bitcoin block that spanned over five years. Some argued in favour of the increased size because of the larger amount of transactions per second, while others argued against the increased size because a hard fork would need a satisfactory consensus and this would run the risk of igniting a consensus failure. Additionally, fast block reproduction would in all probability create centralized controls.
The new features that would require Bitcoin to undergo a network update include hard-coded constraints and natural components of the design, like block frequency, the amount of money supply at its maximum level, and the total number of confirmations required.
The final prominent difference between the two systems is that the traceability of Bitcoin’s users’ transaction amounts, alongside the sender and the receiver, is automatically viewable to the public unless certain steps are taken by the user to ensure otherwise. With this in mind, it is possible for Bitcoin users to make sure that their transactions are kept confidential from the public, however, it is not a default setting like how it would be in Monero. Nevertheless, this at least gives Bitcoin users an option on how transparent they want the records on their account to be.
Competitors (and what they are doing wrong)
In keeping with the ‘follow the leader’ tradition that most innovators experience when their creation becomes a household name, there have been other cryptocurrencies that have attempted to copy the techniques of Monero. Most notably, they base their transaction security system on Monero’s anonymous methods. In doing so, they replicate the function, yet incorporate their own elements into it as a means to make something completely of their own invention.
These are just two of the other types of cryptocurrencies that have implemented privacy technology into their system:
- ZeroCoin/ZeroCash – uses ZKPs (Zero-Knowledge Proofs) in order to obscure the sender and the economy. Any exploits, like creating false proofs, are generally not discovered until much later, due largely in part to the network’s anonymity.
- CoinJoin – a mixing protocol used by Dash (a semi-cryptocurrency based off the Bitcoin and Litecoin code base) that combines transactions like Monero does, however it does not mask the users, the senders, or the transactions. Dash uses the Mastercode (MN) model where the users need 1,000 DASH to host an MN, which means individual nodes that provides the data mixing service are vulnerable to Sybil attacks, which is the forging of identities on a peer network.
A third and interesting cryptocurrency that is mimicking Monero is a branch of Monero itself. It is called ‘MoneroV’ and it is a hard fork of Monero. It retains the anonymity system and decentralized peer network, but what sets it apart from Monero is that it comes with its own tokens, offers lower transaction costs, and it aims to improve the difficulties pertaining to the capability ranges of Monero due to the system having an inflated blockchain.
The shortcomings MoneroV aspires to improve include:
- The infinite supply of cryptocoins.
- The high transaction costs.
- The centralization of the decision-making process that may lead to the delay of implementing new features, or worse, no implementations at all.
- The increasing hash rate due to a bulk of the usage being associated with automated miners, like botnets, thus hindering any genuine miners.
With all that being said, it should be noted that these are predominantly allegations and claims put out by MoneroV. Monero has denied a good amount of these claims against their system and has stated that MoneroV poses a threat to ‘key image reuse’, which is a vital part of the Monero network. It assists in the confirmation of whether or not an output has been spent.
Having elucidated Monero enough to the point that – to some – it may come across as a more favourable system than Bitcoin, you may be wondering, “How can there possibly be a downside to this type of cryptocurrency? My address is anonymous, it guarantees a sense of security, what are the flaws of this system?” Well, like most cryptocurrencies (and other operations for that matter), there are several shortcomings to Monero.
Right off the bat, there is a disadvantage to the very element that Monero boasts about; that being its intentional inability to trace addresses and identities. This component can easily be taken advantage of and used at questionable markets that can be found on the ‘dark web’, including but not limited to drugs and gambling. The dark web is a platform that consists of online content that is not catalogued on conventional search engines. It is the location of anonymous message boards, markets for distributing drugs, and exchanges for private data.
Sketchy market websites such as Alphabay and Oasis have already seen an increase in Monero use. To view these sites, among others, you would need a specific web browser such as Tor, which gives users the ability to browse the web anonymously
Likewise, malicious software has already been infecting computers in order to mine for Monero and send the findings to North Korea.
Other notable drawbacks pertaining to Monero are:
- Development difficulty: Incorporating multi-coin wallets and other integrations that have made Monero use more widespread has resulted in a slower system.
- Mining centralization: While no longer a serious issue, this still poses a potential threat. A large portion of Monero mining used to be dominated by four pools who held roughly 20%.
- Transaction sizes: Monero transactions are much larger compared to Bitcoin, meaning it requires more data and induces a blockchain that grows rapidly every day. However, this has since been on the path to remedy since October of 2018 when Monero implemented ‘bulletproofs’ (a process that reduces the size and cost and transactions).
Just as there are drawbacks to Monero, so too are there numerous capabilities that outnumber the negative. In fact, it would be quite unfair to place so much emphasis on its shortcomings without balancing them out with what Monero has accomplished since its initial launch.
- Thanks to the aforementioned implemented bulletproofs, Monero transactions fees have been reduced by 97%, dropping from $0.60 to $0.02.
- You can now pay an Overstock with Monero. Because of this, the system has adopted more mainstream credibility.
- Monero hardware wallet has been released. This was a project organized and created to be a funding tool in the Monero Forum Funding System (FFS) community.
Monero is a system of cryptocurrency that walks the fine line between being unlike any other and being very similar to others. On the one hand, its reason for being can be drawn back to Bitcoin – what cryptocurrency isn’t in some way tied to Bitcoin? – and its most fundamental elements can be compared to that of other systems (it functions on a peer network, it contains a ledger, users possess ‘keys’, etc.). On the other hand, the fact that it is being touted as a successful cryptocurrency and many are finding more positives than negatives about its operation can all be connected to just how unique it is.
As we have previously explored in great detail, other systems are copying Monero’s signature ‘anonymity’ structure. This is because it is such a revolutionary concept and they are aware of the benefits that could come to not just the users, but also the system itself. With that said, their way of implementing it into their digital system has evidently backfired, leading to multiple drawbacks. But this proves that there is a sense of delicacy behind what Monero provides.
Monero has, without a doubt, its fair share of shortcomings as well. That is to be expected, especially when you have a system that runs on anonymous transactions that can be taken advantage of when fallen into the wrong hands. Would it be a courteous gesture to ignore the flaws out of a desire to shed more light onto it so that it could be given the attention it deserves? Of course not. That would be dishonest for both parties: the consumers and the creators. The latter must hear of and understand the drawbacks so that the former can be given a high-grade product.
Overall, Monero – in spite of its infancy – has made great strides in working its way up the ranks regarding the measurement of market capitalization in cryptocurrency. At the time of this writing, it at the #13 spot. Indeed it has a long way to go if it wants to outrank the likes of Litecoin and Bitcoin Cash, but it is making progress in its development and budding popularity, and it is a contender to becoming just as prominent as the more well-known currencies.