While hundreds cryptocurrencies have been launched and many have attempted to provide users with greater privacy, they have seen varying levels of success.
Bitcoin, the first cryptocurrency, was originally touted as providing users with anonymity. The cryptocurrency’s protocol attempted to offer a high level of privacy by shielding user identities behind pseudonymous addresses, randomly generated strings of numbers and letters. However, this approach proved ineffective.
Bitcoin addresses and transactions are both recorded on the blockchain, making them publicly available. Even though an individual bitcoin address is pseudonymous, it can attach to many transactions over time, making it easier for friends, family and even government agencies to get a better sense of the address owner’s purchasing trends.
While some thought that bitcoin kept their transaction history completely private, organizations such as law enforcement agencies have used blockchain analytics to track bitcoin transactions.
In the years after bitcoin was released, certain cryptocurrencies were developed specifically to provide users with a greater chance of remaining anonymous. Dash, for example, harnesses a feature based on CoinJoin, which combines funds from several users to reduce the chances that any one user’s identity will be detected.
Zcash, another privacy oriented cryptocurrency, leverages zero-knowledge proof constructions called zk-SNARKs to allow users to exchange information without revealing their identities. In addition, the currency’s blockchain does not disclose the value of any transactions.
This cryptocurrency’s launch generated significant hype, but its privacy feature is optional, and many users have refrained from leveraging it. At the time of report, 28% of transactions were shielded.
Monero, by contrast, is private by default, and it has achieved the widespread adoption of those interested in using cryptocurrencies to remain anonymous.
What is monero?
Monero is an open-source, privacy-oriented cryptocurrency that was launched in April 2014 by a core team of seven people. The developers introduced this innovative cryptocurrency without setting aside any for themselves, and the team has relied on donations and the broader community to further development.
Monero leverages ring signatures and stealth addresses to obscure the identity of senders and recipients. Ring signatures combine or ‘mix’ a user’s account keys with public keys obtained from monero’s blockchain to create a ‘ring’ of possible signers, meaning outside observers cannot link a signature to a specific user.
The concept of a ring signature was first described by academics from MIT and The Weizmann Institute in a 2001 paper, and using the technology has helped provide legitimacy for monero at a time when much of the cryptography used in blockchains is new and has not withstood the test of time.
It is worth noting that while mixing services are available for many cryptocurrencies, users generally only mixed coins when they were looking to hide something. Monero, however, mixes all coins used in transactions, which helps eliminate the suspicion that coins are being mixed to conceal information the senders and recipients don’t want third parties to see.
While monero users have the ability to keep their transaction history private, they can also share this information selectively. Every monero account has a view key, which permits anyone holding it to look at the account’s transactions.
Originally, ring signatures obscured the senders and recipients involved in monero transaction without hiding the amount transferred. However, an update called RingCT implemented a new ring signature that concealed both the value of individual transactions and the identity of senders and recipients.
In addition to leveraging ring signatures, monero also enhances privacy through stealth addresses, which require senders to set up one-time email addresses for recipients before making transactions. With this feature, recipients have the ability to publish a single address and have transactions sent to separate, unique addresses that cannot be linked to the recipient’s published address.
Fungibility and adoption
By providing a high level of privacy, monero offers fungibility, meaning that each individual unit of a currency can be substituted for another. Another way of putting this is that every coin has equal value.
Because the transaction history of individual bitcoins is recorded on the blockchain, coins that have been associated with certain events, like theft, could be shunned by merchants and exchanges.
Due to monero’s untraceable nature, no two coins are distinguishable from one another, and they are both equal in the eyes of merchants. Without this level of fungibility, a vendor that accepts cryptocurrency might refuse a unit of one of these assets because of its past transaction history.
Because of this, monero (XMR) has enjoyed a steady increase in adoption since its release. Dark web marketplaces including AlphaBay and Oasis have embraced the cryptocurrency, reportedly due to popular demand.
“Following the demand from the community, and considering the security features of monero, we decided to add it to our marketplace,” the press release stated.
Oasis adopted the currency later that year, and the endorsements of these two dark web markets helped provoke significant media coverage.
Monero’s market
Monero’s market operates like that of many other cryptocurrencies. Those interested in investing in the cryptocurrency can purchase it outright through exchanges including Poloniex, Bitfinex and Kraken.
Poloniex was the first of these exchanges to offer the currency, listing eight separate currency pairs in July 2014. Bitfinex, the largest bitcoin exchange by BTC/USD, followed suit in November 2016, listing XMR/USD and XMR/BTC trading pairs and allowing deposits and withdrawals of monero.
Kraken offered monero trading starting in January 2017, listing currency pairs XMR/USD, XMR/EUR and XMR/XBT. Kraken praised monero at the time, writing on its blog that the currency “trades with high volume and liquidity”.
Like many other cryptocurrencies, monero offers interested parties the opportunity to mine blocks. While individuals have the ability to join mining pools, they can also mine monero by themselves.
Anyone with a computer can take part in this activity, as it does not require any specific hardware such as the application-specific integrated circuits (ASICs) required these days to mine bitcoin.
Monero uses a proof-of-work (PoW) algorithm that was designed to be accessible to a wide range of processors, a specification that was included to ensure that mining was open to many different parties instead of just large mining pools.