Monero (XMR) is an open-source cryptocurrency created in April 2014 that focuses on privacy and decentralization that runs on Windows, macOS, Linux, Android, and FreeBSD. Monero uses a public ledger to record transactions while new units are created through a process called mining. Monero aims to improve on existing cryptocurrency design by obscuring sender, recipient and amount of every transaction made as well as making the mining process more egalitarian.
A Step-By-Step Guide To Monero For Beginners
The origins of Monero
Back in July of 2012, Bytecoin, the first real-life implementation of CryptoNote, was launched. CryptoNote is the application layer protocol that fuels various decentralized currencies. While it is similar to the application layer which runs bitcoin in many aspects, there a lot of areas where the two differ from each other.
While bytecoin had promise, people noticed that a lot of shady things were going on and that 80% of the coins were already published. So, it was decided that the bytecoin blockchain will be forked and the new coins in the new chain will be called Bitmonero, which it was eventually renamed Monero meaning “coin” in Esperanto. In this new blockchain, a block will be mined and added every two mins.
Monero is headed by a group of 7 developers of which 5 have chosen to remain anonymous while two have come out openly in public. They are David Latapie and Riccardo Spagni aka “Fluffypony”. The project is open source and crowdfunded.
Special features of Monero
So what is it about Monero that makes it so hot and in-demand. What are the unique properties that the CryptoNote algorithm gives it? Let’s check it out.
Property #1: Your currency is yours
You have complete control over your transactions. You are responsible for your money. Because your identity is private no one will be able to see what you are spending your money on.
Property #2: It is Fungible
Another interesting property that it gains, thanks to its privacy, is that it is truly fungible. What is fungibility? Investopedia defines fungibility as follows:
Fungibility is a good or asset’s interchangeability with other individual goods or assets of the same type.
Property #3: Dynamic Scalability
The Bitcoin scalability issue has been a very hot topic in the crypto circles the past few months. So, to give you all a gist of the situation, Bitcoin was created with a self-imposed 1 Mb block size limit. In its early developments bitcoin didn’t have any block size limit, however, in order to prevent spam transactions, the size limit was enforced.
Monero, on the other hand, has no “pre-set” size limit, but this also means that malicious miners can clog up the system with disproportionately huge blocks. To prevent this from happening, a block reward penalty is built into the system. This is how it works:
Firstly, the median size of the last 100 blocks is taken which is called M100. Now suppose the miners mined a new block and it has a particular size which is called “NBS” aka New Block Size. If NBS > M100, then the block reward gets reduced in quadratic dependency of how much NBS exceeds M100.
This means that if NBS is [10%, 50%, 80%, 100%] greater than M100, the block reward gets reduced by [1%, 25%, 64%, 100%]. Generally, blocks greater than 2*M100 are not allowed, and blocks <= 60kB are always free of any block reward penalties. Property #4: ASIC (Application Specific Integrated Circuit) Resistant Monero is not exactly "ASIC resistant", but the cost of manufacturing ASICs for Monero would be so high that it simply won't be worth it. Why is that the case? The hashing algorithm used in CryptoNote based systems is called "CryptoNight". Cryptonight was created to build a fairer and more decentralized currency system. Property #5: Multiple keys One of the more confusing aspects of Monero is its multiple keys. In bitcoin, ethereum, etc. you just have one public key and one private key. However, in a system like Monero, it is not quite as simple as that. Monero has a public view key and a private view key. That's the general overview of the process. The public view key makes the first part of the Monero Address and the public spend key makes the second part of the Monero address.
Where can I buy Monero?
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How does a transaction in a cryptocurrency work?
Every transaction has two sides to it, the input side and the output side. Suppose Alice needs to send some bitcoins to Bob how will it look like?
In order to make this transaction happen, Alice needs to get bitcoins which she has received from various previous transactions. Remember, as we said before, in bitcoins, each and every coin is accounted for via a transaction history. So Alice can make the outputs of her previous transactions the input of the new transaction. Later on, when we talk about “outputs”, especially in the ring signature section, we mean the outputs of the old transaction which become the inputs of the new transaction.
So, suppose Alice needs to pull bitcoins from the following transactions which we shall name TX(0), TX(1) and TX(2). These three transactions will be added together and that will give you the input transaction which we shall call TX(Input).
The output basically will have a number of bitcoins that Bob will possess post-transaction and any remaining change that is left over, which is then sent back to Alice. This change then becomes her input value for all future transactions.
An ideal Electronic cash should fulfil three requirements:
- It should be electronic.
- It should be decentralized.
- It should be private.
Monero is attempting to fulfil all these 3 criteria. The underlying philosophy behind Monero is complete privacy and opaqueness. The privacy of the sender is maintained by Ring Signatures. The privacy of the recipient is maintained by Confidential Addresses. The privacy of the transaction is maintained by Ring CT aka Ring Confidential Transactions.
Monero Cryptography #1: Ring Signatures
In order to understand what ring signatures are and how they help maintain the sender’s privacy let’s take a hypothetical real-life example. When you are sending someone a check, you need to sign it off with your signature right? However, because of that, anyone who sees your check (and knows what your signature looks like) can tell that you are the person who has sent it.
Now think about this. Suppose, you pick up 4 random people from the streets. And you merge your signatures with these 4 people to create a unique signature. Nobody will be able to find out whether it really is your signature or not. That, in essence, is how ring signature works.
In a ring signature transaction, any of the decoys is as likely of being an output as the actual output because of which any unintended third party (including the miners) won’t be able to know who the sender is. Now, this brings us to a problem. One of the many important roles that miners have is the prevention of “double spending”. Double spending basically means spending the exact same coin on more than one transactions at the same time. This problem is circumnavigated because of miners. In a blockchain, transactions happen only when miners put the transactions in the blocks that they have mined.
So suppose, A were to send 1 bitcoin to B and then he sends the same coin to C, the miners would put in one transaction inside the block and, in the process, overwrite the other one, preventing double spending in the process. But this is possible only when the miners can actually see what the inputs of the transaction actually is and who the sender is. In Monero, this is all hidden and cloaked thanks to the ring signatures. So how do they prevent double spends? The answer lies in more ingenious cryptography.
Every transaction in Monero comes with its own unique key image. (we will see the mathematics behind key image later on). Since the key image is unique for every transaction, the miners can simply check it out and know whether a Monero coin is being double spent or not. So, this is how Monero maintains the privacy of the sender by using ring transactions. Up next, we will see how Monero protects its receiver’s identity by the use of stealth addresses.
Monero Cryptography #2: Stealth Addresses
One of the biggest unique selling points of Monero is transaction unlinkability. Basically, if someone sends you 200 XMR then, nobody should know that that money is coming to your address. So, how does Monero ensure privacy?
This is the computation of the one-time public key (P).
- P = H(rA)G + B
In this equation:
- r = Random scalar chosen by Sender
- A = Recipient’s public view key
- G = Cryptographic constant
- B = Recipient’s public spend key
- H() = The Keccak hashing algorithm used by Monero
The computation of this one-time public key generates a one-time public address called a “stealth address” in the blockchain, intended for the recipient. Now, how is the recipient going to unlock Monero from the random distribution of data? This is where the private spend key comes into play. The private spend key basically helps scan the blockchain for the transaction. When the recipient comes across the transaction, they can calculate a private key which corresponds to the one-time public key and retrieves their Monero. So, person A paid person B without anyone knowing who they are.
Monero Cryptography #3: Ring Confidential Transactions
So, now we have seen how the spender can be kept anonymous and we have seen how the receiver is kept anonymous. But what about the transaction itself? Is there a way to make sure that the transaction amount itself is hidden?
Ring CT was implemented which was based on the research done by Gregory Maxwell. What Ring CT does is simple, it hides the transaction amounts in the blockchain. What this also means is that any transaction inputs don’t need to be broken down into known denominations, a wallet can now pick up ring members from any Ring CT outputs.
Think of what that does to the privacy of the transaction? Since there are so many more options to choose rings from and the value is not even known, it is now impossible to be aware of any particular transaction. These 3 factors work in harmony to create a system where total privacy is afforded. But this was still not enough for the Monero developers. They needed an extra layer of security.
Monero Vs Bitcoin
So, comparisons can obviously not be avoided let’s look at how both these coins stack up.
Bitcoin prides itself on its open transparency. The blockchain is literally an open ledger that anyone, anywhere can access the blockchain and read up on all past transactions. Bitcoins are relatively simple to access and use.
Monero, on the other hand, is built for complete and utter privacy. All the transactions are completely secret. Monero can be a little complicated to understand and access for beginners.
The pros and cons of Monero
- One of the best privacy features on any cryptocurrency
- The transactions are not linkable
- The transactions are not traceable
- The blockchain doesn’t have a block limit and is dynamically scalable
- Even when the Monero supply runs out there will be a continuous 0.3 XMR/min supply to incentivize the miners
- Has achieved staggering growth financially
- It is selectively transparent. Anyone can make their transactions visible to their person of choice eg. an auditor by giving them their private view key. This also makes Monero auditable.
- Has a very capable and strong developmental team leading the charge.
- Even though Monero was made ASIC resistant to prevent centralization, ~43% of hashrate of Monero is owned by 3 mining pools
- Monero transactions are significantly larger than other cryptos like bitcoin because of the amount of encryption involved
- There is not much wallet compatibility for Monero
- It is not beginner friendly and has not been as widely accepted and adopted
- Because it is not a bitcoin based coin, Monero has faced difficult issues in the sense that it is harder to add things to it
The future of Monero
There is no doubt that as the future becomes more open and decentralized, Monero will become more and more alluring for the privacy it offers. What is particularly interesting is that it is one of the few non-bitcoin based coins which has the potential of truly making it big. Interesting times lie ahead for Monero, and with the staggering growth that it has already undergone, the future looks very bright indeed. It will be interesting to see how things look like once Kovri is implemented.
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