Monero and XMR: The Privacy Coin

Monero’s Popular Approach to Privacy

To understand the value proposition of the Monero cryptocurrency, it’s helpful to understand certain aspects of Bitcoin. While every transaction on the Bitcoin blockchain is technically anonymous, the addresses of both sender and receiver, as well as the transaction amount, are permanently visible on Bitcoin’s public ledger. This degree of pseudo-anonymity sets a limitation on privacy, as user identities can potentially be extrapolated using various forms of metadata.

Founded in 2014, Monero (XMR) is a privacy-focused cryptocurrency specifically designed to address Bitcoin’s limitations with regard to privacy and anonymity. Since its inception, the Monero blockchain has grown into a privacy bulwark on the cutting edge of blockchain cryptography. The project has attracted a significant following of privacy proponents and crypto enthusiasts who have popularized its native XMR coin, making Monero the largest privacy-focused cryptocurrency by market capitalization.

The Monero Blockchain’s Proof-of-Work Protocol

Before we dive into the features of XMR, let’s go over some of the technical details that define the Monero protocol. The Monero blockchain was forked from an existing privacy-focused cryptocurrency called Bytecoin — which means its protocol is based on much of the same code — and utilizes a Proof-of-Work (PoW) consensus algorithm. Unlike Bitcoin’s PoW consensus algorithm, which is primarily powered by ASIC mining, Monero’s RandomX PoW algorithm is designed to be optimized for CPU mining. For average, non-institutional miners, CPU mining is generally considered more resource-efficient and accessible than ASIC mining. As a result, Monero’s mining process is arguably more democratized, user-friendly, and environmentally friendly than the system that Bitcoin uses.

The Monero blockchain’s block reward distribution frequency is designed to decay gradually, which makes XMR a deflationary currency — meaning that the creation of new XMR will diminish over time. At the time of writing, Monero’s miners receive 1.21 XMR coins per successfully mined block, and this figure is set to decline steadily until May 2022, at which time approximately 18 million XMR coins will be in circulation. This block reward system incentivizes early mining and network adoption, while still offering miners the block rewards needed to support the network.

Monero’s Privacy Features

While many cryptocurrencies feature built-in privacy features, Monero arguably focuses more on user and transaction privacy than any other leading crypto project. As a result, the Monero team has developed several innovative privacy features not found in other digital currencies.

• Stealth addresses: Each XMR transaction is sent to a randomly generated, single-use transaction address called a stealth address, which has its own unique public key. In other words, each stealth address serves as the destination for a particular transaction output, and the funds in the stealth address can only be viewed and/or spent if the recipient has the proper credentials to match the address’ public key. As a result, stealth addresses allow both the sender and recipient to verify their transaction without divulging any identification information to the rest of the Monero crypto network or any external viewers. This anonymity is a marked departure from most cryptocurrency projects, which typically deploy static, easily traceable wallet addresses when sending and receiving transactions.

• Dual key pair configuration: Monero’s stealth addresses and private transactions are enabled through its dual key pair configuration, which utilizes two sets of public and private keys. The public key pair consists of a public spend key and public view key, and the private key pair consists of a private spend key and private view key. Every Monero transaction is encrypted using a combination of these public and private keys, in terms of how transactions are encrypted, transferred, and received. When you want to send XMR, you use a public view key and public send key to generate a stealth address for the transaction. Every stealth address’ unique public key is derived from the sender’s public key pair. From there, you will need to sign the transaction using their private spend key in order to execute the transaction. Once a transaction has been executed, the recipient can access the transaction details by combining their private view key with the stealth address’ public key. Furthermore, in order for a recipient to spend the funds they received in a transaction, they need to compute a one-time private spend key for that transaction by combining both their private view key and private spend key with the stealth address’ public key. Additionally, Monero users can share their public view key with external parties, which allows them to view that user’s transactions. This feature allows users to choose to be transparent with whomever they want, when they want.

• Ring signatures: Another central component of Monero’s privacy-focused network is the ring signature — a type of digital signature that allows multiple possible transaction senders to merge together to create a unique signature that is used to authorize a transaction. When using a ring signature, only one of the possible senders involved is actually executing a transfer, but external viewers are unable to discern which of the possible senders it is. The privacy provided by ring signatures works because all of the possible signers involved automatically provide an encoded input that is embedded in the ring signature. However, only the actual signer generates an undecipherable, one-time spend key that corresponds to the output being sent from that sender’s wallet. All of these inputs look identical to external viewers, which effectively obfuscates the true origin of the transaction. Ring signatures enable Monero to send ultra-private transactions which are called  Ring Confidential Transactions (RingCTs). RingCTs effectively conceal a sender’s transaction amounts in a way that allows only the recipient of the RingCT transaction output to decode and view the actual amount being transferred. This is a marked departure from pseudo-anonymous blockchain projects, which typically only hide a transaction’s sender and user addresses.

In addition to the Monero blockchain’s robust privacy features, the cryptocurrency is also compatible with Tor, an open-source network and anonymous web browser that facilitates private communications by directing traffic through a decentralized network of volunteer routers as opposed to centralized internet service provider (ISP) servers. This process is more akin to how blockchain nodes work than the internet as experienced by most users. By using Tor instead of a traditional web browser, Monero users can avoid web crawlers and other types of data scrapers that can potentially compromise anonymity.

And while the Monero cryptocurrency already offers an impressive array of privacy features, the Monero team is constantly looking for new ways to improve the project. Recent upgrades to the Monero blockchain include splitting single transactions across multiple addresses and diffusing transactions via a feature called Dandelion++. An improved version of the original Dandelion protocol, Dandelion++ is a network layer anonymity solution that was originally designed to improve Bitcoin’s network privacy.

The technical details of Dandelion++ are fairly complex, but in short Dandelion++ improves upon its predecessor by increasing the amount of information a hacker would need to successfully deanonymize a user or transaction. As a result, Dandelion++ effectively augments the anonymity of Monero’s users and transactions, which are already protected by a formidable set of defenses.

The Debate Over Privacy-Focused Cryptocurrencies

While many cryptocurrency proponents and those with libertarian ideals are in favor of complete online privacy, many others debate the pros and cons of absolute anonymity. This controversy is not abstract, but rather one with broad societal implications, as anonymized online identities have benefitted a wide array of cybercrimes and black-market transactions.

Privacy coin advocates argue that financial privacy for individuals and organizations alike is a fundamental right, and that a lack of privacy has led to a dystopian financial environment rife with censorship, restrictions, and other highly problematic forms of surveillance. However, critics argue that the anonymity offered by new technologies like privacy coins can contribute to a lack of accountability and allow for questionable and/or potentially illegal activities. As a result, some exchanges have declined to list Monero, and others have delisted it after being pressured by regulators. Notwithstanding, XMR remains a popular project and is still available on several exchanges, which account for more than $100 million USD in daily XMR transaction volume.