History of Monero
Bytecoin is the first cryptocurrency that was written using a technology called CryptoNote. In 2013, the CryptoNote white paper, authored by developer Nicolas van Saberhagen drew a lot of attention from renowned Bitcoin developers Gregory Maxwell and Andrew Poelstra who authored a paper on the implications of CryptoNote on cryptocurrencies.
Although Bytecoin was a good effort at improving privacy in cryptocurrencies, it is said that the developers had tampered with its supply. When it was launched, it turned out that 80% of the coins that would ever be mined were already in existence.
This led to the development of a fork of the Bytecoin blockchain by a group of seven developers. Five of the seven developers have chosen to keep their identities secret. The other two developers are Riccardo “Fluffypony” Spagni (the main developer) and David Latapie. The new cryptocurrency would be called Bitmonero but was eventually shortened to simply Monero which means “coin” in Esperanto.
While most existing cryptocurrencies, including Bitcoin and Ethereum, have transparent blockchains, meaning anyone can trace the cryptocurrencies held in a particular address and link them to real-world identities, Monero uses cryptography to protect this information.
What is Monero?
Monero is an open-source, private, untraceable, secure, fungible, and decentralized cryptocurrency that continues to develop with goals of privacy and security first, ease of use and efficiency second.
Open-source means that technology and software is built, tested and improved through user collaboration. According to Monero, over 500 developers have contributed to the project, with 30 of them marked as part of the ‘core’ group. Monero is primarily written in C++. As it is a decentralized project, anyone is welcome to add or make changes to existing code. Decentralized means that there is no need to trust anyone as the project runs on several nodes.
While most cryptocurrencies like Bitcoin allow for the public viewing of all transactions on the respective cryptocurrency blockchain, Monero has a completely anonymous blockchain. The sender, receiver and the amount of Monero transferred cannot be viewed by anyone. Monero uses special techniques like ring signature, stealth addresses and Ring Confidential Transactions (RingCT) which makes it private and untraceable. The privacy feature of Monero is always on, unlike the selectively transparent cryptocurrencies like Zcash.
Since Bitcoin transactions can be publicly viewed, it is possible to track Bitcoins in different wallet addresses and find out more about the real identities. The transaction history of each Bitcoin is recorded on the blockchain, and people might not accept payment in Bitcoins if it is assumed that those Bitcoins were used for some illegal activity. Thus, Bitcoin is not as fungible as we think it is. The source of Monero, on the other hand, cannot be traced and hence all Monero coins are the same. This makes it more fungible than Bitcoin and many other cryptocurrencies.
As of Jun 23, 2020, Monero had a market cap of $1.16 billion with a supply of 17.6 million XMR and a per-token value of $66.05. The all-time high was $496 on 01/07/2018 and all-time low was $0.213 on 01/15/2015
Why is it valued?
Privacy and anonymity is the USP for Monero. Monero relies on censorship-resistant transactions that aim to provide fast, inexpensive payments to and from anywhere in the world.
Under Monero’s software rules, the reward for new blocks will never drop to zero. Block rewards are scheduled to be fixed at 0.6 XMR per block after May 2022. At that time, roughly 18.4 million XMR are expected to have been issued.
The supply of Monero consists of two curves namely – the main curve where approximately 18.4 million XMR will be available by the end of May 2022 and the tail curve where 0.6 XMR will be supplied as a reward per 2-minute blocks. This leads to a <1% inflation that is decreasing over time.
Because the supply of Monero is known and users can prove they have ownership over their coins, Monero is able to serve as a form of value in a way similar to that of Bitcoin. Since supply will continue to grow, Monero is not recommended to be used as a savings mechanism.
How does it work?
The creation of new Monero coins is completed via the mining process where the node that mines the new block gets a reward for recording the blockchain transactions. This reward keeps decreasing with time but will be fixed at 0.6 XMR post May 2022, maintaining a perpetual decaying inflation rate. The time taken to mine a block takes ~2 minutes. Mining in Monero is a little different from mining in many other cryptocurrencies.
You do not need any special hardware to act as a node on the Monero blockchain. Mining can be done with a laptop (CPU) or graphics card (GPU), lower-cost forms of hardware that are more widely available. Monero uses a Proof of Work algorithm that was designed to make sure that mining is open to different parties, not only large mining pools that solely focus on mining coins using expensive hardware. This is one of the main advantages of mining Monero.
A new block in the Monero blockchain is created every ~2 minutes. The blocks of the Monero blockchain are different from the Bitcoin blockchain as there is no maximum block size, but instead a block reward penalty and a dynamic block size, to ensure dynamic scalability.
Dynamic Block Size
Interestingly, Monero does not have a hard block size limit. The block size cap function of Monero takes the past block sizes and gives a greater block size containing more transactions when network activity picks up. Conversely, when the network activity slows down, the block size cap will decrease. Thus, the block size can increase or decrease over time based on demand.
Block Reward Penalty
The median size of the last 100 blocks on the Monero blockchain are taken. If the new block that the miners are working on exceeds the median of the previous hundred blocks, the block reward is reduced. This discourages spam transactions as miners will not mine blocks if the penalty makes mining unprofitable for them. Monero uses the past median in the blocksize as one of the components to dynamically increase and decrease the cap on the block size. Thus providing a room for scaling over time (See scalability).
Why is the supply not fixed?
Miners need an incentive to mine. The dynamic block size ensures that there is competition among miners. This causes the transaction fees to decrease. Nodes will function and mining will take place only if it is profitable at the end of the day. The security of the blockchain will be compromised if more miners start dropping out. To avoid this, the tail curve ensures that a dynamic block size and fee market can develop where the miner gets a reward of 0.6 XMR for every block he mines.
Scalability means how well the network can grow in relation to demand. Most cryptocurrencies we know today have blocks that are limited in size.
For example, Bitcoin has had a 1 MB block size limit with each block getting mined every 10 minutes. This means that, when there are too many transactions in Bitcoins, the blockchain gets filled with transaction data. Those transactions that can’t fit into a block must wait for a miner to include them in a new block. This is what happened in the Spring of 2017 to the Bitcoin blockchain. Transactions in Bitcoin increased to such large numbers that some transactions were actually requiring a $30+ fee just to be validated.
As mentioned earlier, the size of Monero blocks that contain transactions is flexible and can accommodate many transactions as demand changes. While this does allow for more transaction data in each block, this also means that a spammer may try to fill the blockchain with transactions. This would make huge blocks. The Block Reward Penalty takes care of this situation and prevents the blockchain from getting attacked. This allows for scaling overtime to meet changes in transaction volume.
Given below are a few key features that will help in understanding the technicalities of Monero.
Monero’s blockchain is intentionally configured to be opaque. This is done to keep the identity of senders and recipients, and the amount of every transaction – anonymous by disguising the addresses used by participants. This is possible because Monero works on a protocol that attempts to shield the participant’s identity using pseudo name addresses. These pseudo names are randomly generated combinations of alphabets and numbers.
Mining – Egalitarian process
Mining in Monero is an egalitarian process, meaning all people are equal and deserve equal opportunities. The Proof of Work algorithm in Monero has been constructed in such a way that makes it easy to mine Monero on normal computers and makes it more difficult and costly for someone to purchase a large amount of mining power. Monero uses RandomX, an ASIC-resistant and CPU-friendly Proof of Work algorithm created by Monero community members, designed to make the use of mining-specific hardware unfeasible. This makes Monero even more decentralized than Bitcoin and many other cryptocurrencies.
In fact, Monero continues updating its blockchain protocol to be ASIC resistant, much to the chagrin of ASIC rig manufacturers like Bitmain. It hard forked in both 2017 and 2018 in its war on ASICs. Initially, the ASIC-resistant feature of the network owed itself to a modified version of CryptoNight that was frequently adjusted to prevent ASIC mining. However, since December 2019, RandomX has replaced CryptoNight. Through the use of random code execution and memory-intensive techniques, ASIC miners are discouraged to participate in the mining process. In addition, GPUs have also been penalized since the network upgrade.
Bitcoin and Ethereum use one pair of keys – a public key and a private key. Monero uses two pairs of keys. A public view key, a private view key, and both public and private spend key.
When you create a Monero account you will have a private view key, a private spend key, and a public address. A public view key is needed only for a stealth public address. You can check your funds using your private view key. A public spend key is needed to verify the signature on a transaction and a private spend key is used to create outgoing transactions.
You can have a watch-only wallet that only uses the view key. This feature can be used for accounting or auditing purposes. You can also let someone else view your account details by sharing your private view key. Monero is private by default and optionally semi-transparent
When using the Monero Wallet all this is handled by the software. Sending Monero is as easy as entering the recipient’s address, the amount, and pressing Send. To receive Monero, simply provide the sender your public address. The Monero community has built wallets for pretty much every Operating System. In addition, there are many third-party wallets as well.
Monero is known for its privacy features. Given below is a simple explanation of how Monero achieves it.
Monero is a Proof of Work cryptocurrency, which is currently based on the RandomX algorithm (after the 2019 upgrade), relies on different privacy features such as Ring Signature, Stealth Addresses, and Ring Confidential Transactions (RingCT). Monero’s software is programmed to update every six months, a regular schedule that has helped it more aggressively add new features without much controversy.
Ring signature enables a sending participant to conceal his identity from other participants in a group. These are anonymous digital signatures from one member of the group, but they don’t reveal which member signed the transaction.
This is done by using a combination of a sender’s account keys and clubbing it with public keys on the blockchain, which makes it unique as well as private as it is not possible to decode the signature to find out who the actual sender is. This gets even more interesting as every output also has multiple false outputs to trick the system. Thus, Monero uses ring signatures to keep transactions secured and slimmed down to only necessary information.
Over the years, Monero has experimented with altering the number of signatures involved in this mixing process. There was a time when participants could choose the desired number of decoy signatures in the ring signature. Greater would be the ring size, greater would be the transaction fee, greater would be the security and anonymity. As of 2019, however, a default Monero transaction is now set, adding 10 signatures to every transaction group and mixing 11 signatures in total i.e 10 decoys and 1 real signature.
Stealth addresses allow and require the sender to create random one-time addresses for every transaction on behalf of the recipient. In spite of publishing a single address, it cannot be linked back to either the recipient’s published address or any other transactions’ addresses. By using stealth addresses, only the sender and receiver can determine where a payment was sent.
Ring Confidential Transactions (RingCT)
After achieving success in hiding the identities of senders and receivers, the RingCT functionality was implemented in block number 1,220,516 in January 2017, and has been made mandatory for all transactions executed on the Monero network. It enables hiding the transaction amount.
RingCT introduces an improved version of ring signatures called “A Multi-layered Linkable Spontaneous Anonymous Group signature”, which allows for hidden amounts, origins, and destinations of transactions with reasonable efficiency. Introduced in 2017, Ring Confidential Transactions hide the amount users exchange in transactions recorded on the blockchain.
Ring Confidential Transactions follow a two-step process to achieve its goal.
- The amount sent/received is encrypted with a key derived from the recipient’s address. This encrypted amount can only be decrypted by the recipient.
- While it is impossible to verify the transaction amount, the exact inputs and outputs can be verified by the respective parties. RingCT helps us in achieving the same.
- It is the privacy feature of Monero that makes it number 15 amongst the top cryptocurrencies in the world in terms of market capitalization.
- The dynamic scalability of the Monero blockchain also means that transaction fees will not be volatile and will not be huge as demand gets higher.
- Wallets that support Monero give us four different keys. The private view key can be supplied to the tax authority or for audit purposes. This makes it less likely that regulators will try to ban Monero.
- The supply of Monero will never be zero. This will always incentivize miners to be a part of the network. This improves the security of the network as well.
Criticism surrounding Monero
- While Monero has been hailed for its privacy feature, its non-traceability and privacy features might lead to the funding of terrorism or expenditures being made for illegal activities. Markets on the dark web, like AlphaBay and Oasis, have seen an increased use of Monero.
- There are not many digital currency wallets compatible for Monero because of its complexity. To store Monero in a way that is properly secure is much tougher than most of the other cryptocurrencies. This might be why it has not been more widely accepted by the wider community.
- Despite being ASIC resistant, Monero might not be as egalitarian as we thought it would be. There is still a large degree of centralization of miners on Monero. Roughly 43% of the hashrate is controlled by just three mining pools.
What do people have to say about Monero
- “As cryptocurrencies become more popular, it’s important that my fans have choices when it comes to how they buy my songs and merchandise. Given Monero is one of the safest, most secure, and most private cryptocurrencies, it’s one of the best options for my fans this holiday season.” – G-Eazy (Rapper)
- “I am inundated by people asking me for recommendations on cryptocurrencies. If you would use your heads you would figure out that the privacy coins (anonymous transactions) will have the greatest future. Coins like Monero (XMR), Verge (XVG), or Zcash (ZEC) cannot lose. Fluffypony” — John McAfee (@officialmcafee)
- The Blue Mockingbird malware gang has infected more than 1,000 business systems with Monero mining malware since December 2019. This malware attacks servers running ASP.NET applications and exploits a weakness of the system to install a web shell on the attacked computer to obtain administrator-level access to modify the server settings. The cybercriminals then install the XMRRig application to take advantage of the resources of the infected machines. Most of the infected computers belong to large companies.
In 2019, several reports published by the cybersecurity companies Symantec and BlackBerry Cylance warned about the injection of the XMRRig app into computers through music files.
- Sodinokibi (also known as Revil or Sodin) is a ransomware-type program created by cybercriminals. They use it to encrypt files stored on victims’ computers and prevent people from accessing the files until they have paid a ransom. This ransomware places ransom messages in folders that contain encrypted files. The name of the text file depends on the extension added to the encrypted file. For example, if the extension is “.686l0tek69” (and the encrypted file is renamed from, for example, “1.jpg” to “1.jpg.686l0tek69”), the ransom message filename will be called “686l0tek69-HOW-TO-DECRYPT.txt”. Sodinokibi also changes the wallpaper.
According to an April 11 report by cybersecurity news outlet BleepingComputer, using Monero will make it harder for law enforcement to track ransom payments to the hackers behind Sodinokibi. The ransomware gang has decided to switch from Bitcoin to Monero to protect the hackers’ identities.
To conclude, it is the privacy and security feature of Monero that has made it the 15th largest cryptocurrency in the world (as of June 2020 on CoinMarketCap).
With ever-increasing intrusion into our private lives by firms and governments, privacy and data security has become an even bigger concern. But if there is no check on people then it may also lead to a rise in criminal activities. Regardless of their lack of use on the darknet, a regulative crackdown on privacy coins threatens to unstick anonymous cryptocurrencies. In June 2019, the Financial Action Task Force installed an initiative dubbed the travel rule where all firms facilitating crypto transfers above $1,000 to disclose customer information.
The rule came into being as a way to combat terrorist financing and money laundering via cryptocurrencies. However, skeptics perceived the policy as a direct impediment to financial anonymity. Many privacy coins have suffered losses as a consequence of this. Dash, for example, cites a 76% retrace after its OKEx delisting, and Monero took a 59% hit from a peak of $111 in June following a booting from both ByBit and OKEx. Monero has got a lot of features which will do good to the society as long as it is not regulated or banned by countries.