Monero is a cryptocurrency with a huge emphasis on privacy, that has seen it be championed by many in the crypto world, but also adopted for illicit uses such as transactions for illegal goods on the dark web.
PRIVACY
With Bitcoin, users’ transactions and wealth can be observed on the blockchain which functions as a public ledger. Monero obfuscates its public ledger, so that anyone can send and receive Monero, but the source of funds, the amount and the destination cannot be uncovered by outside sources. By virtue of this, no one can tell how much Monero anyone else is holding.
This is an important advantage over other cryptocurrencies in terms of privacy, useful (as one of many examples) for businesses wanting to keep their transactions confidential from competitors. But, it is clear that this privacy opens up the potential of Monero’s use for illegal activities, which may limit its global adoption if it becomes more heavily regulated in the future.
TECHNOLOGY
Monero achieves this by using ring signatures, to obscure the sender’s address. A signature is used in cryptocurrencies to verify transactions, and is what links a transaction to the buyer, or sender. Monero’s ring signatures are composed of the actual signer (the sender) and a group of non-signers (other Monero users). From an outside perspective, the signatures that make up the ring signature are all equally likely to belong to the user making the transaction.
To hide the receiver’s end, a stealth address is generated that is used once. The sender transfers their funds to the stealth address, which then transfers those funds to the receiver’s actual address.
The amount being sent is obscured by Ring CT technology, which essentially reveals the minimum amount of information about the funds needed to allow the network to verify it and the participants in the transaction to see the amount of Monero being transferred.
Monero is also decentralised, with a worldwide network of computers- miners- verifying transactions and being rewarded with a small amount of the coin. This is the Proof of Work mechanism (explained here), similar to how Bitcoin is mined. However, the Bitcoin mining algorithm runs much faster on custom built mining computers, whereas the Monero algorithm was designed specifically so it could be successfully run on regular computers. While Bitcoin mining has become relatively concentrated in countries with cheaper electricity, using mining pools that control a majority of the Bitcoins being mined, Monero hopes its algorithm will allow it to stay decentralised, and its mining global.
FUNGIBILITY
Monero also emphasises the fungibility of its coins. Fungibility is the property of a good or currency where each individual unit is always equal to another individual unit. Think gold, where 1kg of gold is interchangeable with any other 1kg of gold. Whereas any BTC can be traced, and therefore rejected in transactions (perhaps if it were used for illegal transactions in the past), Monero’s privacy inherently means each unit is completely fungible, preventing any blacklisting by a vendor or an exchange due to its role in past transactions.
VERDICT
Monero’s privacy is simultaneously its greatest aspect and biggest obstacle. The technology used and its decentralised nature may be poised to revolutionise global monetary systems, given time. Monero is quite possibly the closest digital currency to actual physical cash, and like cash, is open to use in illegal activities. For this reason, as Monero grows it may well be clamped down on by governments and regulatory bodies. Monero is decentralised, so should be impossible to close down, but if laws are introduced preventing the transfer of fiat into Monero through large exchanges, its value would surely depreciate quickly and its network hugely diminish.
Whitepaper and other interesting documents: https://ww.getmonero.org/resources/research-lab/
