Monero Deep Dive: The Cryptocurrency To Use If You Want True Anonymity, Far More Anonymous Than Bitcoin
In the early days of cryptocurrency Bitcoin was considered the best payment method for those who wished to stay anonymous. At the time this was true, since Bitcoin required no personal identification information while fiat payment methods like banks and PayPal required a full suite of personal identification information. However, all Bitcoin transactions in history are stored on a publicly accessible block explorer, and with the rise of blockchain forensics it is now possible to figure out who owns a Bitcoin address and what they have been doing with their Bitcoin. Although it is possible to increase Bitcoin’s anonymity by using Tor, VPNs, and CoinJoin, as will be discussed in future Cypherpunk Labs articles, Bitcoin can only be considered pseudo-anonymous rather than fully anonymous.
Nicolas van Saberhagen recognized that Bitcoin lacked full anonymity, in addition to the fact that it is a slow and difficult process to change Bitcoin’s code. Saberhagen proposed to create a new cryptocurrency that was far more anonymous, in addition to correcting some other apparent deficiencies in Bitcoin, and wrote up these ideas in the CryptoNote White Paper.
The first cryptocurrency to utilize the ideas in the CryptoNote White Paper was Bytecoin (BCN), which is a lesser known but still functional stealth cryptocurrency. Bitcointalk user thankful_for_today modified the code from Bytecoin and created BitMonero, but there was community criticism since not everything in the CryptoNote White Paper was adopted. This caused thankful_for_today to apparently abandon the project, but a group of users led by Johny Mnemonic quickly took over and renamed the cryptocurrency Monero (XMR).
One of the most critical pieces of stealth technology that Monero uses is ring signatures. With Bitcoin a transaction is signed with a user’s private key and can be verified with the public key. With a ring signature a transaction is signed by your key as well as the public keys from several other outputs on the blockchain using a triangular distribution method. Essentially, each Monero transaction is signed by a group of keys, and it is not possible to distinguish which key the transaction originated from. This can be thought of as decentralized and trustless mixing, and ultimately ring signatures hide the origin of a transaction.
Eventually Monero upped the ante and implemented ring signature confidential transactions (RingCT), which uses multi-layered linkable spontaneous anonymous group signatures to hide the amount of a transaction. However, RingCT transactions required a large amount of data in order to ensure that the sum of inputs, outputs, and transaction fees equaled zero, and bulletproofs were implemented to solve this problem. More about bulletproofs can be read in this paper. Essentially, bulletproofs helped reduce transaction size, lowering transaction fees on the Monero network, and also made it cheaper to create transactions with higher degrees of complexity.
Another critical piece of technology that makes Monero anonymous is stealth addresses. The sender creates a random one-time address for every transaction on behalf of the recipient. This allows a recipient to have just one published address but all of their incoming transactions go to different addresses on the blockchain. Thanks to stealth addresses, only the sender and receiver can determine where a payment was sent, while an outside observer cannot figure out the destination of any transaction.
A Monero user can see incoming transactions with their view key, and anyone without the view key cannot see the incoming transactions to any particular address. This view key can be shared, so Monero can be considered optionally transparent, but the default is stealth.
Further, Monero tries to increase the decentralization of its network by making application specific integrated circuits (ASICs) inefficient via the CryptoNight protocol. This was originally accomplished by requiring a MB of internal memory, which was unacceptable to ASICs at the time. Also, Monero fit into the L3 cache of modern CPUs, while simultaneously being slower on GPUs, hindering the efficiency of GPU mining firms. That being said, it seems if a cryptocurrency is valuable enough then an ASIC is eventually created for it, and the Monero developers have been in a long term battle where they have to periodically change their mining algorithm in order to prevent ASICs from overtaking the network. Monero is expected to release their new mining algorithm, RandomX, in October in order to stomp out the ASICs once again.
It seems the Monero developers are succeeding in their fight against ASIC centralization, and generally Monero is the most profitable cryptocurrency to mine on a personal computer while it is not that profitable with ASICs. This is important because it allows regular joes to mine Monero on their personal computer, decentralizing the network hash rate, as opposed to Bitcoin which is practically impossible to mine on a personal computer and most of the hash rate is in the hands of big mining farms.
Also, Monero uses dynamic block sizes, ensuring low transaction fees and fast confirmation times, as opposed to Bitcoin which often has a clogged mempool which can lead to long waits for confirmations and high transaction fees.
Additionally, Monero technically has an infinite supply since the minimum block reward is 0.6 XMR, and this will be reached in 2022. This ensures that miners will always have an incentive to secure the network long term, even if transaction fees are kept as low as possible. Compare this to Bitcoin where block rewards will approach zero, which may wreck the mining community if transaction fees are not high enough.
Thus, Monero’s ring signatures, bulletproofs, and stealth addresses combine to obfuscate the sender, receiver, and amount of all transactions, and all Monero users must use all of these privacy features, guaranteeing anonymity for the entire network. Monero provides far more privacy than Bitcoin, since Bitcoin transactions are easily traced on a block explorer. It is clear that Monero is an excellent choice for those that want true anonymity when using cryptocurrency. That being said, it is important to use encrypted messaging as well when organizing a Monero transaction, since anonymity can be compromised if a message regarding a Monero transaction is intercepted.