“Keep it secret. Keep it safe”. This was the famous line from JRR Tolkein’s ‘The Lord of the Rings: The Fellowship of the Ring’. The classic line spoken by the wizard Gandalf the Grey perfectly encapsulates the cryptocurrency Monero.
Monero – secure and highly private
The idea behind Monero was to create a cryptocurrency that was truly private. There has been much criticism of Bitcoin that it isn’t truly private. Whilst Bitcoin qualifies as decentralised it lacks total anonymity.
Whilst Bitcoin user addresses are private, the nature of the transactions themselves are not entirely a secret. Bitcoin’s transaction ledger is entirely public. This means that anyone can observe the balance of BTC held at each address. Furthermore, they can also view which address has paid which. As such, whilst the identity of the address owner may not be known, their activity is known.
Monero was produced in such a way as to transition the gap in transaction privacy such that the entire system is private. Monero sender addresses are private, the detail of the transaction amounts private and the receiver address is private. It’s a fully anonymous system.
The creation of Monero
Monero was created from an earlier coin called Bytecoin. Bytecoin was created in July 2012, however, it came under criticism for being a coin that was 80% pre-mined. As such, a hard fork in the Bytecoin produced Bitmonero that was later shorted to Monero. The Monero project is funded through crowdfunding.
Monero is a project led by seven blockchain developers. Whilst the developers are largely anonymous, much like their coin, two of them have revealed themselves. They are Riccardo Spagni and David Latapie.
How does Monero work?
Just another miner
In simple terms Monero is similar to Bitcoin in that it relies on the Proof of work mechanism. This means it uses the process of mining to verify transactions. However, Monero produces new blocks every two minutes making it five times faster than Bitcoin blocks.
Can grow, grow and grow
Bitcoin block sizes are limited to 1MB blocks, putting a hard barrier on the speed of Bitcoin as it’s user base increases. In contrast, the Monero protocol does not set a limit on the block size. Instead it uses a clever algorithm to allow the block size to change as the Monero user base grows.
The mechanism for scalable block sizes is risky. In theory, a hacker could crash the entire system by submitting an enormous block size. Fortunately, the creators of Monero built in a solution.
Firstly, block sizes that are twice those of the median of the last one hundred blocks are not allowed by the protocol. This prevents any serious attacks on Monero.
Furthermore, there the developers have put together strict incentive structure to maintain steady growth in block size. The mining reward for new blocks is a function of the medium size of the last one hundred block sizes. This automatically encourages limiting the scale of new blocks.
The relationship between the size of new blocks and the reward for mining that block is quadratic. By way of example, the doubling of the block size shrinks the reward by 100%. A 50% increase in the new block size versus the median of the last one hundred blocks leads to a 25% reduction in the reward. Finally, a 10% increase in block size leads to a 1% reduction in the reward.
Stronger than Superman – Cryptonight
One of the faults of Bitcoin is that its hashing algorithm has reached such a hash rate that miners need to use bigger and more powerful machines. Initially, this meant that instead of using a regular CPU, they started to use GPUs. Nowadays, even the GPUs won’t cut it and specialist ASIC mining hardware is required.
The use of expensive and specialist mining hardware has shut out the individual home based miner, replacing them with large mining pools. This type of mining set up requires large capital investment meaning that the mining process is becoming centralised to a few large pools.
In contrast, Monero uses a different hashing algorithm called Cryptonight. The Cryptonight algorithm does not run well on the normally more efficient ASIC hardware. This attribute helps to prevent the build up of mining pools amongst those with capital. This helps to ensure greater decentralisation of the network.
More secret than a super spy
The most prized attribute of Monero is the extreme anonymity that it provides it’s users. Stealth addresses keep both the sender and receiver anonymous. Whilst Monero operates a decentralised system, this does not mean that privacy has to be compromised.
Monero hides the value of the transaction in two different ways. The first is that it uses ring signatures. Ring signatures are issued along with the actual transaction. As such, these are decoy transactions. An additional security measure involves splitting the original transaction into different sized chunks and are mixed with several others. Consequently, this makes it virtually impossible to determine the original transaction size.
Monero is one of the most private and secure cryptocurrencies. Whilst this makes it perfect for less desirable transactions, it does provide the total anonymity that makes cryptocurrencies so attractive.