While most cryptocurrencies are based on the ideals of decentralization and security, Monero (XMR) is one of the few that genuinely uphold privacy and confidentiality ideals. The currency’s eponymous blockchain, powered by proof-of-work (PoW) consensus, stands apart from popular “transparent” blockchains, including Bitcoin and Ethereum.
How does Monero (XMR) work?
What makes Monero fundamentally different is that it ensures the anonymity of users via privacy-enhancing technologies like ring signatures, stealth addresses and ring confidential transactions (RingCT). Monero is the only major decentralized cryptocurrency where every user is anonymous by default. It inherently obscures details about the sender, the receiver and the amount transacted.
Often categorized as a privacy coin, the laser focus of the Monero network on anonymity and confidentiality has been both a curse and a boon for cryptocurrency. On the one hand, it is regarded as the epitome of privacy-centric cryptocurrencies, emulating the anonymity of transacting in physical cash.
On the other hand, Monero continues to be banned by some governments (like in Dubai), and popular cryptocurrency exchanges like Coinbase have delisted the cryptocurrency in some jurisdictions. The prime reasoning is concerns about its potential misuse by bad actors. It is a potential problem for certain governing bodies that the widespread adoption of Monero could result in a loss of control over financial transactions.
Therefore, as much as Monero stands tall as a crypto novelty, it still is somewhat far from being a household name in some ways. Nonetheless, since its humble beginnings in 2014, Monero has stood the test of time and crypto winters, which speaks volumes of its inherent value proposition.
Let’s take a look at a brief history of Monero.
The history and evolution of Monero
The roots of Monero can be traced back to the creation of Bytecoin, the first digital currency to use the CryptoNote technology, launched in 2012. While Bytecoin did not ultimately succeed, it paved the way for developing several popular “privacy coins,” including Monero. CryptoNote technology is a privacy-focused protocol used in cryptocurrencies like Monero to enhance anonymity and security of transactions.
Seven developers from the Bytecoin project went on to form Bitmonero, which was later shortened to Monero. Monero has been committed to privacy and anonymity since its inception, building on the foundation laid by Bytecoin’s CryptoNote technology. This has helped to establish XMR as one of the leading privacy-focused cryptocurrencies in the market today.
Over the years, it has undergone several upgrades to enhance its privacy, security and efficiency. These include the integration of bulletproofs and the adoption of randomX, among others. One notable milestone for Monero was the introduction of the Monero-Bitcoin atomic swap, which allows for the trustless exchange of Monero for Bitcoin (BTC) without the need for a centralized exchange or intermediary.
Moving forward, Monero’s roadmap includes the Monero-Ether (ETH) atomic swap and adopting second-layer solutions for speed and scalability, much like Ethereum’s path. Monero’s commitment to research and development is supported by a team of mostly anonymous researchers at Monero Research Labs (MRL).
Key features of Monero
Let’s look at some of the key features and functionalities of the Monero blockchain that enables it to do what it does best.
RingCT (Confidential transactions)
Transactions are combined with several other transactions in a “ring,” making determining the exact amount being sent difficult.
Ring signatures
This obscures the sender’s identity, who would be rendered as a part of a group (or “ring”) of possible senders, making it impossible to determine which one sent the transaction.
Stealth addresses
This help to protect the privacy of both senders and recipients. A one-time address is generated for each transaction, making it difficult to link multiple transactions to the same recipient.
Bulletproofs
This is a form of zero-knowledge proof used by Monero transactions to reduce the size of confidential transactions. Bulletproofs helps to improve scalability and reduce transaction fees.
P2Pool
This decentralized mining pool allows miners to pool their resources and mine XMR together. This helps to promote decentralization and prevent the concentration of Monero mining power.
RandomX
This is a central processing unit (CPU)-optimized proof-of-work algorithm to enhance the network’s security and prevent ASIC mining, which makes mining Monero within reach of CPUs and general processing units. It prevents mining centralization via behemoth mining rigs, which is a challenge facing Bitcoin.
Smart mining
Smart mining is a way of mining Monero cryptocurrency meant to be less intrusive and more energy-efficient than regular mining. The idea is to allow as many people as possible to mine Monero using their computer’s unused processing power without causing drawbacks like overheating or draining the battery.
How is Monero different from Bitcoin and Ethereum
Inherently, Monero use cases pertain to leveraging it as a currency for seamless anonymous payments. Payment transactions are what Monero is primarily used for.
Unlike BTC transactions, payments in XMR are challenging to trace. Also, the Monero blockchain, compared with Bitcoin, is more agile and scalable thanks to several of the features mentioned above. Many of them were developed and adopted to implicitly reroute around the restrictions of the Bitcoin blockchain.
ETH, on the other hand, is a token used in decentralized applications (DAaps) and smart contract ecosystems for creating decentralized finance (DeFi) applications, nonfungible tokens (NFTs) and more, rather than a private payment enabler.
The following table outlines the key differences between the cryptocurrencies:
Related: What is Ethereum and how does it work?
How to buy Monero
XMR is listed on many decentralized money markets and cryptocurrency exchanges. However, some exchanges may also have delisted the currency in some regions due to pressure from regulatory bodies. That said, there are peer-to-peer (P2P) trading platforms that directly connect buyers and sellers looking to exchange Monero for fiat currencies or other cryptocurrencies.
LocalMonero is Monero’s very own online P2P exchange. Just like transacting in any cryptocurrency, a Monero wallet and address is required to transact Monero. The wallet should be protected by a seed phrase.
How to mine Monero
Mining Monero involves RandomX, a resource-efficient PoW algorithm that’s been optimized for general-purpose CPUs. CPUs and GPUs are both compatible with Monero, but CPUs are generally more efficient.
Solo mining with a CPU can be done via Monero’s command line interface or through graphical user interface wallets. For those who prefer to mine via a pool or solo mine via a GPU or dedicated hardware, software such as lXMRig and CSminer are required.
One can start the mining process by launching the mining software, which will use their device’s processing power to solve complex mathematical puzzles, validate transactions on the Monero network and reward them with XMR coins.
Related: How to build a cryptocurrency mining rig
Is Monero a good investment?
There are hordes of people who regard Monero as a beacon of privacy payment enablement among cryptocurrencies. As a genuinely open-source project, Monero’s growth and development depend solely on the contributions of countless developers, miners, and even typical users and investors convinced about Monero’s potential.
And it has done well in terms of the coin value, market cap and protocol development. This would be the same answer to the prevalent question, “Is Monero safe?”
That said, cryptocurrencies, including XMR, can be volatile, and their value can fluctuate rapidly. Investing in Monero or any other cryptocurrency should be based on careful research and evaluation, analysis of blockchains and market trends analysis, and personal risk tolerance.