When you’re watching a TV show or a movie and a character is forced to become a fugitive for some reason, what do they do?
They probably try to conceal their identity as much as possible. They get a baseball cap, sunglasses, and a beat up car to get as far away from their troubles as possible. They’ll need money to at least get food or gas, but do they take a credit card? Do they have a debit card or checks?
Of course not. To truly avoid detection, they need to avoid being tracked by banks, which the police will check in order to catch them. They take only cash, which can’t be tracked.
This is exactly what Monero does.
The promise of cryptocurrency is not just simplicity, hard money, and decentralization. Many people turn to cryptocurrency for privacy, and Monero is the king of privacy in the crypto world.
The word “Monero” sounds like money, which makes sense because it’s actually the Esperanto word for coin. In many ways, it’s similar to other cryptocurrencies like Bitcoin. It’s a proof of work blockchain with “adaptive block size,” which we will explain later.
Let’s first see what exactly makes Monero so unique, and how it has been engineered to be absolutely private.
What makes Monero private?
The simple answer here is that Monero is based on some open source code CryptoNote. This can be used as the basis for any private cryptocurrency, but is best known for its use in Monero.
Without getting too technical, this software lets Monero stay completely private by using a lot of keys and something called ring signatures.
Imagine if every time you used Venmo or Cashapp, your account produced an entirely different username to send or receive money. This is basically how keys work in Monero. You use stealth addresses which let you randomly generate keys every time you want to make a transaction. This way people can have a target where they are sending money so you both know it’s going to the right place while also never revealing anything else about the user.
Monero also uses something called ring signatures. These are intentionally designed to obscure who is sending or receiving payments to the general public. The transaction happens, and to the outside, people only see a total pool of people from whom the money could have been sent. There’s no way to tell who from this group actually engaged in the transaction so it’s totally private. This means you cant track where Monero is going, but it also means you can’t see how much money the person you’re paying has, unlike almost every other blockchain.
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How is Monero actually different from Bitcoin?
Bitcoin is more private than say, a bank transfer, Venmo, PayPal, or a debit card purchase, but it’s not quite all the way there. In fact, Bitcoins are not actually 100% fungible. Every Bitcoin has a history of where it came from, so it is not completely fungible, you can track where it was mined, and who’s hands it was traded to, including a senator, drug dealer, or a corporation… if you can identify them. In economics, fungibility is the way economists determine whether something is good money. All units of a currency should ideally be identical to each other.
Dollar bills may have different designs or serial numbers, but they are all worth the same amount - 1 USD. Bitcoins and other cryptocurrencies can be traced to a certain extent, so old coins that were used in a hack or in a drug deal may be unwanted because of past issues. Monero however is untraceable, so it is actually completely fungible, not just in terms of value, but in terms of traceability.
Monero also differs from Bitcoin in a seemingly trivial but historically important way - block size.
Has it been long enough since the block size wars in Bitcoin to approach this topic? I’ll try to do this as diplomatically as possible.
Basically, Monero doesn’t have a block size limit. Blocks can get bigger if there are more transactions that need verification. This is the same idea as basically adding lanes to a highway during peak traffic hours. However, when you increase the block size, fees are lower which means people can spam the network with less important transactions that they normally would not make. Monero gets around this problem by measuring the block size and introducing penalties if the block is too big. This penalty basically decreases the reward miners get for confirming a block, so they will be less incentivized to mine it, which means transactions don’t get confirmed. All of these incentives keep Monero running smoothly according to how much “traffic” there is on the network.
But economics aside, the one advantage fans of Monero would stress over all else is its censorship resistance through decentralization. There are a few things to consider here:
- Mining
Both Bitcoin and Monero are proof of work blockchains. But Monero is designed to be more decentralized through its mining. Bitcoin is mostly mined using specific machines called ASICs (not the running shoes!) These make mining easier, but they are a specialized, specific business that is not available to most people without financial investment. Monero is mined mostly using CPUs (Central process units) which are already present in regular computers that people already have. When the mining power is decentralized instead of being a business for which you must have money to really remain competitive, the system is less susceptible to failure.
- A lack of transparency
To remain private, Monero needs to be less transparent. This lack of transparency compared to something like Bitcoin is interesting. In Bitcoin, this transparency allows everybody to check the ledger and makes sure that each node can actually verify the blockchain to make sure nobody double spends. But it also means that you can see where funds are moving to and from and you can analyze those patterns to determine the likely identity of certain wallets.
Knowing which wallets are doing what can help you determine who is who and then determine who else they are doing business with and how much money they have. This kind of transparency fundamentally changes how people interact and negotiate. If I know that you have less money, maybe you are in desperate need of liquidity and will take less than what I would normally offer for something. Monero eliminates this problem by being private and keeps things at a level of transparency we’re actually used to already with concealed bank accounts.
- Decentralization transfers responsibility to individuals
Because Monero is so private, the onus is on individuals to be very responsible. It also means many different keys. These keys keep Monero more private, but it also makes it harder to store and use. You can buy and sell Monero on exchanges, but this makes the privacy use case just a little more complicated.
Some people say that buying Monero from a KYC (know your customer) exchange defeats the purpose of its privacy. This isn’t quite true, because individual transactions still cannot be traced on Monero.
So if you get Monero on an exchange, it’s like going into the bank to take out some cash. The bank knows you took out the cash, how much, when etc. But if you go down to the 7 Eleven and buy a slurpee, the bank would have no idea that’s how you used that money. If the exchange was hacked, all anybody could ever figure out is when you moved your Monero from there to your wallet. Once it’s there, you’re good to go.
So Monero is clearly set up from the start to be an ultra private cryptocurrency, but why? I mean, is it really that important to have private transactions?
Why is privacy important?
To the average person who doesn’t know much about crypto, it’s synonymous with crime. This is actually fair - Bitcoin and other cryptocurrencies have been used for crime, as many new technologies are adopted first by criminals. But what is the definition of a criminal?
There may be many places in which people are deemed “criminals” for simply disagreeing with the government or for following a certain religion, or having a different sexual orientation. Shouldn’t these people be allowed to also have financial freedom even if the banks or government prevent them from using traditional channels?
In many places, cryptocurrency is used to store value and be able to avoid inflation. If the government knows who holds the hard currency, they could use this information to judge who is being “disloyal.” Proponents of Monero would likely say that without privacy, many of the advantages of cryptocurrency are actually moot points because people may be intimidated away from using it.
To many people, this desire for a truly private cryptocurrency is of the utmost importance, which is really why it was started in the first place.
Monero’s past and future
In 2012, shortly after the creation of Bitcoin, a new project called Bytecoin was launched. The goal was to create a private cryptocurrency, but due to other issues in mining, it was forked into what we now know as Monero.
The development arrangement in Monero is interesting. The main spokesman and original developer, Riccardo Spagni, is known, but many other developers are unknown and use pseudonyms.
This differs from both Ethereum and Bitcoin in separate ways. In Bitcoin some (especially those in institutional finance) are afraid that Satoshi Nakamoto will reveal themselves and/or sell all their coins, resulting in huge price fluctuations. In this case anonymity is a risk factor.
In Ethereum’s case, some are afraid of the centralization in Vitalik Buterin’s hands. Even though people would not have to listen to what he says, he not only has some direct power over the network but also is very influential. He is actually responsible for the Hard Fork that caused Ethereum Classic to be created. In this case the centralization is a risk.
Monero is governed by a group of developers, some known and most unknown, which gives them a good balance of developers and is not subject just to the whims of one person. It’s unclear what may happen to the price of Monero and its potential for mainstream adoption. It certainly has use cases, but even for cryptocurrency it may seem too shady and unknown, especially for institutional investors.
It may also carry more political risk because although governments may embrace cryptocurrency in some form, anybody opposing the state can use Monero to get around restrictions or even sanctions, like pariah states such as North Korea, Iran, or Venezuela. This resistance is good for users of Monero, but means that it may be more of a threat to those who want to shut down financial services to certain people or organizations.
It may be something that never catches on, and remains lurking in the shadows of the crypto world, waiting for a killer application. But the killer application may already be here for many people, and we simply haven’t been pushed far enough to the edge to know it yet.
