Monero is one of the oldest cryptocurrencies in the privacy coin category. Monero has held its status strongly against new competitors in recent years. It is still the biggest and the best-known privacy coin in the market. But what is Monero? How does it differ from Bitcoin? Is it only used by criminals? This is the beginner’s guide to Monero.
Monero is the king of privacy coins
Monero is the biggest privacy coin in terms of market value. Privacy is a sub-category of cryptocurrencies and it includes also coins such as Zcash, PIVX and Verge.
Monero can be found from the cryptocurrency prices list with a code XMR. It’s been one of the biggest cryptocurrencies for years, even if Monero has lost a few positions lately.
XMR was the 8th biggest coin two years ago and 10th biggest coin one year ago. Currently, it’s listed 14th, when we look at the market cap.
Monero has lost positions to exchange tokens like LEO and Binance Coin. Platform tokens Tron and Stellar Lumens have also grown past it. However, Monero is still far more valuable than any other privacy coin.
There are also two other Monero versions in the market: Monero Classic and Monero V. These coins were born in the hard fork of spring 2018. Monero blockchain was split into several branches back then. All other Monero versions have been basically dead for some time.
Next, let’s go through the history of Monero. When was it born and what is the purpose of privacy coins?
Monero is a decentralized project
Monero is a different project compared to almost every other cryptocurrency. It is run by a decentralized team, which makes it like Bitcoin. This is one reason why many Bitcoin OGs like Monero of all altcoins.
The history of Monero goes back over five years. It started in April 2014, when a user ‘thankful_for_today’ made an announcement of a cryptocurrency called BitMonero. This was a fork of Bytecoin.
Technically, BitMonero was a clone or “copy-paste” of the Bytecoin code. BitMonero has its own blockchain and it is not a forked branch of Bytecoin (like Bitcoin Cash to Bitcoin). The name BitMonero came from Bit + Monero – the latter word meaning money in Esperanto.
BitMonero didn’t gain much popularity and thankful_for_today departed from the project early on. After this, the Bitcointalk community took over. It was now when the name was changed to just Monero. Users ‘Johnny Mnemonic’ and ‘Tacotime’ had a pivotal role in the beginning.
As mentioned earlier, Monero is based on Bytecoin, which is the first privacy coin in the market. Bytecoin was founded already in 2012 (this is debated, though) and it based on open source technology called CryptoNote. The person behind the CryptoNote white paper is also just a nickname (‘Nicolas van Saberhagen’).
Monero is still a decentralized, open-source project. A lot of people associate Monero to Riccardo Spagni a.k.a. Fluffypony.
Many newbies think Spagni is the founder or CEO of Monero, but that is not the case. Spagni often calls himself “Chief Entertaining Officer”. He is just one of the persons in the project, who has taken the task to speak in public about Monero.
Monero has no CEO or known founder. The development isn’t run by a specific tech company either. This makes Monero different from almost every crypto project there is. Monero is a decentralized project where many of the team members are still behind nicknames.
Monero is linked to criminality and negative news more than most cryptocurrencies. This is due to the fact that XMR is a popular choice for criminals in many ransom cases. Recently, criminals kidnapped a wife of a Norwegian billionaire and demanded 10 million USD in Monero.
Many remember also WannaCry, which was ransomware causing problems in 2017. It locked the files of contaminated computers and demanded Monero as a ransom to unlock it.
There are many legal uses for cryptocurrencies as well. Let’s dive into that next.
What is Monero? A privacy coin hiding the blockchain data
In order to understand privacy coins, one must first understand the concept of a public blockchain. Bitcoin’s blockchain is a public ledger, which is available for anyone at any time.
Click this link to check details of any block in the Bitcoin blockchain. You can view any transaction and see how many Bitcoins have been moved from address A to B. Next, you can also click any of the addresses and view its transaction history.
The sender and receiver are protected by public-key cryptography. Even if you can see an address, you don’t know whose address it is.
However, there are situations where an address can be linked to a person. For example, if your friend sends you Bitcoins, you can see the address it was sent from. Or if you see a Bitcoin address anywhere online, you can just copy-paste it to a block explorer and view the history immediately.
This is the reason why Bitcoin (and other public blockchains) are not suited for all uses. Not just criminals, but normal people want to keep their transactions private. Would you like to post your bank statements online?
Another significant point comes from transaction history. When you buy or just receive a coin directly from another user peer-to-peer, you receive a token with history data included. This coin might have been used to buy drugs by its previous owners.
This means that Bitcoin lacks fungibility. A freshly minted Bitcoin is not technically identical with a Bitcoin that has been used in transactions.
When you look at privacy from this point of view, you’ll notice it’s quite valuable for any normal person. Not just for criminals. It becomes even more valuable when we talk about commercial use of blockchains.
One can make rich lists and collect lots of data from the Bitcoin blockchain. Nowadays there are quite sophisticated AI algorithms, which can connect millions of transactions to real people.
Monero is solving this problem. Next, we’ll see how it is done in practice.
Monero beginner’s guide – the view key
Bitcoin transactions are made from one address to another, meaning from one public key to another. These addresses (keys) are visible in the Bitcoin blockchain, as explained earlier. The private key is only known by the wallet owner.
Monero is solving the privacy issue by using three different keys: a private key, a public key and a view key. The private and public key work just like they do in the Bitcoin blockchain.
View key is by default known only by the wallet owner. It can be given to a third party if the address needs to be audited by an authority.
Monero transaction is done just like Bitcoin transaction if we look at it from the end user’s perspective. Your coins are being sent from your address to the receiving address.
The video below shows how the Monero wallet works. Sending or receiving Monero isn’t any more complicated than sending or receiving Bitcoin. The difference is that the heavy encryption requires the client to be up-to-date with the whole blockchain each time it’s used. This means the blockchain info must be downloaded before each use, which can take some time.
In practice, the following happens. Your XMR coins are not sent to the address visible in the wallet. The real one is created by using the real address (= public key), view key and a hash. It is called a stealth address.
These are basically one-time addresses. Only the recipient’s private key “knows” it can spend funds from this stealth address. This method helps to keep the receiver’s privacy intact. Nobody can view the transaction history of a stealth address, because there is none.
Ring Signature hides the receiver
The Monero network is not only protecting the receiver, but it also hides the sender. This is done using Ring Signature technology, where the sender address is blended in with many decoy addresses. See the image below (source: Monero Youtube).
After this, each transaction is also split into smaller parts. If you send 12.5 XMR, you might be sending in reality 10 XMR, 2.0 XMR and 0.5 XMR, meaning three different transactions. The downside of this technology used to be that the amounts were visible. This was the case a couple of years ago, but not any longer.
Monero made an updated called Ring Signature Confidential Transactions (shorter: Ring CT) in January 2017. This enhanced Monero’s privacy features by making transaction amounts invisible. It also improved the privacy of the Ring Signature technology, because now the Monero wallet can pick decoy addresses among any addresses available.
So, Monero is keeping the sender and receiver private and it also hides the transaction amount. These features make it a unique cryptocurrency and 100% private by default. There are some cryptocurrencies, which have optional privacy functions. In Monero, all transactions are always private.
In the future, Monero will also hide the user IP addresses. This encryption will be done using a component called Kovri. Read this article, if you want to learn more. Kovri is utilising Garlic routing technology, which is an advanced version of Onion routing. Some readers might recognize this from The Onion Routing (TOR) network, which is its most known implementation.
The timetable for Kovri integration can be found from the Monero roadmap.
Monero vs competition
Monero is currently the number one privacy coin, but it also has significant competition. The best-known option is Zcash.
Zcash gets its privacy features from zk-SNARKs technology, which some analysts prefer over Monero’s solution. Zcash has also privacy features as optional, meaning a default transaction is done publicly.
Zcash project is run by a tech company, which also takes a 10% miner for the first four years after the blockchain was launched.
See the video below for some privacy coin comparisons.
Dash is another well-known cryptocurrency with privacy features. The PrivateSend option is done by implementing CoinJoin technology, which is all about mixing different addresses. Dash MasterNodes play also a significant part in this. You can read more about PrivateSend vs Monero from this article.
In practice, Dash is competing with Litecoin and Bitcoin Cash. The PrivateSend is just an additional feature and not that much used.
PIVX, Grin and Private Chain are other less-known privacy coins. Each privacy coin handles the privacy part a bit different way.
There are also differences when it comes to mining. Monero has been built ASIC resistant from the beginning and its mining algorithm has been updated often. Equihash used by Zcash and X11 used by Dash can be mined with ASIC devices.
You’ll find a lot of articles from Google and Youtube when searching Monero vs Zcash, Monero vs Dash etc.
Let’s go through some of Monero’s basic features.
Monero is a mineable cryptocurrency like Bitcoin. The consensus algorithm used is, therefore, Proof of Work, which is also used by Litecoin, Bitcoin Cash, Dash and many other currencies.
The mining algorithm used by Monero is called CryptoNight. This algorithm dictates the processor type one must use to mine the coin.
As mentioned earlier, Monero has been built ASIC-resistant from the beginning. This has been done by releasing new versions of the CryptoNight algorithm. The latest version, CryptoNightR, was published in the spring of 2019.
Bitcoin mining has been dominated by ASIC machines for many, many years. These machines are expensive to buy and use, which centralizes the mining for big mining farms.
Monero blockchain has new blocks every two minutes. New XMR coins are born when a block is mined, just like new Bitcoins are mined as well. Currently, the mining reward is three (3) XMR per block. It is slowly going down each year.
There is a theoretical limit in the Monero supply at 18.4 million. In practice, mining fees will never go to zero like they do with Bitcoin. The floor is set to 0.3 XMR per block. This is reached in 2022 and will result in small yearly inflation.
Monero as an investment
The future of Monero looks bright at the moment. Some of the biggest names in the crypto niche believe strongly in Monero. Privacy is more and more valuable to people each year, which should increase the demand for privacy coins as well.
Monero’s features are needed by normal people and companies alike. This is not just cryptocurrency used by criminals. As mentioned earlier, privacy is a desired feature in many use cases.
Bitcoin’s anonymity is enough for many people…for now. In the future, they might want real privacy.
Privacy brings some problems too, which potential investors should be aware of. These problems come from regulation.
In September 2019, Korean exchange OKEx removed all privacy coins from its offering. Similar moves have been done earlier by Coinbase UK, CEX.io and by Japanese exchanges. This problem is not just about Monero, but all privacy coins.
— The Block (@TheBlock__) September 16, 2019
According to the official statement, privacy coins were breaking the rules of the FATF (Financial Action Task Forcen). These regulations force exchanges to keep track of each customer and their transactions. If the receiver is unknown, these rules can’t be followed.
It is unlikely that regulations could kill privacy coins entirely. In fact, such bans and blocks only underline why privacy is important.
One must consider the long-term price effects, though. If privacy coins are removed from the biggest exchanges, they are going to have fewer buyers as well.
The best place to buy Monero is currently Binance, which is the leading cryptocurrency exchange. You can buy XMR with Bitcoins, but not yet with EUR or USD.
If you buy Monero from an exchange, it might be smart to move them to safer storage. There is a secure desktop wallet available for Monero. You can download it from getmonero.org/downloads.
We don’t recommend Monero for beginners. Updating the wallet software and setting up the Ledger functionality requires some IT skills.
You’d follow these social media accounts to keep up with Monero developments. The official Twitter handle is @monero and Riccardo Spagni can be found at @fluffypony. The official Reddit page is reddit.com/r/monero and the website can be reached at getmonero.org.
Monero is quite old for a cryptocurrency, which means there’s lots of information available online. If you prefer Youtube, search for Riccardo Spagni interviews. Below is one by Ivan On Tech channel.
Article image: Wikipedia