A lot of cryptocurrencies have launched in recent years. Many aimed to enhance privacy and anonymity, although their success varied. A few of these cryptocurrencies allow public viewing of all transactions, while others make privacy optional. And still others keep the privacy feature as strictly implicit.

The cryptocurrency Monero has achieved a high level of popularity and acceptance for its privacy-oriented features. This article explains the key concepts, features, and challenges of monero. (See also, The Rise of 'Private' Cryptocurrencies.)

What Is Monero?

Launched in 2014, Monero (XMR) is an open-source, privacy-oriented cryptocurrency that is built and operates on the blockchain concept. These blockchains, which form the underlying technology behind digital currencies, are public ledgers of participants' activities that show all the transactions on the network.

Monero's blockchain is intentionally configured to be opaque. It makes transaction details – like the identity of senders and recipients, and the amount of every transaction - anonymous by disguising the addresses used by participants.

Along with anonymity, the mining process for monero is based on an egalitarian concept - the principle that all people are equal and deserve equal opportunities. When launching monero, its developers did not keep any stake for themselves, and banked on contributions and community support to further develop the virtual currency.

Monero supports a mining process where individuals get rewarded for their activities by joining mining pools, or they can mine moneros individually. Monero mining can be performed on a standard computer, and does not need any specific hardware such as the application-specific integrated circuits (ASICs).

Monero runs on all leading OS platforms, including Windows, macOS, Linux, Android, and FreeBSD. (See also, The 5 Weirdest Cryptocurrencies.)

How Does Monero Improve Privacy?

Monero alleviates privacy concerns using the concepts of ring signatures and stealth addresses.

Ring signatures enable a sending participant to conceal his identity from other participants in a group. Ring signatures are anonymous digital signatures from one member of the group, but they don’t reveal which member signed the transaction.

To generate a ring signature, the monero platform uses a combination of a sender’s account keys and clubs it with public keys on the blockchain, which makes it unique as well as private. This enables the ability to hide the identity of the sender, as it is computationally impossible to ascertain which of the group members' keys was used to produce the complex signature.

Stealth addresses add additional privacy, as these randomly generated addresses for one-time use are created for each transaction on behalf of the recipient. The use of these stealth addresses enables concealing the actual destination address of a transaction, and it hides the identity of the receiving participant.

Additionally, Ring Confidential Transactions, or RingCT, enables hiding the transaction amount. After achieving success in hiding the identities of senders and receivers, the RingCT functionality was introduced in January 2017, and is made mandatory for all transactions executed on the monero network.

How Is Monero Different from Bitcoin?

Bitcoin, the most popular cryptocurrency, works on a protocol that attempts to shield the participant's identity using pseudo name addresses. These pseudo names are randomly generated combinations of alphabets and numbers. 

However, that approach offers limited privacy as both the bitcoin addresses and the transactions are registered on the blockchain, opening them to public access. Even the pseudonymous addresses are not fully private. A few transactions carried on by a participant over a time span can be linked to the same address, allowing the possibility of public, government, family, and friends to become aware of an address owner's trends, and hence, his identity.

Another advantage of monero over bitcoin is fungibility, which means that two units of a currency can be mutually substituted and there is no difference between the two. While two $1 bills are equal in value, they are not fungible, as each carries a unique serial number. In contrast, two pieces of 1 oz. of gold of the same grade are fungible, as both have the same value, and don’t carry any distinguishing features. Using this analogy, a bitcoin is the $1 bill, while a monero is the gold piece.

The transaction history of each bitcoin is recorded on the blockchain. It allows identifying bitcoin units that may have been linked to certain events, like fraud, gambling, or theft, which paves the way for blocking, suspending, or closing accounts that are holding such units. Imagine receiving a few bitcoins today that were previously used for gambling, and they are banned in the future, leading to a loss.

Monero, with its non-traceable transaction history, offers participants a much safer network where they don’t run the risk of having their held units be refused or blacklisted by others.

Challenges

While these privacy advantages have fueled the rapid adoption of monero, they have also brought challenges. The non-traceability and privacy features of monero allow them to be used for disreputable purposes and at questionable marketplaces, including those like drugs and gambling. Markets on the dark web, like AlphaBay and Oasis, have seen an increased use of monero.

Recent reports by CNBC cite the case of hackers creating malicious software that infected computers to mine monero and send it to North Korea. Essentially, monero is open to be used for illicit activities and for evading law enforcement, as it remains outside of capital controls with no traceability.

The Bottom Line

The privacy-rich attributes have helped monero become the 13th largest cryptocurrency in the world based on its market capitalization as of February 2018, according to CoinMarketCap. One can trade in monero on leading cryptocurrency exchanges like Kraken, Poloniex, and Bitfinex. However, its privacy features have also led to questions about its use in illegal activities. (See also, The 6 Most Important Cryptocurrencies Other Than Bitcoin.)

Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.

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