What is Monero? A Beginner’s Guide
By: Ofir Beigel | Last updated: 1/21/21
Monero is a private decentralized cryptocurrency that uses XMR as its coin. In this post I’ll explain what Monero is, how it works, what the difference is between privacy and anonymity, and give you some general information about XMR.
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What is Monero Summary
Monero is a private decentralized cryptocurrency that obfuscates the 3 parts of any transaction – the sender is obfuscated through ring signatures, the amount sent is obfuscated through RingCT and the receiver is obfuscated through stealth addresses. Monero uses XMR as its currency.
That’s it! If you want a more detailed explanation about Monero, keep on reading. Here’s what I’ll cover:
First, let’s clarify the difference between privacy and anonymity. Privacy means that you don’t want others to know what you’re doing. While anonymity means that you don’t mind that people know what you’re doing, you just don’t want them to know that you’re the one doing it.
For example, privacy is when you lock the door to a bathroom because you want to keep what’s going on in there….well…private. Anonymity is when you post data that can’t be linked back to you on the web, in order to bring something to the public’s attention.
If you look at Bitcoin, it’s certainly not private. The Bitcoin blockchain is completely public and all transactions can be viewed by anyone on the web. If you want to keep your privacy in Bitcoin you’ll have to use transaction mixers, VPNs and a variety of other methods.
Bitcoin is also not completely anonymous. On the one hand, the blockchain shows how many Bitcoins were sent from which address and when. On the other, without any additional information it’s impossible to connect a Bitcoin address to a real life identity (also known as an IRL). So Bitcoin is pseudonymous.
Monero, meaning “coin” in esperanto, started out in 2014 as a fork of Bytecoin, the first private cryptocurrency to be created. The Monero protocol obfuscates the 3 parts of any cryptocurrency transaction – the sender, the receiver and the amount sent. Let’s see how this is done for each part.
Obfuscating the sender
To obfuscate the sender’s identity, when he or she signs a Monero transaction, their signature is combined with past signatures from the Monero blockchain. These act as decoys and make it impossible for an outside observer to determine who actually sent the transaction.
Obfuscating the amount sent
The amount being sent is obfuscated by ring confidential transactions or RingCT for short. I won’t go into the technical aspect of how RingCT works, but suffice to say that instead of broadcasting the actual amount being sent, the user transmits only a small random looking piece of information. This information is enough to verify that the amount being sent is legit while keeping the actual amount private.
Obfuscating the receiver
Finally, we want to obfuscate the receiver. This is done through the use of stealth addresses. A public Monero address is a 95 character string that starts with a 4. However, when I send funds to that address the funds are actually sent to a different address.
Monero address example:
So for example, if I’m the recipient, funds are sent to a one-time stealth address that is derived from my public address. This creates a separation between my public address and the funds sent to me so no one is able to know my balance.
Only the recipient’s private key “knows” they can spend funds from that one-time stealth address and each time the Monero wallet launches it will scan the blockchain for addresses it can spend in order to know the actual balance.
Obfuscating the sender’s IP
While all of the transaction data may be obfuscated, the sender’s IP address can still be tracked. That’s why there’s one additional feature on Monero’s roadmap: Kovri.
Kovri reroutes your transaction through multiple virtual nodes so that your IP address is also obfuscated. Kovri is not yet integrated with Monero but is in active development.
Transactions on Monero are untraceable and unlinkable, so you can’t tell where they originated from and you can’t connect any two transactions together.
Now, you might be asking yourself who really needs a private coin? Isn’t that stuff only for criminals?
Well, while criminal activity can benefit a lot from a private cryptocurrency, there are more than enough legitimate reasons for privacy as well.
For example, with the amount of data being displayed on blockchains like Bitcoin and Ethereum, it has become easier these days to identify patterns, map real-life identities, connect between addresses and uncover behavioral information about users.
So, if you don’t like companies analyzing your data in order to map out your behavioral or purchasing patterns, you may consider using a private cryptocurrency.
Additionally, since all address balances are completely transparent, you may become subject to attacks if you hold large amounts of Bitcoin.
Another thing to consider is market prediction. If I know a certain address belongs to an exchange, I can track it for incoming transactions. If I see a large amount coming in, I can assume that a big sell order may be on its way and short the currency for profit. In a truly perfect market, such loopholes wouldn’t exist.
Finally, we come to the issue of fungibility. Fungibility means that currency units should be completely interchangeable with one another. Simply put, if I have a $20 bill it shouldn’t matter to you where it came from or when it was made. A $20 bill is just a $20 bill, and it’s equivalent to any other $20 bill you can find.
However, in Bitcoin, for example, you can trace each coin back, even as far as to when it was first created as a mining reward which is known as the coinbase transaction. So, if somewhere along the way this Bitcoin was used for illegal activity, you may find some law enforcement agency knocking on your door as part of some investigation they are running.
While this is all theory for now, it could easily happen since Bitcoins are 100% traceable. So you might have different prices for freshly minted Bitcoins as opposed to “used” Bitcoins. For Bitcoin to truly become a currency, it will have to deal with this fungibility issue. On the other hand, A private coin that can’t be traced has complete fungibility.
As you can see, there are numerous use cases for using a privacy coin such as Monero. So what is the difference between Monero and other privacy coins, such as Dash or Zcash?
Well, while other coins like Dash and Zcash offer the option for private transactions, in Monero all transactions are private without exception.
Similar to Bitcoin, XMR is mined through computers that guess the solution to complex math problems, also known as Proof of Work. However, the algorithm used to mine XMR, called RandomX, is completely different from the SHA-256 algorithm used to mine Bitcoin.
RandomX is an ASIC resistant algorithm. This means that you won’t be able to mine more XMR if you have a more powerful specialized computer. This makes XMR still open to mining with your personal computer, something that is completely out of the question with more popular coins like Bitcoin or Ethereum.
Also, unlike Bitcoin which is limited to 21M coins, there’s no limit to how many XMR can be produced. New XMR is issued each time a block is mined, every 2 minutes on average. The actual reward varies and decreases over time. By May 31, 2022, 18.4 million XMR will be in circulation and the reward size will become fixed with 0.6 XMR being distributed with each new block.
Monero is one of the leading decentralized private cryptocurrencies out there today. With a strong development team and a loyal following it seems like it will be quite a challenge to dethrone Monero as the choice for private cryptocurrency transactions.
With increasing pressure from governments and taxation authorities on public blockchains, it seems only natural that as the cryptocurrency space grows Monero will grow with it.
You may still have some questions or comments about Monero. If so, I’d love to hear about it in the comment section below.